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Financial Times: Oil groups hope for North Sea incentives

By Ed Crooks, Energy Editor
Published: March 13 2008 02:00 | Last updated: March 13 2008 02:00

A package of modest tax breaks for North Sea oil and gas companies was set out by the Treasury yesterday, leaving the industry hoping for more substantial incentives to investment in the future.

The oil and gas industry was expected to pay £9.9bn in corporation tax and petroleum revenue tax in the coming fiscal year, the Treasury said, up from £7.7bn this year. In cash terms that would represent the biggest tax take from the North Sea since 1985-86.

That forecast was based on an assumption of an average oil price of $83.80 per barrel this year, well below yesterday’s record high for Brent crude of $106.39.

In that context, the £25m estimated benefit of the new tax reliefs to the industry next year is small.

Alistair Darling said the reforms would “help incentivise investment and support production”.

However, Michael Tholen, the economics director at Oil & Gas UK, the industry association, said that, while the measures were “sensible” assistance, “we are not talking about a tidal wave of new investment coming in to the North Sea as a result of these changes”.

The North Sea is one of the world’s fastest-declining regions for oil production. Oil and gas discoveries are typically very small, and much of the infrastructure is ageing, having been built in the boom years of the 1970s and 1980s. Big international companies that opened up the region, such as Royal Dutch Shell and BP, have been pulling back.

The measures announced yesterday are focused on improving the tax treatment of the costs of decommissioning infrastructure, estimated at about £20bn for the UK sector of the North Sea.

The Treasury is holding consultations with the industry on further tax relief, which is due to conclude in June. Mr Tholen said he hoped it could lead to capital allowances on developing smaller oil and gas fields.

Copyright The Financial Times Limited 2008

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