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Oil and gas sector welcomes North Sea relief

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By Ed Crooks

Published: November 25 2008 03:47 | Last updated: November 25 2008 03:47

A tax break from next year for North Sea oil and gas companies was welcomed by the industry on Monday as a chance to stimulate investment, hit by falling oil prices, high costs and a shortage of finance.

The chancellor also said gas and electricity prices would be monitored quarterly by Ofgem, the energy regulator, to make sure that falling wholesale costs were passed on to consumers.

The move was part of a modest package designed to help families struggling with high fuel bills, which also included an extra £100m ($151m) for home insulation.

The chancellor also extended support for renewable energy, with promises of subsidies now lasting until 2037.

Alistair Darling said: “I am determined that the present economic uncertainty does not push aside the importance of protecting the environment and our long-term needs for a greener and secure energy future.”

The output of Britain’s oil and gas industry has been in decline since the start of the decade and is expected to continue falling. In a consultation paper published alongside the PBR, the Treasury said it wanted to maximise the recovery of the 17bn-20bn barrels-worth of oil left in the North Sea. Producers have already extracted 38bn.

It ruled out a general tax cut for North Sea companies or a universal tax relief on their investment, saying it would be a “blunt instrument” that would not target help on the oil and gas fields that most need it.

However, it proposed measures to help the industry, including a new tax relief, called a “value allowance”, that could be targeted at particular fields. The value allowance would cut the tax rate for some projects, which the Treasury said should be the “fields at the margin that are most in need of assistance.”

The industry welcomed the proposal, but said its effect would depend on the detail of its implementation next year.

Mike Tholen of Oil & Gas UK, the industry group, said: “It is the right idea with the right aim.

“The key thing will be the extent to which investments and fields have access to this allowance and how big it is.

“That will determine whether it has a real effect, or is just window-dressing.”

Mr Darling also put more pressure on energy suppliers to pass on falling wholesale gas and electricity prices to customers. Ofgem concluded in last month’s retail market inquiry that there was no evidence retail prices followed wholesale prices faster on the way up than on the way down.

But from now on it will publish a regular assessment of the link between the two.

Mr Darling gave suppliers a “few months” to end what he called “unfair gaps in pricing”, such as the higher charges for using a pre-payment meter.

But Chris Bowden of Utilyx, the energy risk management company, warned that it would be “very difficult for Ofgem to know whether they are being fair or not”.

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