UK: Budget 2009 - Changes To Oil & Gas Taxation

Last Updated: 24 April 2009
Article by Bob Palmer, Richard Croker and Ted Rhodes

The Government has reacted to a dramatic drop in North Sea drilling activity by unveiling a suite of changes to the oil and gas tax regime aimed at cushioning the impact of the declining oil price. As oil prices have fallen from $147 a barrel in July 2008 to less than $50 a barrel today and financing has dried up in the wake of the credit crunch, figures released by Deloitte this month showed that exploration drilling had collapsed by 78% in the first quarter of 2009 compared with the same period in 2008.

Field Allowance

The Government has announced plans to introduce a "field allowance" that may be set off against the supplementary charge (reducing the tax rate from 50% to 30%) for certain fields that are given development consent on or after 22 April 2009. The field allowance is available for small fields, heavy oil fields and high pressure/high temperature fields and the amount of allowance per field is capped as follows:

  • Up to £75m for fields with oil reserves (or gas equivalent) of 2.75m tonnes or less, reducing on a straight line basis to nil for fields over 3.5m tonnes. In any one year the maximum field allowance is £15m.
  • Up to £800m for fields with a gravity of less than 18API and a viscosity of more than 50 centipoise at reservoir temperature. In any one year the maximum field allowance is £160m.
  • Up to £800m for fields with a temperature of more than 176.67°C and pressure of more than 1034 bar in the reservoir formation. In any one year the maximum field allowance is £160m.

Chargeable Gains

The new budget proposals will also amend the law relating to taxation of chargeable gains as follows:

  • No chargeable gain will arise on the swap of UK/UKCS licences to the extent that the value of one licence matches another that it has been swapped for. This brings the treatment of developed assets into line with the treatment of undeveloped ones.
  • No chargeable gain will arise where the proceeds from the disposal of a chargeable ring fence asset are reinvested in another chargeable ring fence asset.

Decommissioning & Change of Use

The final major category of changes to be introduced by the new budget relate to the availability of tax reliefs for decommissioning costs. The proposals are as follows:

  • Where oil and gas assets are subsequently used for another purpose such as gas storage, carbon sequestration or offshore wind projects ("change of use"), the costs of eventual decommissioning may be set off against Petroleum Revenue Tax ("PRT") in the case of a PRT asset or ring fence profits and carried back in the same way as for assets that have not been subject to a change of use. This amendment is intended to encourage the reuse of offshore infrastructure for these alternative purposes.
  • Companies will be entitled to PRT relief for decommissioning costs even when those costs are incurred after the expiry of the relevant licence. On the other hand, income that may arise in respect of the relevant assets after expiry of the licence shall also be subject to PRT.
  • Capital allowances for decommissioning costs will only be available where the costs are incurred to comply with:

    (a) an approved abandonment programme;

    (b) any condition to which the approval of an abandonment programme is subject; or

    (c) any other condition imposed by, or agreement entered into with, the Secretary of State for DECC in relation to decommissioning.

In addition, the expenditure must have been incurred and paid in respect of decommissioning work carried out during the accounting period in question. This amendment is intended to avoid companies accelerating receipt of their capital allowances by, for example, paying an affiliate in advance to carry out the decommissioning when required.

The budget also proposes a number of more minor amendments and the full detail of the changes will be contained in the Finance Bill to be released on 27 April 2009.

The budget proposals have been generally well received by industry bodies, although operators' groups have stressed that this should be the first step in a continuing dialogue with the Government aimed at prolonging the economic life of the North Sea. They have pointed out continuing difficulties with sustaining production at older fields, opening up frontier areas West of Shetland, ensuring access to offshore infrastructure, and decommissioning.

This article was written for Law-Now, CMS Cameron McKenna's free online information service. To register for Law-Now, please go to www.law-now.com/law-now/mondaq

Law-Now information is for general purposes and guidance only. The information and opinions expressed in all Law-Now articles are not necessarily comprehensive and do not purport to give professional or legal advice. All Law-Now information relates to circumstances prevailing at the date of its original publication and may not have been updated to reflect subsequent developments.

The original publication date for this article was 24/04/2009.

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