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Themes from Budget 2014 (1): Oil and Gas

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DECC pointed out in a statistical release issued yesterday that among the “highlights” of the UK’s 2013 energy figures:

  • oil production was 8.8% lower than in 2012, the lowest annual production volume since the current reporting system began;
  • natural gas production was 6.2% lower than in 2012 and at its lowest level since 1984;
  • gas exports were 24% lower than in 2012.

This puts into context a number of announcements made in last week’s Budget designed to encourage oil and gas exploration and production in the UK and UK Continental Shelf.

  • There will be consultation on a new allowance for ultra high pressure, high temperature (HPHT) clusters.  This will exempt at least 62.5% of qualifying capital expenditure incurred on these projects from the supplementary charge.  The measure could facilitate investments by Maersk and BG Group in the Culzean and Jackdaw fields, which could supply 10% of UK gas needs.
  • 75% of qualifying capital expenditure that a company incurs on onshore oil and gas projects after 5 December 2013 will be exempt from the supplementary charge.
  • From 1 April 2014, reinvestment relief will apply where a company sells an asset in the course of exploration and appraisal activities and reinvests the proceeds in the UK or UK Continental Shelf.
  • From the same date, the scope of the Substantial Shareholding Exemption will be extended to treat a company as having held a substantial shareholding in a subsidiary that is being disposed of for the 12 month period before the disposal, where that subsidiary is using assets for oil and gas exploration and appraisal that have been transferred from other group companies.

With the debate over Scottish independence becoming increasingly vigorous, the Government was not slow to identify these as measures that would support Scottish jobs.

In the longer term, the Government announced that it will review the UK’s tax treatment of the North Sea with the new regulator that is to be set up with a brief to maximise economic recovery of oil and gas from the UK Continental Shelf following the Wood Review.  DECC aims to establish the new body on an interim basis over the summer and to legislate for it in the next Parliamentary session.  It is to report back with its findings and recommendations on how to encourage exploration and reduce decommissioning costs in time for Budget 2015.

More controversially, Budget 2014 repeated the Government’s concern about “the use of specialised lease payments, known as bareboat charters, to move significant taxable profit outside the UK tax net”.  It intends to cap the amount deductible for such intra-group lease payments by companies that provide drilling services or accommodation vessels on the UK Continental Shelf at 7.5% of the historical cost of the asset subject to the lease.  This is an increase from the 6.5% cap announced in last year’s Autumn Statement, but not a large one.  It left Oil & Gas UK “perplexed”, and claiming that the measure could drive drilling rigs out of the UKCS at a time when operating costs were rising and exploration activity is at historically low levels – as pointed out by the Wood Review, amongst others.  For details of this measure (published on 1 April 2014, after this post first went live) click here.

Finally, there was a further piece of good news for developers of onshore oil and gas assets.  An anomaly in the mineral extraction allowances regime will be removed so that they will be able to get tax relief for 100% of their expenditure on planning permission in cases where the application for permission was successful, as well as those where planning permission is not granted.

Legislative details of the Budget 2014 measures referred to above may be found in the Finance Bill, which has now been published.

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