Budget 2013: Deloitte comments on oil and gas announcements in Budget 2013
20 March 2013
Commenting on the Chancellor’s proposals for the oil & gas industry, including on shale gas tax incentives and certainty on tax relief for decommissioning costs proposals, Roman Webber, partner at Deloitte, said:
“The Chancellor today announced proposals for a new field allowance for shale gas and an extension of the current ‘Ring Fence Expenditure Supplement’ rules to encourage development. The field allowances would be expected to reduce the effective tax rate on shale gas production from 62% down to 30% on a proportion of the income. The announcement also means that production of shale gas should remain within the general 62% ring fence tax regime that applies to other UK oil & gas production. This will be good news for companies that are looking to develop shale gas in the UK and have other UK North Sea production income.
“UK shale gas could make a significant contribution to the UK’s future energy needs, though it is still in early stages and likely to develop slowly. However, tax is just one of a number of areas that needs to be addressed. To address some of these, the Government intends this year to produce technical planning guidance, develop proposals that local communities will benefit from shale gas projects in their area and provide remit for the Office of Unconventional Gas and Oil. Taken together these are all welcome developments for this important industry.
“The Chancellor also confirmed today that the UK oil & gas industry will be able to benefit this year from certainty regarding tax relief for decommissioning costs through the decommissioning relief deed (DRD). These measures are in line with expectations and will remove a major fiscal risk for investors. They should also release significant funds for investment by allowing companies to reduce cash tied up as security.
“Significantly, there were no other surprises for oil & gas companies with the headline UK upstream tax rates unchanged. The Government has previously indicated that it would allow the various oil & gas tax measures introduced in the last two years to take effect before considering any further changes."
Confidence is returning to the UK oil & gas industry and in the past two years our Petroleum Services Group has seen positive trends. Exploration and appraisal drilling activity on the UK Continental Shelf (UKCS) has increased by 40% since the 2012 Budget. Transaction activity, where companies buy and sell oil and gas fields and another indicator of confidence, has also increased over the year with a number of deals taking place in the UK North Sea.
According to Deloitte figures, the number of field development approvals and new field start-ups are encouraging signs for the UK North Sea and should slow down production decline in the UKCS. From March 2011 to February 2012, there were a total of 14 field development approvals, of which 70% were eligible for a field tax allowance, while 5 new fields started production. From March 2012 to February 2013 a total of 22 field developments have been approved, of which over 90% are eligible for a field tax allowance. In addition, a total of 11 new fields have started production with estimated oil and gas reserves of over 250mmboe expected to be produced over the next 20 or so years.
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