Budget 2014: Tax relief to boost North Sea oil and gas investment

A new tax allowance to boost investment in the North Sea oil and gas sector has been announced by Chancellor George Osborne, in his Budget speech.

The measures are intended to boost investment in ultra high pressure, high temperature (HPHT) fields, by providing an allowance to exempt a portion of a company's profits from the supplementary charge. The amount of profit exempt will equal at least 62.5% of qualifying capital expenditure a company incurs on these projects, reads the Budget.

The move will be encouraging for companies looking to develop large HPHT projects, and boost exploration activity in the central North Sea. The initiative should also benefit the supply chain in the sector, and encourage Britain to develop leadership in this new technology.

The government will launch a review of the tax regime for the entire oil and gas sector, said the Chancellor. Osborne highlighted North Sea oil and gas resources as a key British resource, in a Budget presentation that focused strongly on supporting export and manufacturing.

Also onshore oil and gas exploration companies will receive a new tax allowance. The amount of profit exempt will equal 75% of the qualifying capital expenditure a company incurs on onshore oil and gas projects since 5 December 2013.

Declining North Sea output

The Chancellor vowed to implement the recommendations of the Wood report, which sets out to maximise the UK's remaining offshore oil and gas resources. Initial promises include investing to prolong the life of existing infrastructure, as well as better collaboration so resources can be shared on a regional basis, not just at individual fields. The stewardship of the UK's oil and gas resources will also move to a new arm's length body.

Industry veteran Sir Ian Wood, the report's author, warned that UK oil and gas output in the North Sea would continue to decline unless the government tackled the problems of falling productivity and rising costs. Production in the region fell by 38% over the last three years, hitting a low of 1.4 million barrels of oil and gas last year.

The government has already been generous with its tax incentives for the oil and gas sector, over the last few years, with measures leading to an additional £7 billion in investments in 2013 alone.

BG Group is among UK companies already currently operating HPHT fields, on the Lomond platform and in the Central Graben Area of the central North Sea.

Investor view

The Interactive Investor discussion boards were buzzing during and after the Budget speech, especially once the Chancellor started talking about North Sea oil and gas investments.

User 'miffed', speaking on the board for Xcite Energy, summed it up: "This will be the catalyst for deals to be done in the North Sea."