Budget 2012: Deloitte comments on Oil and Gas changes

Wednesday, Mar 21, 2012

Following 12 months of intense discussions on the constraint uncertainty around decommissioning relief has on activity and investment, the Chancellor announced today enabling legislation will be put in place to allow UK North Sea companies to enter into contracts with government, which should guarantee the future tax relief on decommissioning costs.

This will remove a major fiscal risk for UK North Sea investors and may release significant funds for investment by allowing companies to move to post-tax decommissioning guarantees. This will also free up capital available for investment and development of opportunities in the North Sea. This activity boost should also increase the tax take for government. Deloitte petroleum Services Group estimates that the UK North Sea decommissioning costs are estimated to be almost $50bn over next 30 years.

The government has also proposed various targeted incentives namely the extension of the field allowances regime to stimulate investment in technically challenging areas such as West of Shetland where the majority of future prospects are located, as well as extending relief for smaller fields.

The government has also left open the possibility of the introduction of further reliefs targeting specific opportunities such as brown fields and High Pressure High Temperature fields. This is to be the subject of further consultation between industry and government.

These proposed changes are the result of detailed dialogue between government and industry and go some way to restoring trust which had been shaken by last year’s SCT increase.

Work done by the Deloitte Petroleum Services group showed levels of exploration and drilling activity on the UKCS during 2011 were 34% lower than during 2010, and the lowest since 2003. To date, the levels in 2012 have been comparable to same period in 2011. The measures announced today show willingness of government to work with industry to create an environment in which the maximum economic recovery of hydrocarbons from the UK North Sea can be achieved in the years to come.

Deloitte anticipates proposed measures will incentivise and encourage higher exploration and appraisal activity levels, brown field and new field developments and overall investment in the UK North Sea. It may also trigger further confidence in the financial markets to support UK oil and gas investment plans. It is likely that asset transfers and deal flow will increase especially for smaller players looking to tap into mature producing assets.

Source: The BIG Partnership