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Tax relief powered 90% of North Sea projects

MORE than 90% of North Sea developments approved in 2012 qualified for tax breaks following last year's Budget, paving the way for the continued boom in activity in the area.

Experts said oil and gas firms are set to ramp up activity in the North Sea, after tax changes combined with high oil prices powered a surge in activity last year. With plenty of firms reckoned to be in the market for North Sea assets, mergers and acquisitions, activity could remain at around the 10-year highs reached in 2012.

"The Government introduced a range of tax reliefs which have sufficient breadth and depth to create an environment in which companies of all sizes and investors have the confidence to take some risk and expand their operations in the North Sea," said Graham Sadler, managing director of Deloitte's Petroleum Services Group.

The big four accountant said a one-third annual rise in exploration and appraisal drilling in the UK North Sea last year reflected renewed vigour on the UK Continental Shelf. Drilling activity levels fell 19% annually in Norway, which has been seen as having a model tax regime.

Deloitte said other key indicators suggested positive prospects for the North Sea in 2013, after the introduction of tax breaks by the UK Government in 2012. The Chancellor previously sparked an outcry by hiking the tax rate payable on North Sea profits in the 2011 Budget.

The number of new developments approved surged to a 10- year high. Oil and gas firms are investing heavily, developing big fields in areas such as in the west of Shetland and boosting output from existing assets.

Deloitte said mergers and acquisitions activity in the UK North Sea increased 30% by volume in 2012, compared with 2011. Describing 2012 as a record year for global deal activity, Wood Mackenzie said the total value of UK deals hit a 10-year high of $10 billion (£6.25bn) in 2012. Buyers included organisations from China, the Middle East and UK and overseas corporations.

Luke Parker, manager of the M&A service at the Edinburgh-based energy consultancy, said: "There's no reason to expect anything different this year."

He added: "There's plenty of potential buyers out there for assets at the right price."

Mr Parker said moves by the UK Government to provide clarity on the tax treatment of the future cost of decommissioning assets had spurred M&A activity.

Last week, Wood Mackenzie forecast the boom in investment in the UK will be maintained until 2015. However, noting only two discoveries were made on the UKCS last year, it said investment might fall after then.

Derek Henderson, energy partner for Deloitte in Aberdeen, said North Sea production may have passed its peak but recently announced tax reliefs may help manage the decline in the province's reserves. The reliefs include a rise in the small field allowance, and an allowance for large deep-water developments targeting west of Shetland.

Wood Mackenzie said global exploration and production-related M&A activity totalled $232bn last year and the industry is primed for more deals.

Deloitte said more than 90% of the 21 new developments approved by the Government in 2012 benefited from tax breaks announced during the year. It said 65 exploration and appraisal wells were drilled on the UKCS in 2012, when there were 80 mergers and acquisitions in the area.

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