Osborne will throw lifeline to North Sea oil industry

UK Political Editor

Saturday 17 March 2012

THE North Sea oil and gas industry is to get a major boost in next week's Budget that will pave the way for tens of billions of pounds of extra investment to create and secure thousands of jobs.

TAX: Last year's budget was bad news for the oil industry.

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MICHAEL SETTLE UK POLITICAL EDITOR

The sector has been held back by a fear among firms that tax breaks on the costs of retiring older oil fields may be scrapped.

However, Chancellor George Osborne, who last year was widely criticised for the Treasury's £2 billion raid on the industry's profits, is expected to announce a long-term guarantee that tax relief on decommissioning will not be scrapped.

This is aimed at giving companies more certainty to plan long-term investments to tap remaining reserves – said to be as much as 24 billion barrels of oil and gas.Last night, a Treasury source told The Herald: "The Government said we would deliver certainty over decommissioning. This should pave the way for billions of pounds in new investment in the North Sea."In November, a report by leading accountants PriceWaterhouseCoopers suggested the UK continental shelf could generate more than £376bn in new revenue through not only fresh investment but also fiscal certainty.Last month, First Minister Alex Salmond called for stable tax incentives for decommissioning off Scotland's coastline. In the spring, Mr Salmond is due to announce the Scottish Government's new oil and gas sector strategy to help maximise extraction rates, secure the industry's skills base and develop the supply chain in Scotland and further afield. At present, the North Sea has almost 500 oil and gas installations. The cost of decommissioning – involving plugging old wells and removing rigs and pipelines – is estimated at £30bn. The prospect of such massive costs has been deterring bidders for older fields and thus the development of their remaining resources. Last month, John Manzoni, chief executive of Talisman Energy, a North Sea producer since 1994, pointed out: "The prospect of future decommissioning costs deters small companies. Hence, the transactions have stalled and the resources are not getting the investment that they otherwise might."The Treasury is hopeful this will change. It regards its expected Budget announcement as "a big deal" and says the potential effect on investment could be as high as £17bn, meaning older and more marginal fields will be exploited for longer. However, industry insiders believe the impact of the Chancellor's tax measure on decommissioning could be even greater and bring in more than £30bn.Mike Tholen, economics director of Oil & Gas UK, said: "Certainty that the current fiscal rules on decommissioning will apply for the long term is crucial to the future of the UK continental shelf. Appropriate measures to achieve this would be warmly welcomed by Oil & Gas UK and would signal the Government's confidence in the industry."He noted: "An independent study has estimated that the measure should result in recovery of an additional 1.7 billion barrels of oil and gas equivalent and postpone decommissioning of the UK's oil and gas infrastructure by five to seven years."He added: "The additional recovery of the UK's oil and gas would drive growth by securing highly skilled jobs, supporting energy security and driving additional capital investment, in our view, to the tune of tens of billions of pounds. Importantly, all this can be achieved at no net cost to the Exchequer."Last year, Mr Osborne's tax hike angered the industry and shook investor confidence. Exploration halved and production fell by 18%.In the face of oil and gas companies' hostility, the Chancellor said he would look at the decommissioning costs issue. Whitehall sources insisted there has been "very positive engagement" between the industry and ministers, including the first meeting of the Fiscal Forum chaired by Chloe Smith, the Economic Secretary, in January.The Coalition's proposal will result in legislation as well as legally binding contracts between Government and companies.While the industry will welcome Mr Osborne's expected announcement on decommissioning, it still hopes he will extend tax allowances to help companies exploit new fields and invest more in existing ones.

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Osborne will throw lifeline to North Sea oil industry

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