The Budget of 12 March 2008 includes a number of welcomed proposals for the North Sea fiscal regime, which are now encapsulated in the Finance Bill 2008. The proposed changes should be seen against the backdrop of the ongoing government-industry consultation, as demonstrated by the consultation document Securing a sustainable future (2007), and the wider government commitment, encapsulated in the government's energy policy (set out in the Energy White Paper of May 2007), to promote investment and maximise production whilst ensuring a fair return for the UK taxpayer. The proposed changes further aim to maximise the economic recovery of North Sea oil and gas by encouraging renewed investment and facilitating asset trade as an alternative to premature decommissioning because of the burdensome taxation regime.
The proposed changes are included in the 2008 Finance Bill, published on 27 March and mainly apply to petroleum revenue tax (PRT) and corporation tax (CT). The changes to the North Sea fiscal regime, which are generally welcomed by the industry, will ease some of the tension regarding the huge decommissioning liabilities through greater access to CT and PRT relief for the costs of the decommissioning of North Sea infrastructure.
Basically, when an oil field comes to the end of its productive life, the licensees are responsible for the costs of decommissioning the offshore infrastructure. Such costs are relievable for PRT purposes where they are incurred at the end of the field's life and can also be used to offset profits made earlier in the life of the field. The PRT regime also includes a number of allowances designed to ensure that the tax does not impact unfairly on smaller or marginal oil and gas fields allowing companies to elect to come out of the PRT regime on the basis that such fields will not become liable to PRT.
Under the existing scheme, where the current licensees default on their obligations, BERR can require ex-licensees to undertake the decommissioning and the former licensees can not get relief for PRT purposes for the costs they incur. However, the 2008 Finance Bill changes this situation and allows for PRT relief for former participators where they are required to meet decommissioning costs by BERR because of default by an existing licensee.
The 2008 Bill also allows companies to carry back decommissioning costs to 17 April 2002 (the date of the introduction of the supplementary charge for profits from oil and gas production in the UKCS). It also allows for 100% capital allowances for new expenditure on long-life assets and mid-life decommissioning.
If you would like any further information on the issues covered by this article please contact Leon Moller.