Brown Field Allowance  

On 7 September 2012 the Government announced that it is introducing a Brown Field Allowance for companies undertaking additional development in certain older oil and gas fields in the North Sea.

The announcement follows an increase in the supplementary charge (from 20% to 32%) brought in last year, which many observers believe has led to a fall in production.

This decline in production has also been addressed earlier this year. In July 2012, the Government brought in a £500 million tax relief for large shallow water gas fields in order to try and stimulate growth in the sector.

What is the Brown Field Allowance?

In simple terms, it is a tax break. It means that the first £250 million earned from projects in existing sites will be shielded from the supplementary charge rate.

This allowance rises to £500 million for projects in the oil and gas fields that pay petroleum revenue tax (PRT). Therefore, the overall maximum tax relief available is £80 million for projects in existing sites and £160 million for fields that pay PRT.

The introduction of this new allowance was facilitated by section 184 of the Finance Act 2012. This section put the mechanisms in place to allow a reduction of the supplementary charge for certain oil fields.

Section 184, FA 2012 was elaborated on in schedule 22, FA 2012. This schedule amended the Corporation Tax Act 2010 to reflect changes in the definitions of oil fields and the insertion of 'additionally developed oil field'.

The Brown Field Allowance applies to any qualifying project, which is defined below as:

  1. an incremental project increasing expected production from an offshore oil or gas field as described in a revised consent for development which is authorised by the Department of Energy and Climate Change on or after September 2012; and
  2. has verified expected capital costs per tonne of incremental reserves in excess of £60.

Its impact and the future

The intention is to drive investment and growth in the production of oil and gas in the North Sea. For obvious reasons, it is not known whether this will be a sufficiently strong measure to achieve the objective. However, key observers in the sector, such as Oil and Gas UK, have stated that it may lead to £2 billion of investment and another 50 years of production.

As for the Government, the measure is expected to have a net cost of £100 million in year one. In the longer term it expects the additional revenues generated to exceed the initial costs of the new allowance.