Following on from announcements in the Budget in March in relation to oil and gas taxation, the Chancellor of the Exchequer announced on Friday a new tax allowance for certain mature fields, known as brown fields. This latest measure will shield a portion of income from the Supplementary Charge, encouraging companies to invest in getting the most out of existing fields and infrastructure in the UK Continental Shelf.

The earlier measures included a commitment to sign contracts with industry to guarantee their long-term level of tax relief on decommissioning used assets, and the introduction or extension of allowances for small fields, large shallow-water gas fields and fields in the West of Shetland. (Please click here to see our Law-Now article on the Budget announcements.)

Older fields have high running costs and are currently taxed at up to 81% (for PRT paying fields).  The new Brown Field Allowance will shield up to £250m of income in qualifying brown field projects, or £500m for projects in fields paying Petroleum Revenue Tax, from the 32% Supplementary Charge rate (providing tax relief of up to £80m or £160m respectively). The level of relief available to an individual project will depend on its size and unit costs but the Government expects that overall the measure will cost it around £100 million a year in the forecast period.  However, this is expected to be more than outweighed by the tax revenues generated from the increased investment. Oil & Gas UK believe that the measure should rapidly lead to a number of new investments amounting to £2 billion, create many thousands of high skilled jobs, add tax revenues of over £1.5 billion and increase oil and gas recovery by 150 million barrels of oil equivalent. 

There may also be indirect benefits in that postponing the decommissioning of older fields and their infrastructure is the key to unlocking the development of many of the smaller marginal discoveries now being made.

A qualifying project will be 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 (DECC) on or after 7 September 2012, and has verified expected capital costs per tonne of incremental reserves in excess of £60. The maximum level of allowance will be £50/tonne and will be available to projects with verified expected capital costs of £80/tonne or above.