On November 24, 2008, the UK Government published its proposals for further reform of the North Sea fiscal regime. The paper follows a consultation document published in December 2007 and builds on changes announced in the Budget of March 2008. A package of reforms is to be introduced in the Budget of 2009 and legislated in the Finance Bill 2009, once industry stakeholders have been given a period of time to respond to the proposals.  

Incentivising investment in the UKCS  

In recognition of the increasingly challenging nature of the UK Continental Shelf (UKCS) as a maturing basin, the UK Government has outlined its views on the need for additional fiscal incentives to stimulate investment, activity, and therefore production in the North Sea. The UK Government concluded that a targeted incentive could result in increased investment, but recognized that the needs of both taxpayers and producers must be taken into account. Having considered various possible mechanisms, the UK Government’s favoured approach is the introduction of a ‘value allowance’ which would be targeted on those commercially marginal, but economic, fields in need of most assistance in the UKCS. Such a ‘value allowance’ would involve a specified amount of upstream profits relating to fields that satisfy certain criteria being taxed at a reduced rate.  

Industry will be consulted for further input with regard to the optimum method for delivering such an allowance, those types of fields which the allowance should target, and the levels at which the allowance will need to be set in order to make a material difference to an economically viable yet commercially marginal field. Types of field which may be targeted include heavy oil, small fields or high pressure, high temperature reservoirs. Mike Tholen of Oil & Gas UK, the industry group said: “It is the right idea with the right aim. The key thing will be the extent to which investments and fields have access to this allowance and how big it is. That will determine whether it has a real effect, or is just window-dressing.”

Change of Use  

The UK Government has proposed a number of changes to facilitate the ‘change of use’ of North Sea assets, from mainly oil and gas exploration and production to alternative uses, such as gas storage, carbon capture and storage (CCS), and renewable energy.  

These proposals include:  

  • the introduction of a relief for decommissioning costs for ex-ring fenced assets if a ‘change of use’ has occurred, as if the assets had stayed within the ring fence.  
  • the removal of a disposal for Petroleum Revenue Tax (PRT) purposes in cases when:
    • (a) a PRT ‘qualifying asset’ is used for a ‘change of use’
    • (b) it ceases to be used in relation to a PRT taxable field and
    • (c) no disposal receipts arise within two years following the last use in connection with a taxable field.  

This means that PRT charge will be removed where a ‘qualifying asset’ is no longer used for a PRT purpose.

  • no PRT charged in relation to assets used for ‘change of use’ purposes.

Chargeable gains

As a means encouraging the trading of North Sea assets, the UK Government has proposed that changes be made to current legislation such that when UKCS licences are swapped, no gain will arise to the extent that the values of the Licences are equal. Further, to the extent that proceeds of disposal of North Sea licence interests are reinvested in other such North Sea licences, any gains will be tax exempt. This is a change from the current legislation under which gains can only be deferred for a maximum of 10 years. In Hogan & Hartson’s experience, the level of activity in swaps and similar transactions in the North Sea has seen a decline in recent years. This measure may help to reignite interest and levels of activity. However, there will always be commercial questions surrounding how to define and calculate the value of exploration acreage. For example, the value of a particular license interest may not necessarily be directly referable to the intrinsic value of the license itself. Other factors may also be relevant such as geographical location which may deliver comparatively more value to one company than to another.  

Petroleum Revenue Tax  

The UK Government has suggested that companies be deemed to be participators in a field for which they have previously been license holders but continue to have obligations relating to decommissioning. This would allow relief to continue to be available for decommissioning costs even after the expiry of the license.  

There are also a number of proposals aiming to simplify the PRT regime, including a series of legislative repeals in areas where the UK Government considers PRT legislation is no longer relevant, or does not serve a purpose.


Comments on this UK Government Paper have been invited from stakeholders by February 13, 2009.