Recognising the importance of gas as the single biggest source of energy in the UK and reaffirming a long term commitment to a stable, secure and lower carbon energy mix, the Chancellor of the Exchequer yesterday announced a new tax relief to support investment in new shallow water gas fields in the UKCS.

Eligible fields are those:

  • whose development is authorised for the first time on or after 25 July 2012;
  • with a share of gas reserves greater than 95% based on the central estimates of oil and gas reserves at the time of development authorisation; and
  • with water depth less than 30 metres.

A link to the press release can be found here.

The tax relief takes the form of a field allowance.  By way of background, a field allowance reduces the amount of profit from a field that is subject to the Supplementary Charge (currently charged at 32%).  Field allowances have previously been used to provide an incentive for investment in 'marginal' fields.  Field allowances do not affect the charge to Ring Fence Corporation Tax (at the rate of 30%) which remains payable on all taxable profits from the field.  The Supplementary Charge remains payable on all profits not protected by the field allowance.

The new field allowances will protect £500 million of income from qualifying fields from the Supplementary Charge.  Maximum allowances will be available for fields with a central estimate of gas reserves between 10 billion cubic metres and 20 billion cubic metres, tapering to no allowances for fields above 25 billion cubic metres. 

An Oil & Gas UK press release states that the new allowances should trigger development of specific gas projects involving expenditure of £2.4 billion, the creation of 4,000 jobs and £600 million of additional tax revenue.  This for a relief that, on the Government's own estimate, should cost the Exchequer only £20 million per annum.

In context, this measure can be seen as another element of the Government's wider strategy to encourage investment in the UKCS.  As well as introducing new targeted financial incentives - we saw a new field allowance (worth £3 billion for certain 'marginal' fields, in particular west of Shetland) in Budget 2012 – the Government also now appears firmly focused on increasing investor certainty. Proposals aimed at removing the uncertainties surrounding the availability of tax relief on decommissioning expenditure – another significant barrier to investment in the sector - are currently subject to formal consultation (for a link to the consultation document see here).  Such recent changes (and proposed changes) to the UKCS tax regime should all help to incentivise development generally within the UKCS.

The announcement of the new relief was made on the same day on which the Energy Secretary has announced the Government's decision on the level of financial support available through Renewable obligations for large scale electricity generators and confirmed the importance of gas as part of the UK energy mix.  For a separate briefing on the Energy Secretary's announcement, please click here.