UK ups tax support for North Sea oil firms

LONDON: Britain will boost tax support for North Sea oil companies to help firms operating in smaller, less profitable oil fields, softening an earlier tax increase that had prompted warnings about the future of the nation's energy supply.

The Treasury said on Tuesday it would raise the annual rate of the Ring Fence Expenditure Supplement to 10 percent from 6 percent. It also said it would continue to consult oil companies on finding new categories of field allowance.

The move follows the government's surprise tax increase on North Sea oil output in March, which led the industry to warn that investment in Britain's oil and gas would suffer, increasing imports and driving UK jobs abroad.

Oil companies cautiously welcomed the move. Norway's Stat-oil said it would resume preparatory North Sea work suspended in the wake of the tax rise, while a UK trade group called it "constructive" and the shares of smaller firms rose.

"They're alleviating some of the damaging effects of the tax increase and we could see more of this as the companies lobby the government," said Sanjeev Bahl, analyst at Numis.

"It is really letting companies increase the value of their tax loss position if they're not profitable."

The government earlier this year announced an increase in a tax on North Sea oil and gas producers to 32 percent from 20 percent to offset lower fuel duty for motorists.

In response, Stat-oil suspended $10 billion worth of projects off Britain and utility Centrica said it had idle a gas field as profits had become marginal.

Stat-oil said on Tuesday it would resume preparatory work on the projects before making a final investment decision at the end of next year.

"With this announcement today, the negative tax impact has been neutralised," a Stat-oil spokesman told Reuters.

"We're now able to move forward at full speed with the technical and commercial work we need to do before a final announcement is made

A trade group representing UK North Sea producers, Oil & Gas UK, called the tax change "constructive" but said it would not undo the impact of the earlier increase.

"Whilst the change to the allowance will not redress the damage caused by the recent tax increase, it will help new investors to the UKCS (UK continental shelf) who are otherwise disadvantaged compared to more established players," said Mike Tholen, economics director of Oil & Gas UK, in a statement.

Share reaction amongst small North Sea oil producers was muted but positive. Amongst the biggest movers was Encore Oil up 5.7 percent and Ithaca Energy, up 3.4 percent.

Enquest the company that analysts said was the most exposed to the initial tax hike and which has seen its shares fall around 20 percent since March rose 3.5 percent to 131.1 pence by early afternoon.

The Treasury said the new allowance would cost around 50 million pounds ($80 million) a year by fiscal year 2015/16.

"Today's change demonstrates our commitment to ensure current allowances work effectively and equitably and lays the groundwork for further constructive discussions on field allowances," said Treasury minister Justine Greening, in a statement.

The supplement was introduced in 2006 and currently allows companies to increase the value of losses they carry over from one period to the next by 6 percent for a maximum of six years.

It is aimed at helping firms that do not yet generate enough income to be able to offset their exploration, appraisal and development costs against corporation tax.

UK oil and gas output peaked in 1999 at 4.5 million barrels of oil equivalent per day (boepd) and has been declining steadily since as the larger and easier-to-tap deposits are pumped out.

Geologists say there are still billions of barrels left to produce in smaller accumulations.

Copyright Reuters, 2011