Chancellor offers tax incentives for new deep sea oil fields

The government is to encourage further development of deep sea oil and gas west of Shetland with a £3 billion new field allowance included in today’s budget, provoking complaints from environmental groups.

It will also seek to agree deals on tax relief for the decomissioning of old North Sea platforms, an activity which could have a beneficial impact on employment in Shetland given its proximity to the fields and its deep water voes.

But motorists across the country will be hit with a 3p increase in fuel duty from August, Chancellor George Osborne confirmed.

Mr Osborne told parliament he was determined that Britain should extract the greatest amount of oil and gas reserves possible at a time of soaring global prices. Brent crude was trading today at $124 a barrel.

“We will end the uncertainty over decommissioning tax relief that has hung over the industry for years by entering into a contractual approach,” he said.

“We are also introducing new allowances including a £3bn new field allowance for large and deep fields to open up west of Shetland, the last area of the basin left to be developed.”

Exploiting west of Shetland reserves is opposed by environmentalists not only because would it lead to the extraction of more fossil fuels, but because they fear the deep water and rough sea conditions would make a potential spill extremely hard to clean up.

Charlie Kronick, senior energy adviser for Greenpeace, said: “George Osborne has opened the flood gates to a new Klondike in the deep waters off Shetland without learning any of the lessons of the dangers this poses after the disaster in the Gulf of Mexico just over a year ago.”

WWF Scotland’s head of policy Dr Dan Barlow said: “New deepwater drilling west of Shetland is just not worth the risk because we should be phasing out our use of oil not chasing ever more difficult sources.

“The Shell spill from Gannet Alpha last year showed that even in easy waters, a long experienced operator can make a total mess of dealing with an oil leak.”

However Derek Leith, head of oil and gas taxation at the accountant Ernst & Young in Aberdeen, said Mr Osborne’s gestures should lead to new investment after the industry was hit hard by increased taxes last year. The tax rate on oil production profit was increased from 50 per cent to 62 per cent to fund a cut in fuel duty.

“The budget demonstrates government acceptance that establishing a stable tax environment in the basin will prolong the life of existing infrastructure, deliver millions more barrels of oil equivalent and boost the Treasury’s coffers via increased tax take,” he said.

“Confirmation that the government intends to enter into contractual agreements on tax relief for decommissioning cost improves the fiscal stability of the UK continental shelf, while the targeted incentives for particular types of fields will go some way in increasing the attractiveness of areas currently starved of investment.”

According to Bloomberg, companies such as BP are trying to dispose of older fields in the North Sea to focus on new exploration. The government is seeking to unlock as much as £17 billion of investment in North Sea energy that is being held back because of uncertainty over decommissioning costs.

Decom North Sea (DNS), the organisation that represents the North Sea’s oil and gas decommissioning industry, welcomed the budget announcement.

Chief executive Brian Nixon said: “The announcement has provided a set level of relief for operators which will assist the whole industry – and particularly the smaller breed of operators working in the North Sea – and will encourage more asset sales with prospective buyers now being assured of government support when the assets reach the decommissioning phase.

“We believe the budget will lead to operators being able to move forward with their decommissioning plans, which will in turn help to re-assure the hundreds of supply chain companies and encourage them to consider investment in new equipment or tooling or to attract new staff.

“We are not trying to accelerate the pace of decommissioning by any means but we are trying to increase the pace of innovation and efficiency in the industry and this needs a more steady flow of projects than seen to date.’’  

Mr Nixon added: “There are huge business opportunities for contractors, service specialists, equipment providers, technology developers, consultants and professional service companies from around the North Sea.”