Ultra-High-Pressure High-Temperature Field Tax Cuts

Published at 10:09AM - 28/07/14

The British government has launched a consultation process for a new cluster area allowance, a tax break that will support investment in offshore ultra-high-pressure and high-temperature oil and gas fields and encourage further exploration and appraisal in cluster areas (areas where separate oil and gas accumulations can be developed as a unit).

The announcement is part of a government response to the recommendations of the Wood Review, a study of the UK North Sea oil and gas sector led by retired industrialist Sir Ian Wood.

The consultation process with all stakeholders in the North Sea oil and gas industry was opened on 23 July and will close on 30 September 2014. The results will be incorporated in the government’s 2015 budget.

Ultra-high-pressure and ultra-high-temperature fields are those such as the Elgin, Franklin and Culzean fields in the central North Sea, where reservoir pressures range between 600 and 1100 bar and fluid temperatures are around 193 degrees C. The Elgin and Franklin fields are the highest pressure and temperature field developments in the world.

The Culzean gas field development project in the Central North Sea, operated by Denmark’s Maersk, is another ultra-high-pressure and high-temperature development that could supply up to five per cent of gas consumption in the British market by 2021.

The government regards the central North Sea area as the region with the greatest future oil and gas potential on the UK continental shelf.

It intends the new allowance to focus on key economic features of any project rather than the physical characteristics of the development, the Treasury said in a statement. The aim is to accommodate cost inflation and provide companies with greater transparency and predictability of future tax revenues.

The hope is that the new allowance will be sufficiently flexible so that it will be able to respond to changes in future capital investment costs. This way the government hopes that frequent legislative adjustments, a decades-long recurring North Sea problem, will be avoided.

The proposed cluster allowance is planned to work in the same way as other field allowances. It will exempt a portion of the investor’s profits from the supplementary charge. It will reduce the effective tax rate on that part of the investment from a current 62 per cent to 30 per cent.

Exploration and appraisal costs will be included in the capital investment that qualifies for the allowance. But decommissioning costs will be excluded, the government said. This exclusion of decommissioning costs is unlikely to go down well with potential North Sea investors, industry sources predict.

The activated allowance amount will no greater than the income generated by a given company’s share in any development where it incurs expenditure, the statement added. However, the government does propose that companies will be allowed to transfer, if they so elect, this generated allowance between projects within a cluster

This means that the allowance generated in an unsuccessful exploration or appraisal in one part of a cluster may be activated on the production income from another project in the cluster.

As with a similar allowance for onshore field developments, this allowance will come into play only three years after the original expenditure was incurred by the investor.

Last updated on 05:47PM - 06/08/14