Britain will boost tax support for North Sea oil and gas companies to help firms operating in smaller, less profitable 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 companies on finding new categories of field allowance.
The move follows the government’s surprise tax increase on North Sea output in March, which had led the industry to warn that investment in Britain’s oil and gas would suffer, increasing imports and driving UK jobs abroad.
Oil firms cautiously welcomed the move. Norway’s Statoil 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 shares of smaller North Sea-focussed 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, Statoil suspended $10 billion (6 billion pounds) worth of projects off Britain and utility Centrica said it had idled a gas field as profits had become marginal.
Statoil said on Tuesday it would resume work on the projects before making a final investment decision at the end of next year, while Centrica said it resumed output at the South Morecambe field on Friday.
“With this announcement today, the negative tax impact has been neutralised,” a Statoil 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.
“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.
Shares in some smaller North Sea players which do not yet have production rose. Xcite Energy jumped 27 percent after it issued a statement saying the improved terms enhanced the underlying asset value of its key Bentley field.
Encore Oil , Serica Energy and Ithaca Energy gained 10 percent and 6 and 5 percent respectively.
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 since as the larger and easier-to-tap deposits are pumped out. Geologists say there are still billions of barrels left in smaller accumulations.
The pro-independence Scottish National Party (SNP), which won a majority in the devolved Scottish parliament in May, had also criticized the March tax increase. The SNP believes an independent Scotland would be entitled to the bulk of UK North Sea oil revenues.
A spokesman for the Scottish Government on Tuesday called the tax development a “welcome but limited concession” while saying the UK Government needed to do more to safeguard the future of the North Sea.
“On its own, it will not be sufficient to undo the damage to output, investment or employment from the UK government’s tax rise,” the Scottish Government spokesman said.
