Beleaguered North Sea industry poised for tax break outline report

The research coincides with speculation of a positive announcement for the offshore sector in the next Budget.

Last week, Energy Minister Andrea Leadsom revealed further fiscal measures were “on the table”.

The Tory frontbencher also highlighted a series of meetings between the UK Government, the Oil and Gas Authority and North Sea operators last year to discuss future steps.

North Sea expert Alex Kemp, professor of petroleum economics at Aberdeen University, said the impending report would highlight a number of options for encouraging exploration.

He and the rest of his research team have looked at four different fiscal measures recently discussed within the industry, as well as incentives specifically for enhanced oil recovery (EOR) projects.

Prof Kemp said: “One focus for us was on full cycle returns from exploration.

“Tax has to be reduced – activities will not be viable otherwise.”

One possible measure similar to Norway’s rebate system for incentivising exploration would “not be a great help” on this side of the North Sea, because of much lower UK tax rates.

Another method extending investment allowances to unsuccessful exploration – currently, only successful projects are eligible – would have a positive but “only small” effect, he added.

A third option would be to allow some investors – those with assets already generating revenue – to immediately take advantage of tax allowances that are currently available only when a field starts producing.

This measure would have a “good, worthwhile” impact, Prof Kemp said, adding that a fourth potential tax change allowing other investors to benefit from interest accrued on allowances hinging on future production revenue would have a “reasonably strong” effect.

Prof Kemp said his report would also look at the potential for a change in the way certain EOR costs are classified.

Treating some “operating” expenditure for these expensive projects as capital spending would pave the way for tax incentives, he said.