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British Gas parent to grab £500m North Sea gas tax break

New allowance for investors in UK Continental Shelf production

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The government has announced a new tax relief for operators of shallow-water gas fields in the UK Continental Shelf, ahead of its planned long-term gas strategy to be published this autumn.

Its new £500m field allowance would, the government said, secure future investment in North Sea gas and create jobs. Centrica, the parent company of British Gas, has already said that the announcement will allow it to proceed with its Cygnus project; which it said was expected to meet the energy demands of 1.5 million homes and create an estimated 4,000 jobs across the supply chain.

Chancellor of the Exchequer George Osborne described the announcement as a "further sign of the government's determination to get the most out of" an asset it has previously described as vital to the country's future energy security. The Treasury estimates that the initiative will cost it £20m per year.

"Gas is the single biggest source of energy in the UK," he said. "The government is signalling its long-term commitment to the role it can play in delivering a stable, secure and lower-carbon energy mix. At the Budget, we announced an ambitious package of support to stimulate billions of investment in oil and gas production in the North Sea. [This] is a further sign of the government's determination to get the most out of a huge national asset.

Energy tax expert Tom Cartwright of Pinsent Masons, the law firm behind Out-Law.com, said that the announcement was "welcome news" for "an industry which has been on the wrong end of tax policy in the recent past".

"The government seems to have understood and responded to the arguments in favour of creating a fiscal regime which will ensure the natural resources of the North Sea are fully exploited," he said. "Discussions on the use of field allowances to encourage exploitation of economically marginal fields are clearly bearing fruit."

The new allowance applies to gas fields with a water depth of less than 30 metres, where development is authorised for the first time on or after 25 July. Up to the first £500m of income from qualifying fields will be exempt from the 32 per cent Supplementary Charge (SC) rate, although fields will still pay the 30 per cent Ring Fence Corporation Tax (RFCT) on all income from the field. The maximum allowance will be made available to fields with a central estimate of gas reserves between 10 billion m3 and 20 billion m3, tapering to no allowance at 25 billion m3.

Centrica has claimed that its Cygnus project is the largest gas discovery in the Southern North Sea in 25 years and will, at peak production, account for around 5 per cent of the UK's total gas production. The company and its partners plan to invest £1.4bn to develop the project, with more than 80 per cent of that expected to be spent with UK-based companies.

"As the UK becomes increasingly dependent on imported gas, [the] announcement represents a significant boost to the UK's long term energy security as well as creating much-needed jobs," its chief executive, Sam Laidlaw, said. "For Centrica, this is an extremely significant project as we look to unlock remaining gas in the North Sea, securing UK gas supplies for our customers."

The announcement is the latest in a package of measures, proposed by Osborne during his 2012 Budget, aimed at encouraging long-term investment in North Sea oil and gas resources. The Treasury is currently consulting (42-page/273KB PDF) on the creation of Decommissioning Relief Deeds, which will contractually set out the levels of relief that companies will be entitled to claim once a facility is decommissioned. Additional tax incentives for oil investors include a new field allowance worth £3 billion specifically targeted at deepwater drilling west of Shetland.

Industry body Oil and Gas UK welcomed the announcement, but urged the government to quickly come to a decision on how a potential brown-field allowance could be used to promote investment in existing fields.

"While we are encouraged by the Chancellor's confirmation that the government will continue to work with the industry on this, discussion with the Treasury has been ongoing for many months and time is now of the essence," its chief executive, Malcolm Webb, said. "For some fields near the end of their planned life, an early decision on support for further investment is urgently required if the UK is to reap the full benefit in terms of jobs, tax revenues and energy security."

Copyright © 2012, Out-Law.com

Out-Law.com is part of international law firm Pinsent Masons.

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