3 Ways The 2014 UK Budget Will Affect Oil & Gas

Tim Haïdar

On Wednesday March 19th, British Chancellor of the Exchequer, George Osborne presented his budget to the assembled Houses of Parliament.

The tax breaks announced in the 2013 budget prompted an additional £7 billion ($11.6 billion) in investments in 2013, so what will the 2014 statement have in store for the oil and gas industry? Here are the main takeaways:

i) A new tax allowance on High-Pressure High-Temperature (HPHT) Developments

The term "HPHT" was first coined in the 1990 Cullen Report and is generally used to describe wells of a hotter or higher pressure than most. In a world of dwindling conventional reserves, HPHT ventures have become increasingly commonplace and more than 100 projects are currently in development or operation in the in the North Sea.

Measures announced today are intended to increase investment in HPHT fields, by allowing a tranche of a company's profits to remain exempt from the supplementary charge. This exempted amount will be equal to at least 5/8 (62.5 per cent) of the qualifying capital expenditure a company spends on these projects.

This tax break will benefit both operators and contracting companies throughout the supply chain alike and will attempt to boost exploration and production activity in the Central North Sea and West of Shetland zones of the UK Continental Shelf (UKCS).

Here at Oil & Gas IQ we are particularly interested in HPHT projects and run the world's largest dedicated HPHT event. For a primer on world HPHT developments, take a look at our exclusive HPHT Hotspots Map.

ii) Adoption of Wood Report recommendations and top-to-bottom review of the UK’s oil and gas tax regime

Chancellor Osborne announced that the coalition government would fully-adopt all of the recommendations outlined in Sir Ian Wood’s review of the UK oil and gas sector.

The report stated that North Sea production would continue to decline unless the problems of falling productivity and rising costs were met. Production on the UKCS fell by 38 per cent over the course of the last three years, hitting a low of 1.4 million barrels in 2013.

In line with this, Osborne today announced that the Office for Budget Responsibility (OBR) had revised down forecast tax receipts from North Sea hydrocarbons by some £3 billion ($5 billion).

Another area of concentration is a comprehensive review of the UK’s oil and gas tax framework. In 2013, the UK industry paid £6.5 billion ($10.8 billion) in corporate taxes into the British exchequer, which equated to 15 per cent of all taxes paid into UK coffers.

iii) A new tax allowance for onshore E&P companies

The Chancellor also announced significant tax allowances for the onshore sector as an encouragement for the development of shale gas resources.

The exemption will be equal to ¾ of the qualifying capital expenditure a company has laid out on onshore oil and gas projects since the 5th December 2013.

According to the United Kingdom Onshore Operators Group (UKOOG), there have been 54 discoveries of oil, gas and coalbed methane in the UK since 1982. There may be up to 170 trillion cubic feet of shale gas in the UK, yet so far only one well has been fracked on the UK mainland and there are permits for only a further two wells to be developed this year so far.

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Tim Haðdar
is the Editor In Chief at Oil & Gas IQ. Reach Him At Twitter Or OGIQ