North Sea tax move set to bring billions in new investment

His Budget will include a commitment on decommissioning in the wake of concern from the oil and gas industry that the cost of dismantling rigs could lead to companies taking them out of service prematurely.

Under a new arrangement, the UK government will sign contracts with oil companies guaranteeing decommissioning tax relief for the long term.

Last night, the measure was welcomed by the industry, which has been concerned that the 50 per cent or 75 per cent tax relief currently given to firms wishing to decommission would not last at this time of economic uncertainty.

The contracts will ensure that current levels of tax relief will be maintained for the foreseeable future.

A 50 per cent tax relief rate would mean a company having to spend £10 million on decommissioning an oil rig would be granted £5m relief on the tax bill it has to pay for extracting fuel from the North Sea.

A Treasury source said: “The government said it would deliver certainty over decommissioning, and this should pave the way for billions of pounds of new investment in the North Sea.”

The package has been thrashed out during discussions involving industry representatives and Economic Secretary to the Treasury Chloe Smith.

Companies are legally required to decommission off-shore equipment after there is no more use for it. It has been estimated the cost of decommissioning all the North Sea infrastructure would be £30bn.

The government believes the increased certainty over the cost of decommissioning will result in an extra £17bn being invested in an industry that supports 350,000 people.

The measure will also help major companies trying to sell on bits of infrastructure to smaller oil and gas firms.

The UK government will be hoping that the measure will repair its relationship with the sector, which was landed with a massive tax bill by Mr Osborne last year.

The Chancellor slapped a £2bn levy on oil firms to fund a 3p petrol price cut, despite industry outrage.

But this led to an 18 per cent fall in production, which meant the Treasury lost £2.3bn in taxes, according to a report by industry body Oil & Gas UK.

Mike Tholen, Oil & Gas UK’s economics director, said: “Certainty that the current fiscal rules on decommissioning will apply for the long-term is crucial to the future of the UK Continental Shelf.

“Appropriate measures to achieve this would be warmly welcomed by Oil & Gas UK and would signal the government’s confidence in the industry.

“An independent study has estimated that the measure should result in recovery of an additional 1.7 billion barrels of oil and gas equivalent and postpone decommissioning of the UK’s oil and gas infrastructure by five to seven years.

Mr Tholen added: “The additional recovery of the UK’s oil and gas would drive growth by securing highly-skilled jobs, supporting energy security and driving additional capital investment, in our view, to the tune of tens of billions of pounds.

“Importantly, all this can be achieved at no net cost to the Exchequer.”