Brown Field Allowance

Friday 7th September 2012 Written Statements

[The Economic Secretary to the Treasury (Sajid Javid)]

The Government are today announcing that they will introduce a brown field allowance for companies undertaking additional development in certain older fields in the UK continental shelf.

This follows the announcement at Budget 2012 that the Government would introduce legislation in Finance Bill 2012 giving it the power to introduce targeted measures to support investment in brown fields. The Government also committed to engage further with industry on how any such allowance could be structured to unlock investment while protecting Exchequer revenues. This legislation was agreed by the House and was given Royal Assent on 17 July 2012.

This allowance will encourage companies to continue investing in vital North sea infrastructure, and to get the most out of ageing assets. It comes on top of the ambitious package of measures that the Government have already announced this year to support investment in the UK continental shelf.

The allowance will shield a portion of income in fields with qualifying projects from the 32% supplementary charge rate, and will be available from the accounting period in which incremental production from the qualifying project is expected to start. A qualifying project will be an incremental project increasing expected production from an offshore oil or gas field as described in a revised consent for development which is authorised by the Department of Energy and Climate Change (DECC) on or after 7 September 2012, and has verified expected capital costs per tonne of incremental reserves in excess of £60. Where a project forms part of a larger development, all elements of the development must receive authorisation consent on the same day.

The field allowance for a qualifying project will be £50 per tonne of expected incremental reserves for projects with a verified expected capital cost per tonne of incremental reserves of £80 or greater, with a straight-line taper to no allowance at a capital cost of £60 per tonne, and no allowance for projects with capital costs below that level. The maximum allowance for which a single project can qualify will be £500 million for projects in fields paying petroleum revenue tax, and £250 million for other projects (i.e. maximum tax relief of £160 million and £80 million respectively at the current 32% supplementary charge rate).

The Government will keep under review the inclusion of projects involving enhanced oil recovery using carbon dioxide. However, such projects will not initially fall within the scope of the allowance because of concerns around cost apportionment across the upstream/downstream boundary.

Changes to the field allowance regime may be made by order. The Government intend to lay the necessary order before the House of Commons later this year.

Further detail on how cost and reserve estimates are to be calculated for qualifying projects will be set out on the HMRC website and in the relevant secondary legislation later this year.

The Office for Budget Responsibility will publish the full scorecard costings of this measure over the forecast period at the time of its autumn forecast. Initial estimations are that the change will cost around £100 million a year in the forecast period.

As this is a new type of allowance, the Government will review its effectiveness in 2015 to ensure that the oil and gas fiscal regime continues to be structured in a way that stimulates investment while ensuring a fair return for the taxpayer.