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Tax cut on shallow-water gasfields due to lift UK gas activity

The UK government has cut tax charges on large shallow-water gasfields

The UK government has cut the tax charge on large shallow-water gasfields, in a move which Oil & Gas UK, the producers’ and suppliers’ association, says could lead to the go-ahead for development projects worth £2.4 billion ($3.7bn). The announcement was followed by GDF Suez’s confirmation that it is moving towards a development application for its Cygnus field, and it is expected to lead to an upturn in the UK’s drilling figures.

The tax incentive is targeted at gasfields with reserves in the range 10bn-20bn cubic metres (cm) and lying at water-depths of less than 30 metres. The first £500 million of production income from such fields is to be exempt from the 32% supplementary charge – a saving for each field of £160m.

Accordingly, qualifying fields given development consent after 25 July this year will only pay ring-fenced corporation tax, set at 30%, up to the limit of the production allowance. Two or more fields given the go-ahead on the same day can be counted together to meet the reserves limits, although the benefit will taper to zero at 25bn cm.

The announcement was welcomed by partners in the southern North Sea’s Cygnus field – operator GDF Suez (38.75%), Centrica (48.75%) and Bayerngas (12.5%) – which are planning to bring the field on stream in late-2015. Cygnus, with proven and probable reserves of about 18bn cm, is the UK’s sixth largest gasfield by remaining reserves and will account for 5% of the country’s gas production when on-plateau. The £1.4bn project calls for two drilling centres, four platforms and an initial 10 development wells, with gas landed to Bacton though the ETS pipeline.

Another group headed by the same operator – GDF Suez (51.56%), First Oil Expro (29.44%) and Hansa Hydrocarbons (19.0%) – received development consent for the Juliet gasfield in June. Juliet, also in the southern North Sea, holds reserves of 2bn cm and will produce from two horizontal subsea wells, tied-back to Perenco’s Pickerill A platform, 22 km away. First gas is due in late-2013.

There are forecasts that the tax incentive will give a lift to UK drilling work, which slumped to a total of only 42 exploration and appraisal wells in 2011 – down from annual totals of more than 60 wells in the previous two years and more than 100 in the two years before that (PE 4/12 p9). The Department of Energy and Climate Change recorded 23 exploration and appraisal wells for the first half of this year – when there were no exploration wells drilled in the southern North Sea gas province, and only one appraisal well in the area.

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