Oil industry applauds decision to extend North Sea tax breaks

The Treasury has agreed to extend tax breaks for the decommissioning of oil fields in the North Sea in a move that it hopes will prolong the life of drilling in the area.

The proposed lengthening of the so-called "loss carry-back" rule, which allows oil companies to deduct decommissioning costs from profits in the three-year period before decommissioning, was applauded by the industry. The change, published in a consultation paper yesterday, "should help to extend the life of many fields and facilitate the transfer of assets," said Malcolm Webb, chief executive of industry lobby group Oil and Gas UK.

Major operators such as BP and Royal Dutch Shell have shifted focus away from North Sea drilling as reservoirs decline and the cost of extracting the black stuff rises. The three-year limit had meant that in many cases it made more economic sense for oil companies to leave oil in the ground and decommission early than to continue to operate there.

The Government declined, however, to scrap the petroleum revenue tax, one of the key planks of the industry's effort to change a tax regime that it says makes the UK less competitive. "Government is categorically not attracted to" abolition of the petroleum revenue tax, the Treasury said in the paper. "Government believes that such a proposal would create a large number of winners and losers, damage investor confidence and fail to secure a fair return for the UK taxpayer."

The tax paid by UK oil and gas producers depends on the age of the fields they operate, but the average rate is 55 per cent.