The Budget: PRT axed for new oil and gas fields: North Sea

KEY changes in the tax regime affecting the North Sea oil and gas industry could have a considerable impact on exploration activity in the sector.

The changes involve petroleum revenue tax, introduced in 1975 to provide Britain with a share of profits from North Sea oil.

PRT will be abolished completely for new fields. Profits from exisiting fields will be taxed at 50 rather than 75 per cent. However, the Chancellor also plans to abolish PRT rules that allow costs of new exploration and development to be set against profits from existing fields.

Some industry experts believe that the tax relief has an important incentive for companies to continue spending huge amounts on exploration work in the North Sea. As a result, the proposals were received with mixed feelings by the oil sector.

Harold Hughes, secretary-general of the UK Offshore Oil Operators Association, said that the abolishment of tax relief could have a negative effect on the industry and lead to a flight of capital from the North Sea.

'The post-tax costs for exploration companies will go up by a factor of four and could lead some companies to withdraw from new projects. Some companies which may have committed themselves to projects on the basis of return available under existing fiscal regime are now facing much higher costs than before,' Mr Hughes said.

One aim of the change is to encourage further development in the UK's oil and gas resources by 'allowing companies to keep more of the fruits of their efforts,' Norman Lamont said.

The present regime was also put in place at a time of high oil prices, but in the tax relief has cost the Exchequer about pounds 200m this year. However, the changes will yield pounds 300m in tax next year and pounds 400m in 1994/95.