Britain hopes to unlock billions of pounds of investment in its North Sea oil fields by offering energy companies a guaranteed level of tax relief for when they eventually close their oil platforms, a Treasury source said on Friday.
Finance minister George Osborne is expected in his March 21 budget to outline a scheme the government believes could attract at least 17 billion pounds ($27 billion) of additional capital investment, the source added.
The move is designed to provide certainty to oil companies, in particular for smaller firms, who have struggled to secure funding for exploration or to take over older platforms.
Investors have been discouraged from backing such projects because of the huge decommissioning costs and the uncertainty over the level of tax relief available.
In recent years, larger oil companies such as BP Plc have been scaling back their operations as profit margins narrow, selling fields to smaller firms to whom they are more valuable and who could then tap the remaining reserves.
But this transition has been held back because oil and gas companies are liable for the cost of decommissioning, such as for plugging old wells and removing production platforms and pipelines once the oil and gas reserves have been pumped out.
Firms currently receive tax relief of between 50 and 75 percent, with the level of tax relief rising with the age of the oil field.
The government is expected to propose it signs contracts with the industry setting out in advance the level of decommissioning tax relief firms will get. Osborne announced in his budget last year that he was working towards this aim.
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 Treasury source said.
There are about 470 oil and gas installations in the North Sea, employing some 350,000 people.
Osborne provoked an outcry by the energy industry in his budget last March by unexpectedly raising a supplementary tax charge on oil and gas producers to 32 percent from 20 percent to fund a cut in fuel duty for consumers. ($1 = 0.6312 British pounds)
(Reporting by Fiona Shaikh; Editing by Tim Castle, Gary Hill)