Drilling up by a third last year, with 90% of projects qualifying for new tax breaks
Exploration activity in the UK North Sea rose by a third last year according to a new report from accountant Deloitte.
Its report found a total of 65 wells were drilled in UK waters last year, up from 49 the previous year.
A series of tax incentives implemented by the UK Government and high wholesale oil and gas prices have led to a revival of the sector in UK waters, Deloitte said.
Graham Sadler, managing director of Deloitte's petroleum services group, said: “After several years of caution and uncertainty, we have a more positive environment, where tax incentives, the high oil price and appetite to invest have combined to make 2012 the most encouraging year for a long time.”
Deal activity in the North Sea also rose by 30 per cent to 80 in total last year, split between outright acquisitions of fields and farm-in investment for development of existing fields.
The bulk of new development activity last year – 90 per cent - was on projects qualifying for new tax incentives introduced in the 2012 budget.
The Chancellor announced two massive tax breaks for the oil and gas industry in the 2012 Budget, which he said would stimulate around £50 billion of new investment.
These incentives included a £3 billion tax break to encourage development of massive oil finds off the coast of Shetland as well as improvements in small field allowances.
The Chancellor also announced changes in tax treatment to “end the uncertainty over decommissioning tax relief that has hung over the industry for years by entering into a contractual approach”.
Then in July, the Chancellor announced another new tax relief scheme for shallow water gas fields to protect the first £500 million of income from qualifying fields from the 32 per cent supplementary tax charge oil and gas firms pay over and above corporation tax.
And last September, the Chancellor announced the Brown Field Allowance, a partial U-turn on the £2 billion windfall tax on North Sea oil and gas firms he announced in the 2011 Budget, which has led to a 19 per cent drop in production output.
The Brown Field Allowance allows developers to shield £250 million of income from the supplementary rate of taxation from brownfield project sites, depending on the size and unit costs, and up to £500 million on projects which are also paying Petroleum Revenue Tax, charged over and above corporation tax.
Petroleum Revenue Tax was introduced under the Oil Taxation Act 1975 to ensure "a fairer share of the profits for the nation" which was discontinued for fields which went into development after 1993.
The Treasury said longer term revenues which will come from this latest tax relief measure for the oil and gas industry would outweigh the initial cost of the allowance.
The Department of Energy and Climate Change (DECC ) received a record 224 applications in the most recent licensing round for oil and gas projects in UK waters and awarded 167 new licences covering 330 North Sea blocks last October
A further 61 blocks were also referred by the DECC for environmental assessment in the 27th licensing round. Applications in the last licensing round surpassed the record set in the previous round by 37.
Deloitte said interest in field development in UK waters reached a 10-year high last year, with 21 projects approved and a further eight redevelopment applications for older fields approved by the Department of Energy and Climate Chance (DECC).
In contrast, drilling activity in the Norwegian North Sea dropped by 19 per cent last year on the previous year, despite a number of large discoveries, including the Johan Sverdrup field, which was the largest find globally in 2011.
Last October the Norwegian government announced plans to double the carbon tax on its North Sea oil sector to help fund climate change mitigation projects in the developing world.
However, the industry in Norway also benefits from a range of favourable tax incentives, and Deloitte played down any hint the Norwegian sector is in decline, pointing to the limited availability of deep water rigs as being the primary reason for the drop in activity.