Investment hit £11.4bn last year though production dropped 14% says industry body UK Oil and Gas
Oil and gas industry investment in the North Sea has reached its highest level in 30 years, according to figures published by its trade body UK Oil and Gas.
UK Oil and Gas said a series of tax breaks introduced by the Chancellor last year has seen the sector respond by investing £11.4 billion in 2012.
Investment in 2013 is expected to rise “to at least £13 billion” the industry body's 2013 Activity Survey suggests.
Despite the boom in activity, production output in UK waters dropped to 1.55 million barrels of oil per day equivalent – down 14 per cent on 2011 figures and down by 30 per cent on 2010.
UK Oil and Gas said: “Taking into account the two to three year average time lag between investment decisions and first production, much of this fall can be attributed to the damage done to investor confidence by the numerous adverse tax changes in the mid-2000s with new developments reaching a low point in 2008/9.”
The industry body suggests the recent surge in exploration activity will see production rise to around two million barrels a day by 2017.
Its survey also found investment in UK waters totalling almost £100 billion “are now in companies' plans”.
UK Oil and Gas said: “Thanks to recent improvements in the tax regime, more oil and gas reserves have become commercially viable for development.
“The number of projects submitted to the Department of Energy and Climate Change (DECC) and given development approval almost doubled between 2011 and 2012.
“The 33 projects that DECC has approved since January 2012 involve investment of £13.4 billion.”
A report published in January by accountant Deloitte revealed drilling activity in UK waters rose by a third last year to 65 compared with 49 the previous year.
Its report found the series of tax incentives implemented by the UK Government and high wholesale oil and gas prices had led to a revival of the sector in UK waters.
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 DECC reported it had 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.
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 2012, 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 then 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 series of tax incentives were introduced after figures for 2011 revealed the biggest ever fall in oil and gas production output, down 19 per cent, and half as many exploration wells were drilled in 2011 compared with 2010.
This was followed by a 15 per cent year-on-year drop in production in the first half 2012 before new tax incentives were introduced with the aim of stimulating investment.