Government to ease North Sea tax rules

LONDON (Reuters) - The government has proposed relaxing rules governing tax relief on the cost of decommissioning oil fields, to remove a time limit that encourages companies to decommission early and leave oil in the ground.

In a paper released on Thursday, the Treasury proposed an extension of the so-called three-year loss carry-back rules for North Sea firms.

Currently, companies can only claim decommissioning costs against profits made in the final three years before decommissioning.

As profitability declines at the end of a field's life, the last three years' profits may not be enough to absorb the costs, whereas early decommissioning would allow offset against a healthier profit stream.

"As a consequence, this is likely to lead in a number of cases to premature decommissioning," the Treasury added, saying the conclusions followed consultation with industry.

North Sea oil and gas production is currently in decline, encouraging the big oil companies such as Royal Dutch Shell (RDSa.L) and BP (BP.L), which developed the province, to shift their focus to more promising areas in Africa and elsewhere.

With the UK now a net importer of oil and gas, the government wants to squeeze every last drop out of the North Sea and so is keen to remove the perverse incentive created by the current tax regime.

The government plans to include the proposals outlined in the paper entitled "Securing a sustainable future: a consultation on the North Sea Fiscal Regime", in the 2008 budget.

The paper said the government was also considering a number of incentives to boost investment in alternative energy sources such as wind farms and to encourage carbon capture and storage (CCS) technology, which involves storing CO2 in depleted oil and gas fields.