Britain will offer new tax breaks to encourage investment in older oil and gas fields in the North Sea as the government, under pressure to stimulate growth, moves to revive a key part of the economy which has long been a driver of its prosperity.
Chancellor George Osborne said on Friday that income from some mature oil fields would be shielded from a supplementary tax charge on producers to encourage them to maximise the amount of oil they pump out of the ground.
A dramatic fall in Britain's oil and gas production shaved at least half a percentage point off the country's economic growth in 2011, a major difference for an economy that is stagnating as businesses struggle with the gravest economic crisis since the Great Depression.
"Finally, the government is waking up to the fact that an 18 percent year-on-year reduction in North Sea production needs to be addressed and is back-pedalling against the recent 12 percent tax hike," Numis analyst Sanjeev Bahl said.
In March 2011, Britain's coalition government raised a tax on oil and gas output to 32 percent from 20 percent, a move greeted with dire predictions by the industry.
Britain's oil and gas production, long a driver of British wealth and boon for now dire public finances, has been in decline since 1999.
Industry body Oil and Gas UK estimated that the tax break would lift oil and gas recovery by 150 million barrels of oil equivalent in the near term, a rise of 10,000 to 20,000 barrels of oil equivalent per day in North Sea production.
In addition, the changes will boost the Treasury's revenues by 1.5 billion pounds, estimated Oil and Gas UK, a not insignificant figure compared to the 11.1 billion pounds that the industry paid in production taxes in the 2011-12 fiscal year.
Should production stabilise or even improve, it will have a positive impact on the UK economy at a time when Prime Minister David Cameron and Osborne are under mounting pressure as their flagship austerity plan fails to stimulate growth.
Canada-based Talisman, a mid-sized North Sea producer, said the tax breaks meant it was much more likely to go ahead with redeveloping its Montrose oil field, a project which will involve installing new equipment to extract oil in the areas surrounding the main field.
The tax breaks for older fields, which are often more costly to run, are the latest measures introduced by the government since last year's tax hike, as tries to reverse its impact and slow the decline in North Sea production by stimulating investment.
"This initiative will have an immediate impact in that it will help to promote investment and sustain production from many mature fields, enabling more oil and gas to be recovered from them," Mike Tholen, economics director at Oil and Gas UK, the industry body said.
Analysts said that in addition to Talisman, British oil companies such as EnQuest, whose shares were up 2.5 percent, British-based Premier Oil, which was 0.75 percent higher, would benefit from the changes.
Talisman said it believed the Montrose project would create or support 2,000 new jobs, echoing claims made by Osborne in his statement that the tax break was positive for employment.
The tax allowance will shield up to 250 million pounds of income from some projects in older fields known as brown field sites, Osborne said.
That figure rises to 500 million pounds for projects in fields paying the petroleum revenue tax, an older tax which was discontinued for fields sanctioned after 1993.
Projects to qualify for the tax breaks will be those given authorisation by the government's Department of Energy and Climate after September 7 2012 to boost production, and which have a capital cost of over 60 pounds per tonne of incremental reserves.
(Additional reporting by Peter Griffiths; Editing by Toby Chopra and Hugh Lawson)