NORTH SEA FISCAL REGIME - TECHNICAL MEASURES

Three technical measures to improve the operation of the North Sea
fiscal regime were announced today by the Chancellor. The measures

-       prevent companies from facing an unintended tax charge by
        ensuring that, in line with previous practice, the
        petroleum revenue tax (PRT) exemption for gas sold to
        British Gas under a pre-July 1975 contract can continue
        when a company acquires an interest in a relevant gas field

- relax the timetable for the delivery of some PRT returns

- change the PRT rules so that UK companies can compete more
pipelines

The Government recognises that the oil industry is facing real
difficulties due to low oil prices. As a result, it has set up a
joint Government and industry Oil and Gas Task Force to help the
industry meet the challenge of continuing low world oil prices by
reducing its cost base and improving competitiveness. In addition,
the Government will be keeping the impact of low oil prices under
review over the coming months.

DETAILS

Exemption for gas sold to British Gas under a pre-July 1975 contract

1. The legislation to be brought forward in the Finance Bill will
ensure that companies acquiring interests in certain mature gas
fields do not face an unexpected tax charge. The legislation will
provide certainty for companies and, as it restores the law to the
way in which it has previously been applied, it will apply to past as
well as future transactions.

2. Proceeds from the sale of gas to British Gas or successor
companies under pre-July 1975 contracts are exempt from PRT. The
exemption recognises that, before the introduction of PRT, gas from a
number of fields had been sold to the former British Gas Corporation
under long-term contracts. When PRT was introduced, the prices set by
these contracts were seen as generally too low to justify a PRT
charge on the producer.

3. When re-organising or developing their North Sea interests,
companies sometimes acquire interests in exempt gas fields. Since
1975, the Inland Revenue has taken the view that the PRT exemption
continues to apply when a company acquires an interest in a
PRT-exempt gas field and takes over the supply of gas to British Gas,
provided that there are no significant changes to the gas contract.
However, recent legal advice indicates that, strictly speaking, the
PRT exemption should terminate whenever a field interest is
transferred.

4. Applying the law as it stands would have an unfair effect on
companies engaged in normal commercial transactions. The measure
announced today will make it clear that when an interest in a
PRT-exempt gas field is transferred, and there is no significant
change in the terms of the gas contract, the exemption will continue.
The legislation will apply to all past and future transfers. As at
present, oil companies will be able to seek advice from the Inland
Revenue on whether particular changes to a contract might terminate
the exemption.

Relaxing the timetable for the delivery of some PRT returns

5. The Budget proposals to allow deferral of some PRT returns will
reduce industry's PRT compliance costs by cutting out unnecessary
form filling and allowing companies to plan their workloads more
efficiently.

6. There are about 150 oil and gas fields liable to PRT. Most of
these fields are not expected ever to pay PRT because of available
allowances and reliefs, and some of the fields which are expected
eventually to pay PRT will not pay tax for some time. However, under
current legislation, returns of the amount of oil and gas produced by
each field have to be made within one month of the end of each
six-monthly chargeable period. In addition, each company with an
interest in any of these fields must make a return, within two months
of the end of each chargeable period, of the value of oil and gas
produced - over 500 returns of this sort are made every six months.
Thus, at present, making PRT returns involves companies compiling a
large amount of information in short time, and much of this
information may never be used by the Inland Revenue.

7. The Inland Revenue and oil industry representatives have
considered how the current requirements might be relaxed without
affecting the flow of tax receipts. Following these discussions, the
Government has decided to bring forward legislation in the Finance
Bill to allow companies to apply to defer some PRT returns. Companies
will be able to apply to:

    - defer indefinitely PRT returns where the field is never
      expected to pay PRT defer delivery of PRT returns for a
      specified period, provided no PRT is expected to be payable in
      that period.

8. These options will be available to companies for returns for
chargeable periods ending on or after 30 June 1999. In addition, the
legislation will allow the return showing the amount of oil and gas
produced to be deferred by up to one month. The Inland Revenue will
consider each application to ensure that a deferral will have no
impact on tax receipts or on the ability to ensure that the correct
amount of tax is charged.

Transport of non-UK gas through North Sea pipelines

9. The measure to be brought forward in the Finance Bill will deal
with an anomaly in the rules covering the transport of oil or gas
from a non-UK field. It will ensure that North Sea pipelines can
compete fairly to transport non-UK oil and gas to the UK.

10. Legislation introduced in 1994 to allow owners of certain North
Sea oil or gas pipelines to elect for the pipeline to be partly
excluded from the scope of PRT does not give a sensible result if a
pipeline, for which an election has been made, is used to transport
oil or gas from a non-UK field. Tariffs received for transporting
non-UK oil or gas would be liable to PRT but any expenditure which
the pipeline owner incurred in order to earn these tariffs would not
be eligible for PRT relief. This prevents these pipelines from
competing fairly to transport non-UK oil and gas to the UK.

11. This defect in the legislation will be removed by taxing tariffs
received by these pipelines from transporting non-UK oil and gas in
the same way as tariffs received from transporting oil and gas from
non-taxable fields in the UK. As a result, these tariffs will be
excluded from the charge to PRT. This change will apply to tariffs
received in chargeable periods ending on or after 31 December 1999.

12. The intention to make this change was announced on 17 November
1998 and a draft clause was published for comment. The oil industry
welcomed the proposed change in the rules, and did not suggest any
changes to the draft clause.

13. The regulatory impact of the gas exemption and pipeline election
measures described above is negligible. Given the reduction in
compliance costs resulting from the option to defer delivery of some
PRT returns, the net impact of these measures is expected to be a
reduction in oil industry compliance costs.

NOTES FOR EDITORS

1. In his March 1998 Budget, the Chancellor outlined proposals for
changes to the structure of the North Sea fiscal regime and indicated
that he planned further consultation on these proposals. On 7
September 1998 he announced that, in view of the low level of oil
prices, the Government had decided not to proceed with reform of the
regime. He indicated that the Government would be consulting the
industry on certain technical issues - the relaxation of the
timetable for the delivery of PRT returns and the defect in the
pipeline election legislation - and two of the measures announced
today reflect the results of this consultation.

2. The Oil and Gas Task Force was set up on 17 November 1998. The
Task Force is chaired by John Battle, DTI Minister for Energy and
Industry, and consists of senior figures from Government and
industry. The Task Force will:

    - develop strategies for reducing the cost base of UK oil and gas
      operations against the background of low oil prices, the
      prospects for world demand, the mature nature of the North sea
      and conditions in other UK Continental Shelf areas

- examine and prioritise initiatives aimed at improving the
competitiveness of the UK industry

- make specific recommendations by summer 1999 for actions to be
taken by the industry or Government.

3. Copies of the draft legislation for the measures announced today
are available from:

      Simon Turrell
      Inland Revenue (International Division)
      Room 509B
      Melbourne House
      Aldwych
      London WC2B 4LL
      Tel: 0171 438 7043

INLAND REVENUE PRESS OFFICE
Media enquiries to: 0171 438 6692/6706/7327
(Out of hours: 0860 359544)
Non-media enquiries to: 0171 438 6420/6425
(Office hours only)
Inland Revenue information is on the Internet:
www.inlandrevenue.gov.uk

# = pounds sterling