The Government have today announced that the Ring Fence Expenditure Supplement (RFES) will be increased from its present rate of 6% to 10% with effect from 1st January 2012. The increase is stated as helping “to ensure that existing field allowances work more effectively” and to bring the rate more in line with the discount rate used by oil and gas companies to assess projects.
This announcement seems to have dashed all hope that the SCT changes announced in this year’s Budget would not be applied to new fields. In this sense the announcement may be seen as a disappointment for many who had hoped for this.
The announcement restates Government’s intention to continue to look at the possibility of extending the categories of field allowance.
An issue with field allowance is that it has limited value for loss making groups and doesn’t therefore have much impact on marginal project economics. The increase in RFES will not directly tackle this issue but will enhance the value of losses to compensate in part for this.
For a number of companies in the start- up phase or with significant developments the announcement will be welcome. However the existing restrictions on RFES remain, namely that RFES can only effectively uplift the net ring fence loss of the group (the group must have an overall ring fence loss for it to apply) and that for any particular company RFES is only available for a maximum of 6 periods.
This change may require companies to rethink their strategy on claiming RFES, and we would be happy to discuss the options now available with any interested readers.
CW Energy LLP
5th July 2011