The costs of the new fields were written off against tax as they were incurred. They were also included in the costs of production as they were incurred.
The extremely generous tax allowances in 2012-14 resulted in record levels of investment. Many new fields were given the go-ahead and many existing fields reduced or stopped production in order for their infrastructure to be upgraded. The temporary tax breaks also accelerated decommissioning of old infrastructure.
The tax breaks for investments that were commenced during 2012-14 continue until the related works are completed. These new and upgraded fields are beginning to come on stream and most of the rest will do so over the next couple of years. Meanwhile, the costs of these investments has tailed off significantly as fields near, and reach, production.
The net effect of the massive tax breaks between 2012 and 2014 was to cause production to temporarily fall significantly. The record high investment levels and the reduced production rate meant that these costs had to be spread across a lower volume of output. The result, inevitably, was that the cost per barrel rose significantly and tax take collapsed despite the oil price being circa $100 per barrel.
As the new and upgraded fields come on stream, production is forecast to double. Meanwhile, investment in new fields has fallen significantly since 2014. The much lower costs of investment will thus be spread across a greatly increased volume of production so the cost per barrel will drop by about 60% or more between 2014 and 2018.
Boom and bust in the UK oil industry is partly caused by volatile prices but a more significant factor is a volatile tax and incentive regime. In 2014, the tax breaks were cut, the oil price fell and the industry was thus hit by a double whammy. New investments were severely curtailed just as the ones that were underway were beginning to tail off. Huge numbers of jobs were lost as a result. Westminster was very slow to react to the changed circumstances.
In the 2016 budget, Petroleum Revenue tax (the tax on extraction) was effectively abolished. The industry still has to pay corporation tax but that is one of the easiest taxes in the UK to legally avoid as evidenced by countless companies. Paying taxes in the UK is now, to all intents and purposes, entirely optional for any individual or business that can afford the best tax advisors and lawyers.
The current situation is that BP is in the process of doubling its UK output, the oil price is over $50 per barrel, it is producing UK oil for $15 per barrel and is targeting a production cost of less than $12 per barrel while currently paying no net UK corporate taxes.