What qualifies as operating expenditure under section 3 of the Energy (Oil and Gas) Profits Levy Act 2022?

Operating expenditure must be incurred to increase oil extraction rates or reserves, extend the economically viable life of extraction activities or facility usage, or increase tariff receipts from upstream petroleum infrastructure. It must relate to qualifying work on a facility or oil well. Routine repair and maintenance costs are specifically excluded from the definition.

What are qualifying matters for facilities and oil wells under section 3 of the Act?

For facilities, qualifying matters include replacement of specific components, modifications to increase capacity or availability, and modifications to handle reduced volumes or different fluid compositions. For oil wells, qualifying matters include water or gas shut off, fracturing, and the removal of sand, salt, scale, or hydrates.

How is mixed expenditure apportioned under section 3 of the Energy (Oil and Gas) Profits Levy Act 2022?

Where expenditure is only partly operating expenditure, for example where a project involves both qualifying modifications and routine maintenance, the total cost must be apportioned on a just and reasonable basis. Only the portion that genuinely qualifies as operating expenditure benefits from the investment expenditure relief under section 2.

Why does the definition of operating expenditure matter for the Energy Profits Levy?

Operating expenditure that meets the conditions in section 3 benefits from investment expenditure relief under section 2 of the Act. This relief allows additional amounts to be treated as incurred when calculating the levy, effectively reducing the taxable amount for companies engaged in qualifying oil and gas extraction and infrastructure activities in the United Kingdom.

Energy (Oil and Gas) Profits Levy Act 2022 section 3

Section 2: meaning of "operating expenditure"

Section 3 defines what counts as "operating expenditure" for the purposes of the investment expenditure relief available under section 2 of the Act.

Operating expenditure must be incurred to increase oil extraction rates or reserves, extend the economically viable life of extraction activities or facility usage, or increase tariff receipts from upstream petroleum infrastructure
Routine repair and maintenance costs are specifically excluded from the definition of operating expenditure
The expenditure must relate to qualifying work on either a facility (such as a platform or subsea well) or an oil well, with specific categories of qualifying work defined for each
Where expenditure is only partly operating expenditure, it must be split on a just and reasonable basis between the qualifying and non-qualifying portions

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