OT20204 - Corporation Tax General

Overview of the Main Types of Costs Incurred in Oil Exploration and Production

Production

A company in production has commenced trading. Again, much of the expenditure on the field, particularly early expenditure, will be capital e.g. on the provision of rigs, on development/production wells etc. Relief, if at all, will be as MEA P&M and IBA with R&D/SRA less likely. There is more detailed comment on R&D/SRA elsewhere. Before FA97 the New Brunswick decision allowed the direct drilling costs of most development/ production wells to be given as revenue deduction (see OT26237). Because New Brunswick has been superseded it is not covered in depth in this Manual. Other costs may be allowable under Case I or through the capital allowances system on basic principles.

A company which has been in production activities for many years, and which is incurring production costs which are admissible revenue deductions, may in parallel incur other costs which are of a capital nature. This will happen where, for example, there is ongoing exploration and appraisal activity, where new and additional fields are being brought on stream and/or where the company is looking at other possible additions to its portfolio of activities.