Dialogue opens on UK North Sea decommissioning charges

Offshore staff

LONDON – Britain’s government has published a consultation concerning tax relief on North Sea decommissioning programs.

Lack of clarity on this issue has impacted investment in mature UK North Sea projects. In the March 2012 budget, the government pledged greater certainty through the signing of contracts with industry.

The new consultation, which lasts until Oct. 1, proposes the creation of Decommissioning Relief Deeds to specify the levels of relief that oil and gas companies will receive. It also promises companies new certainty on the level of relief they will receive when liable for decommissioning costs of another party that has defaulted.

The government’s aim is to reduce significantly the level of security required when one party acquires the assets of another or from companies operating jointly in fields. This should free capital for investment, leading to increased production. 

Economic Secretary to the Treasury Chloe Smith said: “At the budget, the government signaled its determination to get the most out of the UK’s oil and gas reserves. By providing certainty on decommissioning costs through signing legally binding deeds with industry, we are paving the way for billions of pounds of new investment in the North Sea…

“We will also continue to positively engage with industry on the tax regime for oil and gas. I look forward to hearing the views of leaders on our proposals… ”

Profits from UK oil and gas production are taxed at 62%, rising to 81% in the case of older fields. Oil companies receive tax relief of at least 50% on the costs of decommissioning oil and gas assets. Although the level of relief is specified in the tax code, signing of long-term contracts should deliver greater certainty.

In cases where companies are decommissioning assets but cannot achieve a specified level of tax relief under the tax code, they will receive a short-fall payment, subject to the conditions set out in the consultation.  

Companies associated with a UK North Sea asset (i.e. previous owners) presently demand security from the current owner for the full expected cost of decommissioning that asset as assurance that funds are in place should the current operator default and they become liable for decommissioning.

By providing certainty that companies will be able to claim at least half its decommissioning costs back in tax relief if this situation arises, the new Deeds will allow companies to at least halve their securitization requirements. That in turn should theoretically release billions of pounds of capital for additional investment on the UK continental shelf.

Oil & Gas UK’s economics director Mike Tholen, said: “Oil & Gas UK welcomes the opening of the Treasury’s consultation on how best to provide certainty on decommissioning tax relief.

“An effective solution should provide the industry with the long-term confidence to invest in oil and gas activities for a long time to come and delay decommissioning of oil and gas infrastructure, give rise over time to up to £40 billion ($62 billion) of extra investment and result in the recovery of an additional 1.7 Bboe of oil and gas.

“Oil & Gas UK will engage keenly in the consultation over the coming weeks to help ensure that the details of the measure are established to best effect.”

7/10/2012

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