Intelligence brief: UK promises tax relief on decom liabilities; Fund bullish on drillers’ P&A prospects
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UK promises tax relief on post-sale decom liabilities
The UK will provide certainty that companies will be able to access tax relief on their costs when they retain decommissioning liabilities for an asset after a sale, the government announced as part of its 2016 budget.
This is intended to encourage new entrants for late-life assets and the development of late-life business models, it said.
The government further promised to build on the new decommissioning powers of the Oil and Gas Authority by undertaking further work with the OGA and industry to reduce overall decommissioning costs.
EnQuest, one of the independent North Sea oil producers that would be a likely candidate to purchase late-life assets, reacted positively to the announcement. "The tax changes facilitate late-life asset transfers because decommissioning tax relief is a big part of the transfer," Jonathan Swinney, EnQuest's finance chief, was quoted as saying by Reuters.
But Jose Eduardo Ribeiro, an analyst at Douglas-Westwood, argued that a change in taxation regime would not dramatically alter the fate of North Sea production. What is required is substantially increased investment, which is “only likely to occur as a function of higher oil prices”, he said.
“Operators also require support in ensuring that production infrastructure is maintained – and accessible – to allow future additions through satellite developments. Widespread decommissioning could put this under threat, potentially limiting future field activities and ultimate recovery in the UKCS [UK Continental Shelf],” he said.
Douglas-Westwood estimates that $44 billion to $50 billion will be spent on decommissioning activity in UK waters between 2016 and 2040, accounting for more than half of all forecast decommissioning expenditure in the North Sea – including Norway, Denmark and Germany.
Hedge fund bullish on drillers’ P&A prospects
At least one prominent hedge fund is confident that offshore drillers will see an uptick in activity this year on the back of increasing demand for deepwater drilling and plugging and abandonment.
Noble Corp and Awilco Drilling were among the worst performers in Firefly Value Partners’ portfolio last year. But the fund, which is backed by David Einhorn’s Greenlight Capital, told investors in its annual letter that both would recover in 2016.
Awilko’s WilHunter rig recently finished a well plugging and abandonment project for Hess months ahead of schedule, Firefly noted in the letter, which was seen and republished by the ValueWalk investment-news website.
“The WilHunter is currently idle, but we like its chances of picking up additional plugging and abandonment work rather than cold stacking or retiring. Awilco’s other rig, the WilPhoenix, continues to work on its current contract, which doesn’t end until late 2017,” Firefly wrote, according to ValueWalk.
Global demand for oil continues to grow even as investment in new supply is curtailed, Firefly argued. It added: “We continue to believe that deep water drilling will be necessary to supply future oil. Given increasing drilling needs and the current rate of retirements, the demand for deepwater rigs should exceed supply in a few years—an eventuality unnoticed in the current industry carnage."