UK promise of decom tax relief has industry unconvinced
Members of the offshore oil industry have expressed serious reservations about the British government’s promise of tax relief for vendors that retain decommissioning liabilities.
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Chancellor of the Exchequer George Osborne said in the 2016 budget that the government 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. He said the move was designed to encourage new entrants for late-life assets and the development of late-life business models.
But Mike Dyson, Director, Upstream Energy at Navigant Consulting, said Osborne had acquired a reputation for “changing his mind” fairly rapidly. Doubts about his commitment would cause companies to factor in a degree of risk, Dyson said, and this caution would apply to both the majors selling off late-life assets and the potential independent purchasers.
“I’m not suggesting the chancellor is deceitful, but priorities in politics can change and there may not be total confidence,” Dyson told DecomWorld.
He also doubted whether the government had carefully considered the full bill for providing tax relief against decommissioning costs. A common estimate has been that 55-60% of decommissioning costs will be covered by the government, mainly through tax relief. Although the government wants to encourage asset transfers, the prevailing uncertainty makes late-life assets “unattractive” for potential new buyers, Dyson said.
Simon Padfield, a now-retired ex-operations manager of several North Sea assets, also expressed doubt to DecomWorld over the tax-relief promises. Padfield said tax relief is only useful when companies are making money; otherwise, it merely serves to create nice headlines.
“I know several companies with multiple sites who won’t be in a position to pay corporation tax for many years. So decommissioning tax relief won’t help their tax position one bit,” he said.
Padfield felt the government’s decision to “effectively abolish” Petroleum Revenue Tax was more significant. Industry body Oil and Gas UK calculates the move will reduce the headline rate of tax paid on UK oil and gas production from between 50% and 67.5% to 40% across all fields.
Multi-billion pound question
The question of who pays for decommissioning is a crucial one for the cash-strapped North Sea industry. Total decommissioning costs in the UK continental shelf over the next 40 years could reach as high as £70 billion ($99 billion), according to estimates compiled by Xodus Group and based on figures from the Oil and Gas Authority (OGA), Department of Energy and Climate Change (DECC) and Genesis Oil and Gas Consultants.
Yet ownership transfer has decreased in popularity as the smaller independents steer clear of investments with potentially low profit margins. The number of North Sea transactions declined by 33% in 2015, according to EY's annual review of global oil and gas transactions. EY said there was a danger the majors would opt for early decommissioning of many large oilfields, increasing the risk of ‘domino effects’ and removing the chance of exploiting their full potential. For the larger operators, finding a buyer for late-life assets is often the most desirable path, even if it retains some responsibility for decommissioning.
“Pushing back the time when they will be responsible for decommissioning lowers the immediate threat to the cash flow and retains money for revenue generation, as well as allowing time for decom technology to improve,” said Padfield.
There are precedents for such an approach. When BP and ConocoPhillips sold the Thistle and Deveron assets to DNO in 2002 (who later sold them to EnQuest), BP retained a 1% share and made a commitment to retake the operatorship for decommissioning. But there have been few such cases to date, something that Dyson puts down to a longstanding gap between buyer and seller expectations. The gap is closing and ultimately “we could see more deals”, he said.
Limits to government influence
In theory the OGA could play a role in assisting the larger and independent operators to reach a suitable compromise in regard to decommissioning. The industry regulator is in a transition process as responsibilities are transferred over from DECC.
When contacted by DecomWorld for comment, an OGA spokesperson said only that: “Achieving the maximum extension of field life, ensuring that decommissioning is executed in a safe, environmentally sound and cost-effective manner and the UK gains competitive advantage are high priorities for the OGA.”
As industry regulator, the OGA is privy to the plans of various operators and well-placed to encourage the type of information-sharing which could lead to discussions about decommissioning. The OGA might help address some of the complexities of the commercial deals. For example, there are concerns that if the last company to operate the field is not liable for decommissioning, it may not feel obliged to spend money maintaining equipment.
Whether or not a major retains decommissioning responsibilities will ultimately depend on the terms of their commercial agreement, a DECC spokesperson said. In some cases, oil majors will retain financial obligations under decommissioning security agreements, but the government is generally not a party to these agreements, the spokesperson said.
By David W. Smith