There is an unavoidable theme in politics, economics and business at present – uncertainty. But it’s nothing new for the oil and gas industry. A review of oil price figures back to 2008 is evidence of our experience of adapting to change.
Over that time the focus on decommissioning has sharpened and is front of mind for oil and gas industry leaders. It is a complex issue that requires careful consideration not least from a logistical and technical perspective especially as discussions around best practice continues to evolve.
In a changeable environment areas of stability are increasingly important, including the issue of funding decommissioning liabilities.
Decommissioning tax relief provides tax refunds in relation to decommissioning costs borne by oil and gas operators, but these are only available once the decommissioning costs are incurred – the majority of which will be at the end of a field’s life. The structure of the tax regime ensures companies pay the full amount of tax from all profits generated from a field during its productive life. If a loss arises on decommissioning that loss can be carried back and, if tax was paid on profits in previous years, the company will be entitled to reclaim some of that previously paid tax. If the company has no history of tax payments, no refund is likely to be available on decommissioning.
It is worth noting that the reductions in ring fence corporation tax and supplementary charge rates (62% to 40%) and petroleum revenue tax (from 50% to 0%) in the last few years will decrease the amount of tax repayments to companies in relation to decommissioning costs. While there be will various aspects that contribute to this, a measured prediction of the tax refunds arising on decommissioning might be in the region of 50%-60% of the ultimate cost.
The Government introduced the Decommissioning Relief Deed (DRD) in 2013, and one of its purposes was to give certainty and stability to the industry in relation to the availability of decommissioning relief. That stability is important to companies looking to make investments that maximise the economic recovery of resources from the North Sea.
Nonetheless, the system does bring some specific challenges for activity and investment in the UKCS. As I explained in my blog on November 22 [link] while Budget 2016 brought some certainty regarding a seller’s ability to get tax relief for decommissioning obligations retained on an asset disposal, it hasn’t necessarily resolved all issues – and in particular transactions where sellers want to get a clean break from an asset, but the buyer may not generate sufficient taxable profits from the asset to absorb the decommissioning expenditure and get effective relief. HM Treasury is consulting informally to try and establish whether this issue is causing market failure.
Decommissioning tax relief is an enormously important issue for the industry. A system that provides certainty and stability, without creating barriers to transactions, is imperative if the goal of maximising economic recovery is to be achieved.
Derek Leith, EY Senior Partner, Aberdeen and Head of Oil and Gas Tax
The series so far:
Turf wars and the North Sea’s next 30 years
Lerwick confident experience will tell in hunt for new work
Aberdeen harbour sees supply chain as its ‘strong suit’
Gap between P&A and platform removal full of opportunities
Montrose to punch above its weight in decommissioning market
New simulator to ‘massively reduce’ well decommissioning costs
Dundee strives to shape the market by investing early
Harland & Wolff banks on ‘Holy Grail’ of decommissioning
Able Seaton tells other UK ports to think hard before investing in decommissioning
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