Elaine Maslin, 21st March 2012
Chancellor George Osborne has announced a widely anticipated plan to end uncertainty over decommissioning costs for North Sea oil and gas producers and a £3billion allowance to open up the west of Shetland.
Announcing the 2012 Budget today in the UK Houses of Parliament, Mr Osborne said both plans to offer certainty over decommissioning tax relief and new field allowances would be a huge boost to the industry unlocking billions of pounds of investment.
His comments come following months of close engagement with the industry, which came together in the wake of last year’s surprise £10billion tax grab on the industry.
Mr Osborne said the concession on decommissioning – an issue which had “hung over the industry for years” – would be part of a “major package of tax changes” in order to maximise recovery from the North Sea.
It would see the Government introduce legislation in 2013 which could see it sign contracts with oil and gas operators working in the North Sea, to provide assurance on the tax relief they would get when they are decommissioning platforms, pipelines and other infrastructure.
There are nearly 500 platforms in the UK North Sea, as well as subsea pipelines and infrastructure. The cost of removing them all has been put at in excess of £32billion.
Consultation on the finer details of the proposals is due to be carried out in coming months. Legislation would then be enacted in 2013.
Announcing the measures to boost North Sea investment Mr Osborne also said: “We are also introducing new allowances including a £3billion new field allowance for large and deep fields to open up west of Shetland, the last area of the basin left to be developed. A huge boost for investment in the North Sea.”
Professor Alex Kemp, professor of petroleum economics at Aberdeen University, welcomed the Budget and said the most spectacular measure was the £3billion allowance – firms with qualifying fields could get tax relief on £3billion worth of profits on fields over time.
“To a qualifying fields that is a lot,” he said. However, he cautioned: “It is for fields in 1,000 metres of water and with reserves of at least 25 million tonnes. It is quite a targeted allowance and there will be quite a few smaller fields that will not qualify.”
Derek Leith, office managing partner and head of oil and gas taxation at Ernst & Young in Aberdeen, also welcomed today’s announcements.
He said: “Today’s announcement promises to encourage significant investment in the North Sea and was badly needed after last year’s shock increase in the oil and gas tax rate.
“Confirmation that the Government intends to enter into contractual agreements on tax relief for decommissioning cost improves the fiscal stability of the UK Continental Shelf, while the targeted incentives for particular types of fields will go some way in increasing the attractiveness of areas currently starved of investment.
“The Budget demonstrates government acceptance that establishing a stable tax environment in the basin will prolong the life of existing infrastructure, deliver millions of more barrels of oil equivalent and boost the Treasury’s coffers via increased tax take.”
James Edens, managing director of CNR International, said: “The announcements made in the Budget concerning the North Sea oil and gas industry are good for our industry and also good for CNR International. These outcomes clearly demonstrate the positive value of the collaboration and alignment we have seen in the industry, and with Government, over the past several months. On the back of today’s progress, we look forward to continuing this constructive dialogue and working together to seek solutions that maximise the economic recovery of the basin’s potential.”
Bruce McLeod, a partner at Aberdeen law firm Paull & Williamsons, said: “The new field allowance targeted at the west of Shetland is one for the majors, while the whole industry will welcome the announcement supporting brown-field development and extensions to the existing small field allowance.
“If delivered, those measures will be more significant that it may at first appear as they will extend the economic life of existing platforms and pipelines, thereby facilitating the development of other fields which require long term access at reasonable cost to third party infrastructure.”
Responding to the decommissioning relief proposal, Derek Henderson, head of tax at Deloitte, said: “This will remove a major fiscal risk for UK North Sea investors and may release significant funds for investment by allowing companies to move to post-tax decommissioning guarantees.
“This will also free up capital available for investment and development of opportunities in the North Sea. This activity boost should also increase the tax take for government.
“Deloitte petroleum Services Group estimates that the UK North Sea decommissioning costs are estimated to be almost $50bn over next 30 years.”
Stuart Mitchell, director of strategic development at subsea firm Flexlife, which specialises in integrity management, said: “This sounds like very good news all round.
“We would anticipate it leading to further deals where smaller operators buy into older fields. So for a company like us dealing regularly with the leading independent operators, we’d hope for further projects in future which will support our ongoing growth.
“The various changes in the tax and legislative regime should also ensure additional budget is available for ongoing maintenance and asset integrity work.”
Mike Forbes, managing director of Aker Solutions in Aberdeen, said: “This provides welcome news for the North Sea industry in terms of providing certainty around decommissioning relief.
“It will allow the sector to progress with long-term planning with regards to investment decisions and development of future opportunities.
“A significant number of fields and installations in the UK Continental Shelf are expected to cease production and commence decommissioning in the next decade.
“Having a clearer indication of the future tax treatment of decommissioning costs was vital for companies looking to assess commercial opportunities, maximise recovery of remaining reserves and ensure infrastructure access.”
Announcing the Budget, the Chancellor said the Office for Budget Responsibility’s (OBR) overall assessment of the outlook and risks for the British economy were “broadly unchanged” since last November.
The OBR expects the British economy to “avoid a technical recession with positive growth in the first quarter” of this year.