Clarity needed on decommissioning costs, say MPs

Rates for activated rigs is expected to increase by “at least 15%” by 2021.
Rates for activated rigs is expected to increase by “at least 15%” by 2021.

Significant uncertainty remains over the multibillion-pound cost to the taxpayer of decommissioning offshore oil and gas assets, MPs have said.

The Commons Public Accounts Committee (PAC) has called for more clarity on the impact to taxpayers of the move to plug and abandon wells and remove structures as reserves run out.

MPs say transparency is needed as HM Revenue & Customs (HMRC) estimates that oil and gas companies will pass on £24 billion of decommissioning expenditure to taxpayers through tax reliefs.

“Significant uncertainty remains about the future costs to taxpayers of decommissioning offshore oil and gas assets,” according to MPs.

The report has called on the Oil and Gas Authority (OGA) to bring more certainty to cost estimates.

The study states: “Future decommissioning costs are uncertain because oil and gas companies are at the early stages of decommissioning and are still learning about how much different activities will cost.

“The OGA forecasts that the cost of decommissioning to companies will be between £45 billion and £77 billion.

“HMRC estimates that the cost to taxpayers from tax reliefs associated with decommissioning will be £24 billion based on the central estimate of the OGA’s range.

“But it has not estimated what the costs to taxpayers would be if decommissioning costs are at the top end of the OGA’s range.”

The PAC report expressed concern that the Government does not have a clear plan to maximise the potential economic benefits of decommissioning which could make the UK a global leader in the sector.

The study found the Government has a “poor understanding of potential liabilities to decommission assets used in fracking”.

The Business, Energy and Industrial Strategy (BEIS) department “must ensure taxpayers are protected from the risk of footing the bill for decommissioning fracking assets, where there are fewer protections than for offshore oil and gas”, according to the PAC.

PAC chairwoman Meg Hillier said more transparency was needed.

Ms Hillier said: “Taxpayers will incur costs running to billions for oil and gas decommissioning, but it is far from clear what these costs will be in practice.

“The Oil and Gas Authority must bring greater certainty to its cost estimates.

“Together with the Department for Business, Energy and Industrial Strategy it should be transparent about how these estimates measure up to reality, and explain exactly what impact it is having on reducing costs.

“It is concerning that the department has not yet properly set out the terms for how fracking assets will be decommissioned. It must do so before this industry grows further.

“It would be wholly unacceptable for taxpayers to pick up a hefty bill that could have been reduced had more timely action been taken by the Government.”

The PAC also called on the OGA to set out the direct impact it was having on reducing decommissioning costs by July.

A BEIS spokeswoman said:“The oil and gas industry employs around 280,000 people, meets around half of our energy needs and has contributed over £334 billion in taxes. By providing tax relief on decommissioning we are attracting continued investment into our reserves, supporting jobs and further boosting the economy.

“We are working with industry to minimise costs and recently launched a call for evidence on how we will seize the £80 billion export opportunity to turn the UK into a global hub for the decommissioning.”

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