A leading petroleum economist has said there are “positive signs” that a new law is making an impact on North Sea deals, a year on since it came into effect.
In November last year, the UK Government introduced Transferable Tax History (TTH), a mechanism to ease the sale and acquisition of oil and gas installations by “levelling the playing field”.
Access to relief for decommissioning costs is predicated on “credits” – a history of tax payments against which costs can be set.
This was seen as a major barrier to new deals as many buyers did not have the tax history required for relief once fields came to the end of their lives.
However the new legislation has permitted the transfer of a portion of a seller’s tax history to the buyer, so the new entrants could carry back decommissioning costs against their own history, and that of the seller.
In the time since, a trend of new players acquiring older assets has continued – we’ve seen Chrysaor follow up its Shell deal in 2017 with a £2 billion acquisition of ConocoPhillips’ assets, Ithaca has taken on Chevron’s portfolio and it was RockRose that swooped in for Marathon Oil’s installations.
Professor Alex Kemp of Aberdeen University said the signs are encouraging, but the industry has not yet seen the full benefits of these deals in terms of extending the life of fields and maximising economic recovery.
He said: “I think the buyers have mostly been reassessing all the assets they bought and in some cases they have already committed. Chrysaor has certainly committed investment in the fields they bought from Shell. Whether that was due to the TTH is another matter.
“In general it may be a little early to know to what extent the buyers will extend field lives, increase production, increase investment. A lot of them, I think, are just assessing what the assets can do and what investments would be justified.
“The sellers would have been reluctant to engage in significant new investment when they had made the big decision to exit the North Sea so the fact that others have come in and are assessing all the possibilities is a positive sign.
“We’ll see the full benefits of that hopefully in due course. But the fact that they are willing to come in and take over what are often ageing assets is encouraging. I expect the result would be enhanced recovery and the extension of field life.”
The North Sea industry is facing the challenge to extend fields’ lives and maximise recovery, deferring decommissioning where possible.
This comes as the industry faces increased scrutiny from investors and climate change protestors who in some cases argue that this contradicts the climate change agenda, despite the industry’s repeated pleas that it is working through the energy transition with a gradual switch to cleaner forms of energy.
When the question of decommissioning does finally come around, the total bill will range between £40bn and £67bn according to Oil and Gas Authority figures published
in July, as many costs are still uncertain.
The HMRC believes around £24bn will come out of the taxpayers’ pockets although that too is the subject of high uncertainty.
That figure raised concerns and headlines earlier this year.
Meanwhile when Energy Voice reported in April that Japanese manufacturing giant Mitsubishi was to receive £400m in taxpayer relief for two North Sea fields it was also met with outcry.
Green MSP John Finnie said the government “pleads poverty as it slashes social security spending, harming some of our most vulnerable citizens, but is never short of a few quid when the oil and gas industry come calling”.
Taking various measures together, decommissioning tax relief is about 40% for newer fields, and more than 50% for some of the larger, older fields out there.
However, as far as decommissioning relief is concerned, the industry has maintained that it should all be kept within the context of the benefits these oil and gas fields have brought to the economy.
In a report earlier this year, the National Audit Office (NAO) discussed the taxpayer cost in decommissioning, highlighting that the government had received £334bn in net tax revenues since 1970-71.
So, in a time when protesters are taking to the streets, the airports, and even oil rigs, should tax relief be another point of contention?
Prof Kemp added: “It shouldn’t really be problematic in the sense that decommissioning costs are part of the costs of doing business.
“They get relief against corporation tax and the supplementary charge. These are profit-related taxes so just like you get relief for the investment you make in developing a field, so you should get relief when you decommission a field as part of the normal costs of running the business.”