The UK oil and gas industry will be looking for a firm step towards resolving the fiscal uncertainty surrounding North Sea decommissioning when Chancellor George Osborne delivers his 2012 Budget on March 21, according to business advisory firm Deloitte.
Over the next decade, the UK Continental Shelf (UKCS) can expect to see a number of fields and installations cease production and commence decommissioning, potentially leading to the loss of critical infrastructure.
Long term, over the next 30 years, almost 500 platforms, 8,000 wells, 4 million tons of steel and several hundred subsea wells, manifolds and pipelines will need to be decommissioned in the North Sea area*.
With UK costs projected to be between $40 billion and $50 billion, Derek Henderson, senior partner at Deloitte in Aberdeen, says oil and gas companies are looking for a clear commitment from the Government on the future tax treatment of decommissioning costs:
"The UKCS is at a tipping point where stability and certainty in the fiscal regime will facilitate the maximum recovery of remaining reserves. Under the current system the Government can unilaterally change the tax regime –- something that was starkly brought home to us last year when a restriction to decommissioning tax relief was announced."
"This gave rise to considerable uncertainty as to the rate of relief that decommissioning costs will attract in the future. This fiscal uncertainty means that investors include a higher risk premium when assessing commercial opportunities on the UKCS. There is also clear evidence that existing owners are factoring decommissioning uncertainty into appraisal projects for investment and providing infrastructure access, making the economics more marginal."
Whilst the Government has committed not to reduce the availability of relief further, this commitment holds only for the life of this Parliament. The vast majority of decommissioning will however be undertaken over a much longer timescale.
"Considerable engagement has taken place between the industry and the Government to reinforce the need to be far more sensitive and supportive of the UKCS at this stage of its life. We would hope to see a commitment from the Chancellor, on Wednesday, towards providing a contractual guarantee to companies as to the rate of relief that would be available not just within the life of the current Government but far beyond," added Henderson.
It is also hoped that any announcement will provide sufficient certainty to allow the funding requirement to move to a post-tax basis, bringing clarity to exactly what expenditure is covered by the relief."
Other targeted incentives which would be welcome and which should be tax neutral given their potential to promote additional activity include an extension to the field allowances regime with regards to:
* Figures sourced from second edition of The North Sea Offshore Decommissioning Report by Douglas-Westwood and Deloitte's Petroleum Services Group. Based on current exchange rates these costs would be $40-$48 billion (GBP 25-30 billion).
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