News story

Tax certainty for oil and gas decommissioning will lead to extra £13 billion North Sea investment

This news article was published under the 2010 to 2015 Conservative and Liberal Democrat coalition government

First decommissioning relief deeds presented to oil and gas industry will provide greater certainty over future tax relief.

The first decommissioning relief deeds have been presented by new Economic Secretary to the Treasury Nicky Morgan to senior representatives from the oil and gas industry.

The deeds will provide greater certainty over the tax relief companies will receive when decommissioning equipment in the future.

Currently, the government offers tax relief at 50% (or 75% for older fields) on the costs of decommissioning equipment. Oil and gas companies are legally required to decommission their equipment at the end of an oil or gas field’s life.

The total cost of decommissioning is currently estimated by industry to be £35 billion. However, uncertainty around the future availability of decommissioning relief is deterring investment in older fields and making it difficult for new entrants to the market.

The new decommissioning relief deeds will provide certainty for oil and gas companies, and encourage future investment, by guaranteeing the decommissioning tax relief a company will receive in the future.

Locking-in this certainty will drive new investment and encourage new companies to enter the basin. Industry estimates suggest the tax certainty created by this policy will drive at least an additional £13 billion of capital investment in the North Sea.

Provided the government makes no change to the existing tax regime, there will be no need to claim on the deed. However should a future government make changes, the company can use the deed to claim a ‘difference payment’ from the government.

This certainty gives reassurance to the industry that the cost of decommissioning will not steeply rise in the future.

The presentation of the first deeds by Economic Secretary to the Treasury Nicky Morgan to seven oil and gas companies took place Thursday 17 October.

It was attended by senior representatives from a number of major companies from the industry, and the CEO of Oil and Gas UK, Malcolm Webb.

Economic Secretary to the Treasury, Nicky Morgan said:

The oil and gas industry is of vital importance to the UK economy. I am delighted to be able to present the first signed decommissioning deed to provide certainty to the industry. The government is determined to see more investment in the North Sea, creating jobs and revenue for taxpayers.

This has been a great opportunity to meet the leaders of this industry, and I look forward to working with them.

Malcolm Webb, CEO of Oil and Gas UK said:

By providing certainty on the availability of tax relief on decommissioning, the government has removed a major concern that was impeding investment in the UK’s oil and gas. It will give investors a level of certainty that can be reliably factored into investment decisions and commercial decommissioning security arrangements.

The move will, at no cost to the government, promote near-term investment in many mature assets and in the longer-term, postpone decommissioning by five to seven years on average and unlock a further 1.7 billion barrels of oil and gas over time.

By allowing the industry to make a much fuller contribution to economic growth, this measure is great news for British jobs and tax revenues.

The first deeds follow a consultation on the policy after its announcement at Budget 2012.