North Sea tax review ‘good news’ for offshore sector

Following Wednesday’s announcement by the UK chancellor Philip Hammond that a review of North Sea tax rules would be open to provide further support for the oil and gas producers, the industry has reacted with an overwhelming support. 

In his Spring Budget 2017 speech on Wednesday, the chancellor emphasized it was essential for the UK to maximize exploitation of remaining reserves. Therefore, the government will publish a formal discussion paper on how to help the oil and gas industry in the transfer of late-life assets to maximize economic recovery.

The discussion paper, which will be published on March 20, will investigate how to make it easier for operators to sell oil and gas fields by allowing transfers of tax history between buyers and sellers.

The government will also establish a new advisory panel of industry experts to ensure appropriate scrutiny of the options. The review will report at Autumn Budget 2017.

Deirdre Michie, Chief Executive of Oil & Gas UK, a representative body for the UK offshore oil and gas industry, responded to the budget announcement by saying: “We welcome the Chancellor’s response to our call to resolve the tax issues slowing down asset transfers and his recognition of the need to maximize recovery of remaining UK oil and gas reserves.”

“Enabling assets to transfer when appropriate to new owners is key to this strategy,” Michie said.

Michie also added: “The UK Continental Shelf continues to offer an attractive range of opportunities and it is vital that we draw in a diversity of investors to ensure these are realized. Enabling assets to transfer when appropriate to new owners is key to this strategy. As the Chancellor has indicated, the tax regime has presented some significant barriers to asset trading, which we have been working on with Treasury for a number of years. These must be addressed as a matter of urgency.

“The current tax treatment of decommissioning makes it harder for existing owners to sell mature assets and leads to lengthy, complicated deals which slow down activity in the basin. Recent deals highlight the opportunities in the basin but more transactions could be achieved if this issue is resolved.”

Right assets in right hands

EY, professional services firm, also responded to the budget announcement. Derek Leith, EY Partner and head of oil and gas tax, said: “It is often said that the right assets need to be in the right hands to maximize economic recovery late in the life of the North Sea. Any hindrance to new investors being able to obtain effective tax relief for decommissioning costs may create a barrier to entry for those who want to invest in the future of the basin. Changes that remove such barriers can only be positive for the industry and the associated supply chain.

“While this announcement is a clear indication that HM Treasury understands the significance of this issue, much hard work lies ahead to prove the case for change and identify a satisfactory solution that does not increase the Exchequer’s exposure to decommissioning.”

Douglas-Westwood, an energy intelligence group, said this new measure is expected to promote further sale of assets and, in turn, extend the production life of older, marginal fields.

In the latest Western Europe Decommissioning Market Forecast, published this week by Douglas-Westwood, the UK decommissioning spend is forecast to total £47 billion over the 2017-2040 period, with over 300 platform removals and thousands of wells permanently plugged and abandoned. It is thought that around 50% of the overall UK spend will be borne by the taxpayer, implying a liability of nearly £23 billion.

According to DW, there is a clear incentive for the UK to prolong field life, not just to delay the costs of abandonment, but also to ensure that infrastructure remains in place to allow marginal field development in the future, for example, by means of subsea ‘tie-backs’ to existing platforms and pipeline export routes.

‘Good news’ for offshore sector 

International accountant and shipping adviser Moore Stephens said the UK Budget 2017 is neutral for shipping and good news for the offshore sector. Moore Stephens emphasized that the improvements to the oil and gas regime are aimed at improving the attractiveness of the North Sea as an area for investment.

Partners at Ashurst law firm also released a statement regarding the North Sea oil and gas industry.

Oil and gas partner Michael Burns said: “The cost of decommissioning and who bears the liability is the single biggest issue on North Sea M&A transactions relating to mature fields, so it is extremely encouraging that the Government is taking steps to make fiscal incentives better able to address the practical hurdles facing buyers and sellers trying to deal with decommissioning costs.”

Tax partner Nicholas Gardner said: “North Sea Producers will welcome the announcement of a formal discussion paper to consider further support for the transfer of late life assets promoting further exploitation of these assets.”

Offshore Energy Today Staff