UK budget offers decommissioning tax relief

By OGJ editors

The UK government has offered oil and gas operators a measure of certainty about the ability to recover costs of decommissioning production platforms and related offshore facilities.

In his speech on the government’s 2012 budget, Chancellor George Osborne said, “We will end the uncertainty over decommissioning tax relief that has hung over the industry for years by entering into a contractual approach.”

Budget documents submitted by Osborne said the government will submit legislation outlining the decommissioning approach and “extending the amount and scope of the existing small-field allowance, introducing a new-field allowance targeted at the West of Shetland area, and introducing primary legislation to allow the potential introduction of measures to support investment in brown fields.”

Oil & Gas UK Chief Executive Malcolm Webb welcomed the announcement as “a turning point for the UK’s oil and gas industry towards a more stable future fostered by constructive collaboration between the government and industry to ensure that the recovery of the country’s oil and gas resource is maximized.”

Webb said the move on decommissioning “should delay decommissioning of oil and gas infrastructure, give rise over time to up to £40 billion of extra investment, and result in the recovery of an additional 1.7 billion bbl of oil and gas.”

As a result, he said, the Exchequer could receive “an extra billion pounds of tax revenues in the first 5 years alone.”

Webb said field allowances in the budget “should result in additional investment of over £10 billion and the production of hundreds of millions of barrels of the UK’s oil and gas. It will also help to stimulate exploration for further oil and gas reserves.”

Derek Henderson, head of tax at Deloitte, also welcomed the move on decommissioning, which his firm estimates could cost the UK North Sea producing industry £50 billion over the next 30 years.

Henderson said: “This will remove a major fiscal risk for UK North Sea investors and may release significant funds for investment by allowing companies to move to post-tax decommissioning guarantees. This will also free up capital available for investment and development of opportunities in the North Sea. This activity boost should also increase the tax take for government.”

He said the proposed changes “go some way to restoring trust which had been shaken” by a surprise tax increase last year (OGJ Online, Mar. 25, 2011).

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