By OGJ editors
HOUSTON, Feb. 10 -- High costs associated with the decommissioning of oil and natural gas platforms could threaten future asset deals in the North Sea, an Ernst & Young LLP oil and gas taxation partner said.
Speaking to a North Sea decommissioning conference in Aberdeen Tuesday, Derek Leith said that industry estimates the cumulative costs of decommissioning at £9 billion. Costs are believed to be rising at £500,000/year.
The decommissioning estimates come from the United Kingdom Offshore Operators Association. The conference was sponsored by a unit of First Conference Ltd., London.
"As mid-tier and small companies have to post security for abandonment, it places an additional strain on their borrowing facilities and can hamper deals," Leith said.
As the majors pull out of the North Sea and the region's production lies increasingly with independents, the vast monetary sums required for decommissioning are becoming a more critical issue.
"Whereas major oil companies have the credit ratings to avoid any impact on their ability to borrow, less established players are not in such a favorable position," Leith said. The existing rules do not allow companies tax relief on the financial provisions made for decommissioning until the process actually starts—potentially decades later.
The North Sea is dominated by offshore structures commissioned in the 1960-70s to deal with the harsh environment. At that time, little consideration was given regarding how the structures would be removed, Leith said.
"As the UK continental shelf is in a mature phase with declining production, this perceived long-term issue is fast becoming a close reality for many structures in the region. It is also proving to be a barrier to the successful transition of ownership to smaller independent operators," he said.
Decommissioning costs are an issue for all oil and gas companies doing business in the region.
"We believe that legislation—which was drawn up over 20 years ago when the prospects for the development of the North Sea and the players in it were very different—needs to be reexamined. Let's not have a reason to deter investment just at the time when it is most needed," Leith said.
He called for a review of the tax laws, saying change was needed, "to ease the pressure on the independents and allow the full development of the North Sea, with all the implications that it has for jobs and the economy, and not least of all for future higher tax revenues for the [UK] Treasury."
Background
The UK government is bound by the 1999 Oil Spill Preparedness and Response rule.
"In a nutshell, the decision prohibits the dumping and leaving of disused installations in place at sea. At present, both government and industry recognize this is an issue, but no
formal review is being progressed from a technical or fiscal standpoint," Leith said.
A balance has to be reached between the freedom of large companies to transfer mature assets to independents and the UK Department of Trade and Industry's desire for provisions that avoid the risk of companies defaulting on their decommissioning costs.
"From a fiscal point of view, any changes that are to be implemented by government need to have the united buy-in from the industry as a whole. Given the different size, portfolios, and future aspirations of the operating community in the North Sea, each are likely to have different views on what should be done.
"An uncoordinated approach may confuse the government and restrict the success of any appeal. Additionally, the industry needs to ensure that any government action will also have a knock-on effect of increasing activity or prolonging the productive life of the region. The government and Treasury will unlikely give any concessions that do not provide a win for government in the long term," he said.