Oil industry welcomes proposals on North Sea shutdown costs

LONDON Tue Dec 11, 2012 12:45pm EST

LONDON Dec 11 (Reuters) - The oil industry has welcomed the UK Treasury's draft proposals on tax relief for costs of shutting down ageing wells and oilfields which, if implemented, should help unlock more North Sea oil and gas reserves by encouraging investment.

The oil and gas industry has been waiting for clarity on the tax treatment of decommissioning liabilities for ageing assets in the North Sea since 2011. The hope is that this will help more late life assets change hands.

On Tuesday the Treasury published a draft of its proposed Decommissioning Relief Deed, and a set of draft clauses for the Finance Bill 2013, which will provide the legislative framework for the Deed.

The government is inviting views on these documents by Feb. 6, 2013 and will publish a final version of the Deed and its clauses in spring 2013.

The proposals follow in-depth consultation with the industry and suggest the government has taken the industry's comments on board, industry experts said.

"The government has recognised that the decommissioning regime needs to adapt to attract investment," said Andrew Moorfield, managing director, head of EMEA Energy Origination at Scotiabank.

"They have consulted quite widely with the industry and it appears they are listening, so on that basis it seems likely that the final decommissioning paper will accept many of the industry's concerns."

Mike Tholen, economics and commercial director at trade body Oil & Gas UK, said the measures would grant investors a level of certainty on decommissioning tax relief that could be factored into investment decisions.

"In this move, the government has brought down what was a major barrier to investment in the UK's oil and gas."

Decommissioning involves plugging old wells and removing installations such as production platforms and pipelines once the oil and gas reserves have been pumped out. Companies have to factor in these costs when assets change hands.

An estimated 4.5 billion pounds ($7.25 billion) is expected to be spent on decommissioning assets on the UK Continental Shelf from 2012 to 2017, according to a study by Accenture and Decom North Sea.

The study was based on a survey of 51 companies, with the largest expenditure likely to be on well-plugging and abandonment at almost 2 billion pounds.

STUMBLING BLOCK

The bigger the company, the more able it is to cover this decommissioning liability. But problems have arisen when supermajors have looked to dispose of ageing fields to smaller companies.

"The real activity in the North Sea is these smaller companies - the upstream minnows - developing and exploiting older fields," said Moorfield.

"With the lack of clarity on decommissioning, that exploitation of older fields couldn't take place, because the older fields are the ones with the decommissioning liabilities."

Lindsay Wexelstein, head of the UK and Southern Europe upstream research team at consultants Wood Mackenzie, said companies' ability to buy assets had been affected because they have to post the financial security for decommissioning spend on a pre-tax basis.

"But they may be able to do it on a post-tax basis once there is certainty on the amount of tax relief available," she said. "This means they can provide less financial security to cover the ultimate abandonment spend."

Smaller and mid-sized players will now be in a better position to take on ageing assets in the North Sea and run them for a few more years, draining late life assets of the last drop of oil.

"Together with the brownfield allowance announced in September, it will promote near-term investment in many mature assets and ... unlock a further 1.7 billion barrels of oil and gas over time," said Oil & Gas UK's Tholen.