LONDON Dec 11 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
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
"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
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.
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
"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
"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.