Removing abandoned oil rigs will plunge North Sea tax into red

Mar 29, 2004 02:00 AM

The cost of removing hundreds of abandoned oil rigs and platforms will push the Treasury’s North Sea tax accounts into the red within 16 years, says Wood Mackenzie, a leading energy consultancy. The annual windfall from taxing oil and gas producers, which this year should bring £ 6.5 bn to the Exchequer, will turn into a cash drain over the next two decades as energy companies remove platforms and claim back oil taxes paid in previous years.
Estimates of the likely cost of toppling the vast steel and concrete structures littering the UK continental shelf are soaring to more than £ 15 bn at the same time as forecasters plot the rapid downward trend in the tax take from the North Sea. According to Wood Mackenzie’s forecasts, the Treasury is expected to earn £ 6.5 bn this year from taxing oil and gas profits but that income will rapidly decline to £ 1.5 bn in 2015 as the North Sea’s oil reserves run dry.

By 2020 the Treasury’s income turns into a deficit of £ 115 mm, the consultants estimate, because oil companies will claim back the cost of decommissioning from taxes already paid. Under current rules, the cost of removing infrastructure can be offset not only against current and future profits but earnings in previous years. However, Wood Mackenzie sounded a warning that future Chancellors may be tempted to change the tax rules in order to stem the potential revenue drain.
"If they were to change the fiscal terms, it could remove the liability. It creates a significant uncertainty for oil companies," Rhodri Thomas, a Wood Mackenzie analyst, said.

Derek Leith, head of oil taxation at Ernst & Young, is convinced that the Treasury will scrap Petroleum Revenue Tax. The income from PRT is already in rapid decline because it applies only to older fields.
"It is established wisdom that we don’t expect PRT to be around when oilfields are abandoned," Mr Leith said. "If I am a Treasury minister in 2015 anticipating a dozen abandonments, wouldn’t it be clever to shut the door?"

However, fears that the Treasury might scrap the allowances could provoke a rush to the exit by companies abandoning oilfields in decline, thereby wrecking the DTI’s efforts to stimulate further North Sea investment. Concerns about the cost of abandonment rose after the decommissioning of Maureen, a ConocoPhillips platform, that cost £ 150 mm to break up in a Norwegian fiord in 2002, more than twice the original £ 60 mm budget. Mr Leith argued that the Government needs to provide a specific tax incentive for oil companies to set aside real funds to pay the cost of removing platforms or risk deterring investors.
"The North Sea is at a crossroads," he said. "One part of the DTI is doing road shows in North America to attract oil investment. Another is seeking to ensure that companies have the funds to pay for scrapping the rigs."

Roy Franklin, CEO of Paladin Resources, a self-styled "scavenger" that acquires mature oilfields from the major companies, believed that companies would seek to delay decommissioning by squeezing oil out of old wells. The worst outcome could be a game of pass the parcel with insolvent companies shifting liability to partners or even vendors.
"If your name was on the licence, you never escape," Mr Leith explained. Selling out to a scavenger company does not fully acquit an oil company because if the buyer defaults, the DTI can pursue the license holder. An industry is emerging that seeks to insure decommissioning liabilities, but the size of the risks remain unknown. "I don’t know any other industry that has a finite life," said Mr Leith. "It would be better if people were setting aside funds."

Source: Times Newspapers
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