THE Treasury must set the right decommissioning tax breaks if the North Sea is going to successfully compete with East Africa and North America for foreign investment, oil and gas industry experts have warned.
Overseas investors and private equity firms are known to be circling UK waters following last week’s pair of blockbuster deals involving Chinese firms.
Sinopec bought a 49 per cent stake in the North Sea assets of Canadian firm Talisman Energy for about £1 billion, while state oil company China National Offshore Oil Corporation is buying Canadian rival Nexen for £9.7bn in a blockbuster transaction that would represent China’s biggest-ever foreign corporate takeover.
Acquiring Nexen will make the Chinese firm the operator of the Buzzard oilfield, the UK’s largest, and give it a major role in setting the price of Brent crude.
But experts warned that, if further deals are to follow, then changes will need to be made to the tax system as the UK competes with gas discoveries in East Africa and shale gas developments in North America for international investment.
Bob Ruddiman, head of energy at international law firm Pinsent Masons, said: “It’s inevitable that there will be further foreign investment in the North Sea.
“I know there are potential acquirers looking closely at the North Sea in terms of both prospects and owners of assets. It’s a combination of existing players and potential new investors.
“But before everybody gets too excited, those same players will be constantly screening other international opportunities – we’re competing on a global stage for foreign investment. The key for any investor is stability. That’s why the decommissioning tax relief is so critical.”
Chancellor George Osborne promised in March’s Budget to give companies greater certainty over the tax reliefs they will receive when it comes to scrapping oil rigs and other assets.
Chloe Smith, economic secretary to the Treasury, launched a consultation earlier this month to discuss the level of subsidies on offer to the industry. It is due to run until 1 October.
The UK government claims that the proposed changes could unleash “billions of pounds” worth of investment in British waters because companies will have to hold less cash back to decommission infrastructure.
The move is designed to provide certainty to oil companies, in particular for smaller firms, which have struggled to secure funding for exploration or to take over older platforms.
Investors have been discouraged from backing such projects because of the huge decommissioning costs and the uncertainty over the tax relief available.
Derek Leith, managing partner of accountancy firm Ernst & Young’s Aberdeen office, said: “If we can get those changes across the line then I think we will definitely see further investment in the North Sea.
“They would reduce the barriers to entry for new players and would allow bigger firms to sell assets on to smaller companies.”
Renewed interest in British waters could also give a boost to takeover activity among support services – such as engineering and maintenance companies – that have grown up around the oil and gas exploration and production companies.
Deloitte partner Graeme Sheils, an expert in mergers and acquisitions (M&A), said: “I see quite a lot of M&A activity coining in the energy services sector.