Billions in tax relief to dismantle oil rigs

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CHANCELLOR George Osborne is set to unleash a fresh wave of corporate activity in the North Sea if he uses the forthcoming Budget to cement proposed tax breaks on oilfield decommissioning.

The measures were promised at the same time as field allowances introduced last year, which helped push investment in the UK oil and gas industry to record levels.

By signing contracts with oil firms the current UK Government will be able to guarantee tax relief on the cost of closing down depleted fields in the long term, beyond the life of this parliament.

Industry expert Derek Henderson, a senior partner at Deloitte in Aberdeen, said the move will free up billions of pounds for small and mid-cap oil companies.

He expects firms will use the extra money and resulting increased borrowing ability to boost their exploration and production activities and perfect their portfolios to best suit their individual strengths and ambitions.

“I think it will help borrowing capacity, there will be more funds available and more liquidity in the market,” he said. “It will free up the market in terms of asset transfers and corporate transactions.

“The smaller exploration and production companies will benefit – they have had the most difficulties in raising the finance in recent years.”

Recent figures from trade body Oil & Gas UK show that oil firms invested £11.4 billion in Britain last year and it is predicted that will rise to a record £13bn this year.

Henderson said the figure could go even higher, but although the industry is confident Osborne will come up with the goods on Budget day on 20 March, companies cannot start borrowing on the new basis until the agreements are in place.

He said decommissioning projects in the North Sea are expected to cost between £25bn and £40bn from now and 2040, but with an average tax rate of 62 per cent among oil and gas firms, the costs to firms should come down accordingly under the new rules.

Although such a loss of revenue will be expensive to the UK Government, Henderson says long-term agreement on decommissioning is the key measure behind the revival of North Sea investment and by allowing more transactions it will put the industry on a more efficient footing.

“Assets will better be able to get into the hands of those best placed to optimise them,” he said.