Government finalises decommissioning tax relief guarantee for oil and gas operators

Out-Law News | 03 Sep 2013 | 4:48 pm | 1 min. read

The Government is to enter into legally-binding contracts with individual oil and gas companies which will guarantee the tax relief they can expect when decommissioning assets decades down the line.

At an industry conference in Aberdeen Chancellor of the Exchequer George Osborne said that the first decommissioning relief deeds between the Government and industry would be signed within weeks.

"Never before has any government entered into legally binding contracts with individual companies to guarantee the tax relief they can expect decades into the future," he said. "No other place in the world provides such a guarantee."

"And your industry – not the Treasury – estimates that this decommissioning certainty will drive at least £17 billion of increased investment, extending the life of the North Sea basin with an additional 1.7 billion barrels extracted," he said.

The announcement came alongside the publication of new analysis of the Scottish economy. In its report, the Treasury said that an independent Scotland would be "directly exposed to a narrower tax revenue base and more volatile fiscal position" without an economic and fiscal union with the rest of the UK.

The UK Government has previously said that the equivalent of at least 20 billion more barrels of oil (boe) could still be produced from the UK Continental Shelf (UKCS), although the area is now past "peak production". It has also estimated that oil and has will continue to provide up to 70% of the UK's primary energy supplies in 2030.

The new Decommissioning Relief Deed, which is the culmination of 18 months of negotiations between industry and the Government, is one of a number of new incentives introduced since January 2012 to encourage investment in oil and gas fields that are smaller or more difficult to develop. The Government has also doubled the value and extended the scope of the allowance applicable to small fields and created new reliefs for unexplored deepwater fields, large shallow-water gas fields and older 'brownfield' sites.

Energy law expert Bob Ruddiman of Pinsent Masons, the law firm behind, said that the Government's "commitment and guarantee" to the North Sea oil and gas industry was "critical".

"The industry has been frustrated by the lack of coherent strategy through successive governments," he said. "What we're seeing is Government recognising and standing behind its share of the cost of decommissioning in order to stimulate full exploitation of remaining reserves. This support is essential to boost investment and employment across the UK oil and gas industry."

"As the UK seeks to diversify its energy resources it's refreshing to see Government support for the oil and gas industry, which ultimately remains critical to our energy supply. Shale gas and renewable energy have dominated recent discussions, but we need to recognise that successful energy policy will support a range of technologies. North Sea oil and gas should be a pivotal part of these discussions," he said.