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09 July 2012

Government to deliver certainty on decommissioning relief

The Government has today published a consultation aimed at giving oil and gas companies more certainty over the level of tax relief on the costs of decommissioning used assets in the North Sea.

At the Budget, the Government pledged to deliver greater certainty through the signing of contracts with industry. Uncertainty over future relief is cited as blocking new long-term investment, and making it more difficult for oil and gas assets to change hands.

Today’s consultation proposes the creation of Decommissioning Relief Deeds, which specify the levels of relief that companies will receive. Companies will also receive new certainty on the level of relief they will receive when liable for the decommissioning costs of another party which has defaulted.

Without increasing the forecast Exchequer cost of decommissioning, the Government’s intention is to reduce significantly the level of security required when one party acquires the assets of another, or from companies operating together in fields. This will free up significant levels of capital for investment, increasing production and Exchequer revenues. 

Launching the consultation, Economic Secretary to the Treasury Chloe Smith said:

“At the Budget the Government signalled its determination to get the most out of the UK’s oil and gas reserves. By providing certainty on decommissioning costs through signing legally-binding deeds with industry, we are paving the way for billions of pounds of new investment in the North Sea. This is great news for jobs not just in the North Sea, but across the UK. These changes will also benefit the taxpayer, with increased tax revenues in the long term boosting the public finances.

“We will also continue to positively engage with industry on the tax regime for oil and gas. I look forward to hearing the views of leaders on our proposals and will be chairing a meeting of the Fiscal Forum today in Aberdeen.”

Notes for Editors

1. Profits from UK oil and gas production are currently taxed at 62% or (in the case of older fields) 81%. Currently oil companies receive tax relief on the costs of decommissioning used oil and gas assets at a rate of at least 50%. The level of relief is specified in the tax code, but the signing of long-term contracts is designed to deliver greater certainty.

2. Where companies are decommissioning assets and are not able to achieve a specified level of tax relief under the tax code they will receive a short fall payment (subject to the conditions set out in the consultation).

3. Currently, companies associated with a North Sea asset (e.g. previous owners) demand security for the full expected cost of decommissioning that asset from the current owner, so that they know funds are in place if the operator defaults and they become liable for decommissioning.

4. By providing certainty that companies will be able to claim at least half their decommissioning costs back in tax relief if they are paying in the case of another company’s default, these Deeds will allow companies to at least halve their securitisation requirements. This will represent billions of pounds of capital released for additional investment in the UK Continental Shelf.

5. The consultation will last until 1 October 2012.

6. Read the consultation in full.

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