North Sea oil: a race to the bottom

The fact that the Chancellor of the Exchequer saw the need to intervene in the tax regime for North Sea oil decommissioning during the UK budget of spring 2017 says far more than the headlines allude to.

The media speak of ‘help’ to extend the lives of existing platforms, some of which have been standing stoically against the elements for many decades.  But what is that help, and who is it helping?

Currently, the owner of a platform has responsibility for decommissioning regardless of how many years they’ve held ownership for.  The intention of the tax incentives, say the government, is to make it easier for smaller companies to take rigs and platforms off the hands of the oil majors without incurring the full responsibility for decommissioning when the fields ultimately run dry and the platforms have to be dismantled at great cost.

Intuitively therefore, the flight of super-majors such as BP and Shell from the North Sea prior to the announcement seems to have more to do with the impending decommissioning costs rather than end-of-life concerns with regards to the productivity of the oil fields those majestic pieces of engineering rest upon.

Would it be proper for an oil company that has taken billions of dollars in revenues from a country’s economic region to sell the asset that facilitated those profits in the hope that their responsibilities diminish?  Of course not, and that’s not entirely the case now that an intervention has been made by the government.

The UK will now attempt to calculate the tax paid by the new owner’s predecessors and offer some of that perceived de-com relief up to the smaller companies who are willing to keep drilling and producing from those fields whilst facing the prospect of multi-billion dollar decommissioning costs.

And, for sure, that sounds like a great idea.  But there’s always a caveat in modern economics, and it is that no matter how much tax the UK government calculates has been paid in the past, there have been no funds squirreled away to cover the UK’s share of the cost.

So effectively the UK will calculate how much the oil and gas super-majors historically paid in tax, to help give a tax break to smaller companies to offset their decommissioning costs, to allow field life to be extended for perhaps a decade, all so that the UK taxpayer can foot the enormous bill through borrowing anyway.

The only way the cost could’ve been offset was through a sound oil fund that accounted for the future as well as the present, and no amount of tax relief will ever push back the onset of time.

Decommissioning won’t go away until every last platform has been dismantled, and to offer perpetual tax incentives to squeeze out dribbles of oil rather than face environmental and fiscal responsibility stinks of procrastination.

I believe the phrase the youth of today who will feel the pinch in their salaries tomorrow is:

#facepalm


Enjoy this blog?  Managed to get here without dozing off and coating your tweeds in red wine?  Perhaps you’d enjoy some of this blogger’s other works:

Ceresian: something lurks

Blank bookcover with clipping path

 


Other articles by this author:

Clean up the Brents? This is the oil patch, son.

UK “Fracking” to begin… on the fly.

So how DO you get a job offshore? It’s all in the contacts.

 

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