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Taxpayers likely to pay £24bn for scrapping oil rigs

UK business & economy

Taxpayers likely to pay £24bn for scrapping oil rigs

Bill to dismantle North Sea infrastructure could be higher, National Audit Office says

© PA

British taxpayers could be on the hook for more than £24bn to safely dismantle oil and gas rigs and other infrastructure in the UK North Sea, parliament’s spending watchdog warned on Friday.

There are around 320 fixed installations such as platforms and pipelines in UK waters that will need to be decommissioned in the coming decades as oil and gas reserves begin to run dry.

Energy companies are able to claim tax reliefs — by deducting costs from their profits or claiming back duties previously paid — to help with the expense of plugging and abandoning wells and removing equipment.

The cost to the Treasury of these tax reliefs has been estimated by the government at £24bn, but the National Audit Office warned the final bill could be higher.

“The actual cost to government of decommissioning is highly uncertain as it will depend on how much decommissioning ultimately costs operators as well as future economic conditions, such as oil prices and exchange rates, which determine profits,” said the NAO.

The Oil & Gas Authority, the regulator for the UK North Sea, has estimated oil and gas producers will have to spend between £45bn and £77bn on decommissioning but the NAO argued this forecast was also uncertain.

The watchdog also accused the government of having “gaps” in its “understanding” of numerous changes to the tax treatment of companies that are decommissioning assets.

It also pointed out that taxpayers will ultimately be liable for decommissioning costs if oil and gas companies go bust.

In recent years, large energy groups have been selling off assets in the North Sea to smaller operators, heightening concerns over decommissioning liabilities.

The NAO acknowledged some safeguards have been introduced, and the Department for Business, Energy and Industrial Strategy has ordered nine operators to set aside a total of £844m to meet future decommissioning costs.

North Sea oil and gas producers have contributed £334bn in net tax revenues to the Treasury since the 1970s.

However, in 2016-17, the government paid out more to producers — £290m in tax repayments — than it received in revenues, following a crash in the oil price and lower levels of production.

Although that position has since been reversed, the North Sea is expected in the coming decades to become a drain on the public purse rather than a source of revenues.

It is estimated up to 20bn barrels of oil and gas could potentially still be recovered from the UK North Sea but more mature assets are already being decommissioned.

These include Royal Dutch Shell’s giant Brent field, which lies around 115 miles north-east of the Shetland Islands. It gave its name to the international benchmark price for crude oil.

A UK government spokesperson said decommissioning tax reliefs encouraged operators to invest in recovering remaining oil and gas reserves.

“We are working with industry to increase the efficiency of decommissioning and minimise costs,” added the spokesperson.

Oil & Gas UK, a trade body representing North Sea operators, said: “Industry is wholly committed to decommissioning assets efficiently, cost-effectively and in a safe and environmentally responsible manner.”

Letter in response to this article:

Putting extractive offshore infrastructure to good use / From Professor Chris Baines, Wolverhampton, UK

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