Technical tax changes over N. Sea decommissioning welcomed by oil and gas sector – but Budget does nothing for renewable energies

The Brit-govt will introduce next year tax changes to oil and gas companies operating in the North Sea, finance minister Philip Hammond announced in his Budget in an effort to spur new investment.

With effect from November 2018, tax history for oil and gas fields in the North Sea will be transferable from seller to buyer.

This will allow buyers to benefit from larger tax relief when fields reach the end of their life and require to be removed and dismantled onshore.

The Oil and Gas Authority forecasts that North Sea oil and gas operators will spend almost £60 billion pounds on decommissioning between now and the 2050s.

British government tax relief covers around 40 percent of these total costs.

Phil Hammond,
Phil Hammond, Chancellor

The tax-transfer move has been welcomed by the industry.

Ewan MacKinnon, Investment Director at Maven Capital Partners commented: “We welcome these reforms from the Chancellor as the cost of decommissioning older fields is becoming increasingly troublesome, with current tax rules deterring M&A in the sector.

“It is essential that the right assets are controlled by the appropriate owners to allow for ongoing investment, which could raise up to £40 billion in the UK.

“It has been proven time and again companies that specialise in late life assets can be highly successful in buying maturing North Sea fields. For example, Apache’s Forties field is still going strong 15 years after it was acquired from BP.

“The improvements outlined today should attract further investment in the North Sea and prolong the life of the sector for years to come.”

Edison Investment Research said the move is “likely to further support transactions, especially with oil prices currently above $60-barrel

Edison analyst Ian McLelland said: ““There is a substantial amount of deal flow in the region, in particular from private equity capital and the allowing transferrable tax history for oil and gas fields should further support transactions in the North Sea.

“However, though many deals were already structured to allow for the transfer of historic tax loss pools and we will have to see the detail to understand if this really will make things substantially easier.”

The Aberdeen-based oil and gas trade body, OGUK, said the tax-transfer change will unlock further investment in the North Sea by enabling more assets to change hands and allow new owners to provide fresh investment in many mature oil and gas fields.

However, there was little to cheer up the British renewable energy industry.

The Budget states that apart from honouring existing commitments, there will be no new public support for renewables that lead to an increase in consumer bills, until 2025. There is also no increase in carbon pricing, meaning no clear long-term signal for investors.

A spokesman for the Solar Trade Association commented: “It isn’t right that solar is being put at a disadvantage in the UK where it does not benefit from any of the tax breaks available to fossil fuels.

“The Chancellor recognises our economy has no future without a planet, but is bending over a North Sea barrel to offer fossil fuels even more tax breaks.

“Let’s be clear; the solar industry is not asking for any new public support – but we urgently need just some of the tax breaks available to fossil fuels today.

“And the whole energy industry needs a clear signal to continue to invest in low carbon power. We also believe solar can win effectively subsidy-free clean power (CfD) contracts today, so we now hope to see clean power auctions for established technologies resume on that basis.”

The STA also said that the Chancellor still has an opportunity to take ‘a small step in the right direction’ by including solar under the eligible technologies listed for Enhanced Capital Allowances in the Finance Bill, when it goes to the Westminster parliament.

23 Nov 2017

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