The government estimates that decommissioning the UK’s offshore oil and gas infrastructure will cost taxpayers £24 billion, although the actual cost is highly uncertain according to today’s report by the National Audit Office.
There are currently around 320 fixed installations – such as oil platforms – in the UK, primarily in the North Sea. To date, operators have recovered more than 44 billion barrels of oil and gas, but reserves are running out and tax revenues from production have declined significantly over the past decade1.
Oil and gas operators in the UK are increasingly decommissioning their infrastructure, spending over £1 billion on this annually since 2014. The government allows operators to recover some of this expenditure through tax reliefs, by deducting costs from their taxable profits and potentially claiming back some taxes they have previously paid.
Tax revenues from oil and gas have declined from a recent high in 2011-12 due to lower oil and gas prices and operators incurring high levels of expenditure that is tax deductible. In 2016-17, the government paid out more to oil and gas operators in tax reliefs than it received in revenues, resulting in total repayments of £290 million. The Office for Budget Responsibility expects net annual receipts from the oil and gas sector to recover slightly, rising from £1.2 billion in 2017-18 to a projected £2.4 billion in 2022-23.
The Oil & Gas Authority (OGA), which was established as a new regulator and to work with the industry to reduce costs and find efficiencies, estimates that decommissioning will cost UK operators a total of between £45 billion and £77 billion.
HMRC forecasts that associated tax reliefs will cost the taxpayer approximately £24 billion from 2018-19 to 2062-63. The total cost of decommissioning to taxpayers could be higher because the government is ultimately liable for the cost of decommissioning assets that operators lack the financial resources to decommission. The Department for Business, Energy and Industrial Strategy has acted to mitigate this risk by requiring nine operators to set aside a total of £844 million to pay for decommissioning in the future.
There is evidence that progress has been made against the government’s objectives for the oil and gas industry since the creation of the OGA in 2015. For example, the OGA estimates that operators have added 3.7 billion barrels to the forecast of recoverable oil and gas reserves in the UK, and its 2018 estimate of the cost of decommissioning projects fell 7% compared with its 2017 estimate, although an increase in the total number of decommissioning projects partly offset these reductions. However, it is difficult to isolate the impact of the OGA’s interventions from wider influences, such as economic conditions.
The NAO found that there are gaps in the government’s understanding of the costs and benefits of changes to the tax regime. HM Revenue and Customs has not historically calculated the total combined cost of decommissioning tax reliefs it has already given to operators. It plans to publish this information for the first time in January 2019. HM Treasury and HMRC told the NAO that they draw on a range of data, including that gathered by the OGA to assess whether changes to tax rules are maximising the oil and gas that operators extract. HM Treasury prepares five-year revenue forecasts for all tax changes but said it has not been able to separate out the impact of individual tax changes given the wide range of factors that influence production. It expects the tax regime to have an important influence on operators’ investment decisions.