The Press and Journal (Inverness, Highlands, and Islands)
Tax incentive could lead to rush of deals in North Sea
Analysts say reform that allows transfer of credits will attract investment to mature fields
A ground-breaking new tax break for the oil sector will revitalise the North Sea and pave the way for a flurry of deals, industry experts said yesterday.
They said the UK Government’s decision to let firms transfer tax credits would attract fresh investment to the basin and prolong production from mature fields. Industry bodies said the reforms would play a vital role in making sure mature assets find their way into the “right hands”.
They want new entrants to take on older fields, invest in infrastructure, and push decommissioning further into the future.
The UK Treasury said the step was “unprecedented” in UK corporation tax history and that an extra £70million would be added to its coffers over the next five years.
Ross Thomson, Scottish Conservative MP for Aberdeen South, said the support package for the oil and gas industry “delivered for the north-east”.
But Scottish Finance Secretary Derek Mackay said the decision was “well overdue”.
Chancellor Philip Hammond announced the move in yesterday’s Budget, and said the new system would be in place in November 2018. Mr Hammond said the “innovative” policy would help support a basin that still holds up to 20 billion barrels of oil.
Oil companies build up credits on the taxes they pay during the production life of a field. They can then use those credits to offset decommissioning costs once the well runs dry. But under the current regime, those tax credits cannot be transferred from the asset owner to the prospective buyer.
The system has made it difficult for deals to be struck between oil majors looking to sell non-core assets and smaller, aspiring firms who are keen to beef up their portfolios, but do not want to be faced with a hefty decommissioning bill.
A number of deals have been completed in the last year, including Shell’s sale of a package of North Sea assets worth up to £2.85billion to Chrysaor.
But that acquisition and others like it were only possible by “creative” deal structuring. Shell retained a fixed liability of £750million on the decommissioning costs.
Oil and Gas UK (OGUK) chief executive Deirdre Michie said: “While there have been a number of deal announcements in the basin over the last year, these have mostly been for less mature assets, have been extremely complicated and taken a very long time to negotiate. This tax measure should help complete deals more quickly and in a more efficient way.”
Ms Michie also said new investment in the North Sea would generate activity for the supply chain, which has been “hard-pressed” during the downturn.
OGUK estimates the reforms could save the Treasury an average of £10million per asset in deferred tax relief.
The Oil and Gas Authority has forecast that almost £60billion will need to be spent on decommissioning North Sea infrastructure. Government relief covers about 40% of the total bill.
Derek Leith, head of oil and gas tax at EY, said: “New investment in the UKCS is the lifeblood to preserving an industry which has made a huge contribution to the UK’s economy over many decades, and supporting a supply chain focused on innovation and internationalisation.”
Alex Kemp, professor of petroleum economics at Aberdeen University, said the reforms were to “everyone’s advantage”, as “more transactions mean more oil will be recovered”.