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Cost of North Sea Decommissioning Will Negate All Future Tax Revenues

Published in Oil Industry News on Tuesday, 10 January 2017

Graphic for News Item: Cost of North Sea Decommissioning Will Negate All Future Tax Revenues

Nicola Sturgeon’s economic case for independence has suffered another major blow after an expert analysis warned the cost to the public purse of decommissioning North Sea oil rigs is threatening to“wipe out” all future tax revenues.

Research group Wood Mackenzie warned taxpayers are facing a £24 billion bill for decommissioning oil and gas fields, 50 per cent higher than the official Treasury estimate of £16 billion.

Oil companies are forecast to spend £53 billion from this year winding down their North Sea operations and almost half that sum is expected to be recouped from the Treasury through tax relief.

The analysis predicted this burden will exceed the remaining net tax revenues, meaning the North Sea will become a net drain on the public purse, and warned of a “domino effect” as fields begin to shut.

Ms Sturgeon promised Scots a second oil boom if they voted for independence in 2014 but the price has since collapsed and Scotland’s geographical share of the revenues tumbled to only £60 million last year.

Without oil revenues, Scottish Government figures published last year gave Scotland a £15 billion public spending deficit, proportionately more than twice the size of the UK’s and higher even than Greece’s.

The First Minister has appointed a party growth commission to examine ways in which the huge gulf could be closed if Scotland left the UK but its interim report, submitted before Christmas, has not been published.

Alexander Burnett, the Scottish Tories’ energy spokesman, said: “This is a significant bill for the UK to manage, but it will do so. Had a separate Scotland had to find £24 billion, it would be a different story altogether, not least against the backdrop of the SNP's oil revenue myths.

"And while this will be a large tab to pick up, it brings with it the opportunity to provide jobs and opportunities in the North Sea once again."Decommissioning costs are subsidised under rules allowing oil companies to claw back some of the £330 billion of taxes paid since North Sea production began.

Last year was the first when tax relief exceeded Treasury revenues and the deficit is due to grow to £500 million this year, before returning to a modest surplus thanks to production increasing and a slight recovery in the price.

But the Wood Mackenzie analysis said the price slump means “the UK government’s expected future net income from North Sea taxes has been wiped out.”

The document predicted that companies will try and delay their decommissioning spending as long as possible, even if that means sustaining short-term losses. However, it warned that “the maturity of the basin is working against them”.

“Whole areas, including larger platforms and smaller tie-back fields, are under threat, and there is a clear risk of a domino-effect as fields and hubs begin to shut in,” it said.

Large, fixed platforms in the central and northern North Sea will be costly and challenging to remove, it said, with the Ninian field having three platforms weighing a combined 706,000 tons.

They are expected to cost £3.5 billion and take around 20 years to decommission. Royal Dutch Shell, the UK oil and gas group, will shortly launch a consultation on its plans for decommissioning the giant Brent field, which helped launch the North Sea industry in the 1970s.

Paul Wheelhouse, the SNP Energy Minister, said: “The North Sea will have a bright future if the focus of industry and Government is on maximising economic recovery, efficiency of extraction and encouraging new investment.

“As fields reach the end of their economic lives, decommissioning is an economic opportunity for Scotland in its own right.” He referred to a major contract for BP’s Miller field awarded last month, with 80 per cent of the spend expected to be in the UK.

Source: Telegraph

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