Significant uncertainty remains about the future costs to taxpayers of decommissioning offshore oil and gas assets, said UK Government’s HM Revenue & Customs service. HM Revenue & Customs (HMRC) estimates that oil and gas companies will pass on £24 billion of decommissioning expenditure to taxpayers through tax reliefs, but there remains a wide range of possible future costs as most companies are still improving the certainty of their cost estimates.
If oil and gas companies can reduce their decommissioning costs then, in turn, UK taxpayers will benefit through a reduction in the value of tax reliefs that the government provides.
The Oil and Gas Authority (OGA) claims to have helped oil and gas companies to reduce the expected cost to decommission their offshore assets by 7%, and we recognise the value it has added by benchmarking performance, making data more widely available and encouraging the sharing of best practice. But the direct impact of the OGA is hard to isolate from other factors influencing company decision-making, particularly the wider economic situation.
In this regard, HMRC called the Department to ensure taxpayers are protected from the risk of footing the bill for decommissioning fracking assets, where there are fewer protections than for offshore oil and gas.
The Department also needs to ensure its support for oil and gas remains compatible with its other activities aimed at achieving climate change goals, including ensuring alignment with the development of carbon capture, usage and storage, which could potentially reuse offshore oil and gas assets.
The Oil and Gas Authority must bring greater certainty to its cost estimates. Together with the Department for Business, Energy and Industrial Strategy it should be transparent about how these estimates measure up to reality, and explain exactly what impact it is having on reducing costs. It is concerning that the Department has not yet properly set out the terms for how fracking assets will be decommissioned. It must do so before this industry grows further,
…stated HMRC Chairman.
Conclusions and recommendations
1.There is significant uncertainty over the potential costs to taxpayers of decommissioning offshore oil and gas assets.
-Recommendation: As part of its next estimate of decommissioning costs, expected in June 2019, the OGA should set out how it is making its estimate more certain and what the expected impact of new and as-yet uncosted projects could be.
2. It is unclear how actions taken by the Department and the OGA are reducing decommissioning costs for oil and gas companies.
-Recommendation: The Department and the OGA should set out by July, and report to Parliament annually thereafter, on: the direct impact it has had on reducing decommissioning costs; and the actual decommissioning costs incurred during the previous year set against what the OGA had forecast.
3. The Department does not yet have a clear plan to ensure the UK maximises the benefit of developing exportable decommissioning skills and resources.
-Recommendation: The Department should set out by July its strategy for maximising the economic benefit of the development and export of decommissioning skills and resources.
4. The Department has a worrying lack of understanding of the potential for government liabilities to decommission assets used in fracking.
-Recommendation: The Department should write to the Committee by the end of June 2019 explaining the decommissioning arrangements for fracking, including a full and clear explanation of the responsibility for subsequent costs once licences have been returned to the Government, and what it is doing to prevent liabilities falling to taxpayers.
5. Government support for oil and gas may become incompatible with its long-term climate change objectives.
-Recommendation: The Department should set out as part of its energy White Paper, expected during 2019, how it will continue to ensure that government support for oil and gas remains compatible with its wider energy objectives.
6. There is uncertainty over whether carbon capture, usage and storage (CCUS) will become a viable option for reusing oil and gas assets.
-Recommendation: The Department should, as part of its Treasury Minute response, set out its expected timetable for CCUS deployment and how this aligns with the latest indications of when oil and gas companies will decommission their assets.
