Taxpayers could have to repay around £12.9 billion in taxes and forgo a further £11.1 billion of tax income over the next 20 years, because of the costs of decommissioning oil and gas installations, according to a new report from the National Audit Office (NAO), and the true figure is uncertain.
The OGA estimates that the total cost of decommissioning around 320 installations, including offshore platforms, will be between £45 billion and £77 billion. But operators can use decommissioning costs to offset corporation tax they have paid since 2002 and petroleum revenue tax, which is a tax on profits made on oil fields commissioned before 1993. In November 2017, HM Treasury changed tax rules so that companies buying assets could offset decommissioning costs against taxes paid in the past by the operator selling the assets, a change that was intended to make buying and selling assets more viable for operators.
The NAO notes that operators’ expenditure on decommissioning is rising: they have spent more than £1 billion on decommissioning in each year since 2014. In 2016/17, the government paid out more to oil and gas operators in tax reliefs than it received from them in revenues for the first time – a repayment of £290 million.
Revenues recovered in 2017/18 – the Office for Budget Responsibility expects net annual receipts from the oil and gas sector to rising from £1.2 billion in 2017/18 to £2.4 billion in 2022/23 - but the government’s tax relief payments are increasing as tax revenues fallen due to a combination of lower production rates, a reduction in oil and gas prices and operators incurring high tax-deductible expenditure.