Oil and gas operators fear £10bn bill for cleaning up North Sea

As fields near the end of their lifespan, Treasury review could end 75% rebate on cost of decommissioning
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The North Sea oil and gas industry is braced for a £10bn stealth tax from the Chancellor.

The sector escaped further tax hikes in the Budget last week, following Gordon Brown's announcement in the pre-Budget report in December that the supplementary tax charge on North Sea revenues would be doubled to 20 per cent.

But concern is mounting that Mr Brown could use a structural review, which he also announced just before Christmas, to change the rules determining who is liable for the estimated £10bn costs of decommissioning ageing North Sea oil and gas rigs.

In a letter to the US group ConocoPhillips late last year, Jo Wakeman, a senior corporate tax adviser at the Treasury, wrote that decommissioning and the "lifespan" of the Petroleum Revenue Tax (PRT) were two issues up for review.

PRT is a tax on profits from UK oil and gas production and is levied at 50 per cent. Only the estimated 140 fields given development consent before 1993 have to pay. Crucially, operators of these older fields are able to claim a rebate on up to 75 per cent of the cost of decommissioning them from past PRT payments.

Many of these fields will be decommissioned over the next decade, potentially landing the Government with a bill for billions of pounds.

Most rigs that are decommissioned are dismantled, with the steel broken up and sold as scrap metal. The oil giant Shell caused controversy 10 years ago when it tried to dump its Brent Spar rig in deep water. Following a campaign by Greenpeace, the rig was taken to a Norwegian fjord and eventually most of its steel was used for new harbour facilities there.

The Treasury, which pledged last year not to hit the industry with further tax increases before the next general election, will start consulting oil and gas producers on the review soon.

Industry tax experts fear that the Government could decide to abolish PRT, which would allow it to claim that it is simplifying - and reducing - the tax regime. But it would also remove the Government's liability for the decommissioning costs, which instead would be handed back to the industry, in one swoop increasing its tax burden massively.

Julian Small, tax partner for the UK oil and gas industry at the accountancy firm Deloitte, said: "There has been some speculation over the future of PRT. The industry is trying to decide how best to approach the consultation. Everyone is suspicious that the Government will decide to scrap [the tax] to avoid having to pay out the rebate for decommissioning."

Mr Small said that the continuing uncertainty over who would foot the bill for decommissioning had already led to fewer older fields changing hands. "It is having an effect on the industry. If you are thinking of buying a field subject to PRT, you may think twice if you think you are not going to get tax relief for the cost of decommissioning."

A spokeswoman for the industry trade body, the UK Offshore Operators Association, said that discussions between the Treasury and the sector had already begun over the review. She declined to comment on the future of PRT.

But companies such as Tullow Oil, which reports results this week, have become vocal in their protests over the Chancellor's tax increases.

Mr Brown levied his first windfall tax on the industry in 2002. North Sea operators say that countries such as India now have a more stable fiscal regime than the UK since Labour came to power.

Nevertheless, encouraged by record oil prices, companies are clamouring to drill the remaining oil in the North Sea. Last year's licensing round was the most highly subscribed for over 40 years, with a record number of blocks taken by companies.