Taxpayers pouring billions into North Sea oil and gas decommissioning: It's an oil slick on the pubic finances

As green energy subsidies decline, the oil and gas industry is being paid to clean up after itself 

James Moore
Chief Business Commentator
Friday 25 January 2019 11:51
Decommissioning rigs like these will cost the exchequer £24bn in tax reliefs, a report has warned
Decommissioning rigs like these will cost the exchequer £24bn in tax reliefs, a report has warned

Call it an oil slick on the public finances.

The National Audit Office (NAO) has crunched some numbers about the tax take from this country’s North Sea oil fields. They are so incredibly, stunningly awful they verge on the surreal.

What they show is that the British taxpayer has effectively been paying oil companies that have made a mint from pumping the stuff up from under the sea bed to decommission their equipment.

Operators are spending about £1bn a year on that, which sounds like a lot but is a drop in a 44 billion barrel ocean compared to what they’ve made (multiply that number by, say, $50 and see what you get).

The government allows them to recover some of their costs through tax reliefs on the profits they make. Astonishingly, they can also claim back a portion of what they have previously paid.

Lower prices have led to lower profits (and less tax paid). Because of the way these reliefs work, you and I and everyone else who pays tax (which means just about everyone because, VAT) shelled out a net £290m to flatter the bottom line of an already bloated industry in 2016-2017.

The NAO says that the exchequer was back in positive territory last year and will be so over the next few years, but those reliefs are still going to act as a major drag on its receipts. They are forecast to cost the chancellor (whoever that is) £24bn over the next 45 years from April 2018. Needless to say, that’s an awful lot of schools and hospitals being sacrificed on the altar of the energy industry’s bottom line.

These are, remember, estimates and as we all know making estimates over that length of time is tricky. At the end of the 2062-2063 tax year, the numbers could end up looking better. But they could just as easily end up looking worse too.

One particularly nasty fly in the ointment is that if an operator goes bust the cost of decommissioning lands with, you guessed it, the UK taxpayer again.

The NAO does note that the Government has required nine of them to set aside £844m to pay for future decommissioning. That looks prudent but when you consider that the total cost of the work will come in at anything between £45bn and £77bn, and that operators can trade their holdings and their tax reliefs along with them, you do rather wonder whether it will prove quite prudent enough.

The real sting in the tail, however, is this, and I’m going to quote it in full because it really is worth reading. The NAO’s report says that “there are gaps in the government’s understanding of the costs and benefits of changes to the tax regime. HM Revenue and Customs has not historically calculated the total combined cost of decommissioning tax reliefs it has already given to operators".

Looking at all this, you start to understand why people talk about an oil curse and note that countries without the stuff not named Norway tend to do better long term.

The absence of this questionable crutch means less corruption, less environmental destruction, fewer oil mafias, or just less of the incompetence that allows private outfits to turn huge profits while leaving you and I to foot the bill for cleaning up the mess they make in doing so.

We taxpayers are basically getting gassed by the people who produce the stuff. It's worth bearing that in mind the next time some climate change denier or other right wing rube starts whinging about green taxes and the subsidies accorded to the producers of clean energy. They're declining by the way.

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