1Minimising costs and maximising benefits of decommissioning to the taxpayer
1.On the basis of a report by the Comptroller and Auditor General, we took evidence from the Department for Business, Energy and Industrial Strategy (the Department) and the Oil and Gas Authority (the OGA) on the actions they are taking to reduce the costs to taxpayers of decommissioning offshore oil and gas assets.1
2.There are currently around 320 fixed installations, such as oil platforms, in production in the UK, primarily in the North Sea. To date, oil and gas assets have enabled operators to recover more than 44 billion barrels of oil and gas. But reserves are running out, with the remaining oil and gas becoming harder to find and extract. Oil and gas companies in the UK are increasingly decommissioning their assets as they are reaching the end of their useful economic lives and have spent more than £1 billion on decommissioning in each year since 2014. International obligations require the companies operating assets to plug and abandon wells and remove all the surrounding structures, with exceptions in certain circumstances.2
3.The OGA estimates that decommissioning will cost companies between £45 billion and £77 billion, with almost all the expenditure coming in the next 20 years. Decommissioning affects the government’s finances because oil and gas companies can recover some of their costs through tax reliefs. These enable the companies to deduct decommissioning costs from their taxable profits and potentially claim back some taxes that they have previously paid. HM Revenue & Customs (HMRC) estimates that tax reliefs will cost £24 billion in total.3 HMRC calculates that it has given tax reliefs for decommissioning worth between £635 million and £965 million in each year since 2013–14 and forecasts that tax reliefs for decommissioning will exceed £1 billion for the first time in 2018–19.4
4.The Department has overall responsibility for the safe, cost-effective and environmentally sensitive decommissioning of offshore oil and gas infrastructure. In 2015, the Department established the OGA to regulate the industry, promote the continued extraction of remaining resources and help operators to reduce their decommissioning costs. The Department also monitors the financial health of oil and gas companies and can require companies to set aside money to pay for future decommissioning if it thinks there is a risk of the bill falling to taxpayers.5
Uncertainty over the cost to taxpayers
5.The amount that decommissioning will cost oil and gas companies is very uncertain. The OGA produces an annual estimate of the total future cost to oil and gas companies of decommissioning. Its latest estimate, in June 2018, was that decommissioning would cost between £45 billion and £77 billion. The OGA expects 49% of the estimates that feed into this total to be accurate only within a range of -20% to +100% and an additional 40% of estimates to be accurate within -15% to +50%.6 The OGA told us there is uncertainty over the costs of decommissioning because there are hundreds of installations to be decommissioned over the next 40 years, ranging from projects being decommissioned now to new discoveries where the assets have not even been built yet.7
6.HMRC’s estimate that future tax reliefs for decommissioning will cost £24 billion is based on the central estimate from the OGA’s range, which is £58.3 billion. The actual costs taxpayers will incur is highly uncertain in line with the uncertainty of the OGA’s estimate of the decommissioning costs for oil and gas companies, as well as other economic factors that feed into HMRC’s estimate, such as future oil prices and exchange rates.8 The Department was unable to tell us what the cost to taxpayers would be if decommissioning costs were £77 billion, which is the top end of the OGA’s range, but it assumes it would be around 40% of that figure.9 The total bill for decommissioning is also set to grow as the government approves new projects in line with its objective to maximise the recovery of the remaining oil and gas. The OGA told us, for example, it had approved 19 new projects last year, which will be added to future estimates of decommissioning costs.10
7.The OGA told us it is taking action to increase the certainty of its decommissioning cost estimate. It explained that it previously highlighted its concerns to the chief executives of the oil and gas companies about the lack of certainty in their estimates, which has resulted in the percentage of estimates being in the least certain category falling from 72% to 49%. The OGA also told us it has plans to state a new expectation of companies that they increase the certainty of the cost estimate three years prior to beginning decommissioning and that it will use its regulatory powers to enforce this if necessary. The Department told us that oil and gas companies are required to estimate their future decommissioning liabilities each year in their audited accounts, which provides an additional incentive for the companies to ensure their estimates are accurate.11
Impact of OGA and the Department
8.The OGA has stated that it will work with oil and gas companies to reduce their forecast decommissioning costs by 35% by 2022.12 It tracks progress towards this target through its annual forecast of future decommissioning costs. In June 2018, it reported that the forecast cost to decommission assets included in both its 2017 and 2018 estimates had fallen by 7%, although new projects offset some of this reduction in the overall estimate.13 The OGA told us that if oil and gas companies reduce their costs by 35% this would result in a saving to taxpayers of £8.6 billion.14 The OGA told us that oil and gas companies incurred £1.45 billion of decommissioning expenditure in 2018 but it has not said whether this demonstrates that reductions in estimated decommissioning costs have started to be translated into actual savings.15
9.The OGA explained that it has helped oil and gas companies to identify savings by showing them how they compare with other companies and sharing best practice. It said, for example, it had shown one company that was expecting to spend £3.6 million to plug and abandon each of its wells that other companies were planning to perform the same activity for just £1 million per well. According to the OGA, this one example resulted in a reduction of £126 million in the estimated decommissioning cost.16 The Department told us that the success of comparing different companies had caused it to consider how the approach could similarly be used in nuclear decommissioning.17 The Department also claimed that the OGA’s successes had caused other countries around the world to be interested in its work.18
10.The Department and the OGA both acknowledged the challenge of isolating the impact of the OGA’s work from the wider factors that influence oil and gas companies’ decisions. The Department said that, despite the work of the OGA, the costs of decommissioning to taxpayers could increase if oil and gas prices crashed, though it does not expect this to happen, and that the overall economic situation is the biggest factor determining oil and gas companies’ decisions.19 The OGA told us it has done work to address the challenge of measuring its own success when ultimately it is the oil and gas companies themselves that are achieving cost savings. In doing this work it has recorded 22 ‘successes’, which equate to just over £300 million of savings.20
Exporting decommissioning skills and resources
11.The UK is the first country to be decommissioning assets in the North Sea. Therefore, the Department sees a lot of potential for exporting decommissioning skills and resources to other countries that are decommissioning later.21 In the 2018 Budget, the government announced it would work with the OGA to call for evidence to identify ways of strengthening the UK’s position as a ‘global hub’ for decommissioning.22 The UK and Scottish governments have also established the Oil and Gas Technology Centre (OGTC), which has in turn established the National Decommissioning Centre, in partnership with the University of Aberdeen, as an industry-led centre of excellence set up to deliver research and training in oil and gas decommissioning.23
12.We asked the Department what thought it had given to protecting the intellectual property from technology developed using taxpayer money. The Department told us it had not considered this yet but would see to what extent the issue is raised in the responses to its call for evidence.24 We also asked the Department how it would ensure the government accrues the benefits of developing decommissioning skills and resources rather than companies moving it to other parts of the world. The Department said that, as well as the initial £90 million funding for the OGTC, it has support from the Department for International Trade and it is planning a seminar with ambassadors from around the UK on the Industrial Strategy where it will market the use of British expertise in oil and gas around the world.25
Decommissioning fracking assets
13.Under the Petroleum Act 1998, the government is liable for decommissioning offshore oil and gas assets if oil and gas companies are not able to pay for decommissioning themselves, for example due to insolvency. The risk is partly mitigated because the liability transfers in the first instance to existing partner companies operating the asset, or previous owners of the asset, and only transfers to government if no such companies exist.26 The Department told us that it focuses on the 20% of offshore assets that have never been owned by one of the largest oil and gas companies and that it can require companies to set money aside for future decommissioning costs if it considers there to be too high a risk of the bill falling to taxpayers. To date, it has asked nine operators to sets aside a total of £844 million and it is negotiating similar arrangements on a further three fields.27
14.We asked the Department whether taxpayers could face similar liabilities to decommission onshore fracking assets in the event of the licence holder going out of business. We drew attention to the apparent greater risk than in the offshore industry because fracking is conducted by smaller companies, with less financial backing, meaning they could be short lived. The Department told us that the Secretary of State would consider the ability of a company to meet their decommissioning costs when deciding whether to give consent for operations to commence and can require them to set money aside. The Department said that the Environment Agency, as the regulator for onshore activities, would also consider decommissioning as part of its role.28 We asked the Department if it plans to produce any additional guidelines to the decommissioning of fracking infrastructure, especially in light of the government’s promotion of developing shale gas in the UK. On 12 March, the Department published guidance on fracking,29 including an assessement of its enivronental and economic impact. It does not, however, provide any information on the decommissioning of fracking infracture.
15.The Department wrote to us after the session to state that the Environment Agency would not allow the surrender of a permit until sites have been returned to a satisfactory condition. According to the Department, if a permit holder company is no longer in existence the Environment Agency would have the ability to pursue former directors from that company and if this was unsuccessful the Environment Agency would identify if there were other appropriate parties who could bear responsibility, such as the landowner.30
1 C&AG’s Report, Oil and gas in the UK – offshore decommissioning, Session 2017–19, HC 1870, 25 January 2019
2 C&AG’s report, paras 1, 2, 2.2, 2.3
3 C&AG’s report, paras 9, 11
4 HM Revenue & Customs, Bulletin: Estimated cost of tax reliefs, 31 January 2019
5 C&AG’s report, paras 4, 14
6 C&AG’s report, paras 2.7, 2.8
7 Q 3
8 C&AG’s report, para 2.18
9 Q 8
10 Q 9
11 Q 7
12 C&AG’s report, para 3.6
13 C&AG’s report para 3.16
14 Q 9
15 Q 6
16 Qq 5, 6
17 Q 37
18 Q 25
19 Qq 14, 25
20 Q 26
21 Q 37
22 C&AG’s report para 3.11
23 Q 37; C&AG’s report para 3.10
24 Q 42
25 Qq 58–61
26 C&AG’s report, para 2.19
27 Qq 11–12
28 Qq 79–95
29 Department for Business, Energy and Industrial Strategy, Guidance on fracking: developing shale gas in the UK, 12 March 2019
30 Letter from the Department for Business, Energy and Industrial Strategy, 25 February 2019
Published: 27 March 2019