Clarity needed on impact of decommissioning on public finances
27 March 2019
- Significant uncertainty over costs to taxpayers of decommissioning offshore oil and gas assets
- Government has a poor understanding of potential liabilities to decommission assets used in fracking
- It needs a clear plan to maximise economic benefits from UK decommissioning skills and resources
- Read the report summary
- Read the report conclusions and recommendations
- Read the full report: Public cost of decommissioning oil and gas infrastructure
Significant uncertainty remains about the future costs to taxpayers of decommissioning offshore oil and gas assets.
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.
There is potential for the UK to become a global leader in decommissioning skills and technology but we are concerned that the Department for Business, Energy and Industrial Strategy (the Department) does not yet have a clear plan for maximising the potential economic benefits.
The Department must 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.
“Taxpayers will incur costs running to billions for oil and gas decommissioning, but it is far from clear what these costs will be in practice.
“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.
“It would be wholly unacceptable for taxpayers to pick up a hefty bill that could have been reduced had more timely action been taken by the Government.”
Conclusions and recommendations
There is significant uncertainty over the potential costs to taxpayers of decommissioning offshore oil and gas assets. Future decommissioning costs are uncertain because oil and gas companies are at the early stages of decommissioning and are still learning about how much different activities will cost. The OGA forecasts that the cost of decommissioning to companies will be between £45 billion and £77 billion. HM Revenue and Customs (HMRC) estimates that the cost to taxpayers from tax reliefs associated with decommissioning will be £24 billion based on the central estimate of the OGA's range. But it has not estimated what the costs to taxpayers would be if decommissioning costs are at the top end of the OGA's range. At the same time, oil and gas companies are commissioning new assets in line with the government's objective to maximise recovery of remaining oil and gas reserves. New projects could generate tax revenues for the government but will also add to the total decommissioning bill and increase the future cost of decommissioning to taxpayers.
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.
It is unclear how actions taken by the Department and the OGA are reducing decommissioning costs for oil and gas companies. The Department established the OGA in 2015 to encourage companies to reduce their decommissioning costs. The OGA says it has helped oil and gas companies to achieve a 7% reduction in their expected costs of decommissioning through benchmarking performance, making data more widely available and encouraging the sharing of best practice. The OGA estimates that if companies achieve its target for reducing expected costs by 35% by 2022, UK taxpayers will benefit by £8.6 billion through a reduction in tax reliefs. But it is difficult to isolate the impact of the OGA's activities from wider economic conditions that influence oil and gas companies' decisions. Additionally, the OGA has only published estimates of future costs and has not compared costs already incurred with its previous estimates to demonstrate whether savings have actually been achieved.
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.
The Department does not yet have a clear plan to ensure the UK maximises the benefit of developing exportable decommissioning skills and resources. The UK is one of the first countries in the world to start decommissioning its offshore oil and gas assets on a large scale. This presents an opportunity for the UK to become a global leader in decommissioning skills and technology that can be exported to other regions. The government announced in the 2018 Budget a call for evidence to identify ways the UK can become a global hub for decommissioning. Since then, the UK and Scottish governments (in partnership with Aberdeen University) have helped fund the creation of the National Decommissioning Centre as part of the drive to become a world-leading centre for decommissioning research & development (R&D). But industries that have been nurtured with UK tax incentives and R&D funding can take intellectual property and move abroad, reducing benefits from taxpayer-funded schemes. We are concerned that the Department does not yet have a clear vision for how the benefits for taxpayers of government support for decommissioning industries will be realised.
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.
The Department has a worrying lack of understanding of the potential for government liabilities to decommission assets used in fracking. In offshore oil and gas, the government is ultimately liable to decommission assets that the operating companies cannot afford to decommission themselves. There is some protection given by the fact that partner operators and previous owners of assets are liable before it falls to the government. The Department focuses its monitoring on the 20% of assets which it considers to be highest risk because they have never been owned by one of the largest companies and has required nine companies to set aside £844 million for future decommissioning costs. In contrast, backers of fracking schemes may often be small companies with limited financial resources. The Department tells us that landowners are liable if project backers cannot decommission their assets, but we are concerned that determining liability may not always be as straightforward as the Department believes, and that the liability will ultimately fall to the government. The Department must ensure it sets the terms for how fracking assets are decommissioned before the industry grows further.
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.
Government support for oil and gas may become incompatible with its long-term climate change objectives. As well as providing tax reliefs for decommissioning, the government has reduced tax rates and made trading assets easier to encourage oil and gas companies to invest in maximising the extraction of the UK's remaining reserves. The government is committed to supporting oil and gas companies due to the industry's role in generating direct tax revenues, supplying energy and providing employment. The Department says that oil and gas will remain an important part of the energy supply: it estimates that oil and gas will provide nearly 70% of total energy required in 2035 and will remain particularly important fuels for transport and domestic heating. But the role of oil and gas in the economy is expected to decline as the government switches support to cleaner renewables to achieve its climate change targets.
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.
There is uncertainty over whether carbon capture, usage and storage (CCUS) will become a viable option for reusing oil and gas assets. CCUS could be essential for decarbonising the economy at the lowest cost, but it is currently too expensive to be commercially viable. The Department has stated that the costs of the first CCUS projects could be reduced if oil and gas assets are reused, such as repurposing pipelines to transport carbon dioxide and using wells to store it. This could also defer part of the bill for decommissioning. But, as this Committee has previously reported, the government has tried and failed to support deployment of CCUS twice in the past and there is no imminent prospect of a large-scale CCUS facility being in operation in the UK. There is a risk that oil and gas assets are decommissioned before they can be used for CCUS schemes due to the Department's slow progress at bringing forward CCUS.
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.
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