UK: Decommissioning Relief Deeds – A World First!
12 November 2013
Posted by: Authors: J Aldersey-Williams, N Wisely & P Warne
Authors: J Aldersey-Williams, N Wisely & P Warne (CMS Cameron McKenna)
The publication yesterday by HM Treasury of the final form of
Decommissioning Relief Deeds marks a milestone in a 30 month
collaboration between government and industry to provide long-term
certainty on decommissioning tax relief.
Under UK legislation, owners of offshore infrastructure at the end of
its useful life are jointly and severally liable to decommission it.
If the owners default, a wide range of people including former owners
are also potentially liable to be brought back to pay for
decommissioning. As a result, co-venturers in oil fields often enter
into decommissioning security agreements (DSAs), under which each owner
provides security to the others against the risk of defaulting on its
decommissioning obligations. Oil companies selling interests in fields
will also require such security from those purchasing their interest.
Security is usually provided in the form of a letter of credit from a
bank, and the bank will often require collateral from the party
providing the security. This security therefore ties up a lot of capital
which could be more usefully employed.
Tax relief is currently available for decommissioning costs when they
are incurred but this relief could be withdrawn or amended at any time,
and requires a party to have sufficient taxable profits against which to
set the reliefs. Owners deciding whether to invest in a field where
decommissioning may not happen for another twenty years will make
cautious assumptions about the availability of relief, as they will when
requiring security from their partners or from purchasers. DSAs
typically therefore require security to be calculated "gross”, without
any allowance for tax reliefs. This significantly increases (by a factor
of 4 in some cases) the funds tied up in security which would otherwise
have been available to invest, and prices some parties out of the
market for assets.
Over the past two and a half years Oil & Gas UK has been working
with HM Treasury to find a means of addressing this issue. The novel
solution proposed by industry was the use of a contract which would be
available to any party potentially liable for decommissioning in which
the Government effectively guarantees the present rates of tax relief.
Under these contracts, if the tax relief regime changed, the Government
would make a compensating payment to the affected companies. However, if
the tax relief regime remains unchanged, then except in the rare event
of default (where minimum rates of tax relief are available to unrelated
parties brought in to remedy the default) the Exchequer will pay no
more in tax relief than it is expecting to pay today. The advantage of
the contractual solution is that it is much harder for the Government to
unilaterally alter the terms of a contract than to change tax rules.
In a speech at Offshore Europe in September the Chancellor of the
Exchequer, George Osborne, stated: "Never before has any government
entered into legally binding contracts with individual companies to
guarantee the tax relief they can expect decades into the future. No
other place in the world provides such a guarantee.”
The Government has now introduced the necessary authorising
legislation, and amendments to the tax code, to facilitate the contracts
in the Finance Act 2013. The contracts, known as Decommissioning Relief
Deeds (DRDs), are also now available to eligible companies and the
first DRDs were signed
last month. The effect of this change will be to encourage investment
by existing owners of assets, increase asset trades and free up capital
currently put aside to provide security, thereby extending the
productive life of many fields – all at no cost to the Exchequer. Oil
& Gas UK’s analysis suggests that decommissioning certainty will
unlock new investment of about £40 billion, generate an additional 1.7
billion barrels of oil and gas and, over the next five years alone, the
Exchequer could receive an extra £1 billion in tax revenue.
To achieve the full extent of these benefits, now the Government has
put in place the statutory authority and begun to issue the new
contracts, the final piece of the tapestry is for both existing and
future DSAs to be amended to provide for security to be given net of tax
relief. Oil & Gas UK has published suggested revised versions of
its template DSA to take account of the introduction of DRDs. Oil
companies are now beginning to address the significant task of amending
existing DSAs (many of which predate the industry standard and are in
many and various forms) to reflect the new guarantee.
This article first appeared in lexology.com.