British taxpayers face a £24bn bill for tax relief awarded to oil and gas companies removing hundreds of North Sea wells, rigs and pipelines, the UK public spending watchdog has said.
The National Audit Office (NAO) said the figure would climb if companies collapse and are unable to pay for cleaning up their operations, leaving the government to pick up the tab.
The industry has contributed more than £300bn in tax revenues to the Treasury since the 1960s. North Sea production peaked in the mid-1980s and the late 1990s, and has been declining ever since.
Tax revenue peaked at about 3% of GDP during the 1980s, but slumped as output from the region declined. A combination of low oil prices and decommissioning costs resulted in the industry becoming a net drain on the government purse for the first time in 2016.
The NAO, in a report on the cost of decommissioning the region’s oil and gas fields, said the Treasury faced a £24bn bill because of tax arrangements.
About half of the figure comes from decommissioning reducing companies’ taxable profits, with the rest from tax reliefs based on the large sums of tax paid historically. Those reliefs allow companies to offset decommissioning costs against revenue, cutting the amount of tax they pay on their profits.
The vast majority of the costs will land over the next 20 years, with a small amount falling as late as the 2060s.
However, the watchdog warned the £24bn estimate was “highly uncertain” as it relied on factors that are hard to predict, such as future oil prices.
The bill could also be bigger if oil and gas companies become insolvent, leaving the government liable for clean-up costs.
“Taxpayers are ultimately liable for the total cost of decommissioning assets that operators cannot decommission,” the NAO said.
The report revealed there have already been cases of companies defaulting on their clean-up obligations. The Treasury had to pay out £5.4m in 2016 and £45m in 2017 for decommissioning because of unnamed companies not meeting the costs.
Decommissioning involves everything from plugging old wells to removing the miles of pipelines on the seabed in the region.
The industry has been a set a target of reducing the total costs of decommissioning – pegged at £59.7bn in 2017 – by 35% in three years’ time.
However, decommissioning experts said the target is very ambitious.
The Oil and Gas Authority, the industry regulator, has rejected freedom of information requests by the Guardian seeking to discover how many decommissioning projects are coming in on budget, on the grounds the data is commercially sensitive.
Labour said the government needed to rethink changes last year that allow buyers of oil and gas fields to inherit the seller’s tax relief.
Clive Lewis, the shadow Treasury minister, said: “The obvious issue looming over all of this is the climate emergency. We know we need to urgently be ending the UK’s reliance on fossil fuels, not offering yet more tax breaks for big oil companies.”
Much of the regulation requiring companies to remove oil and gas structures stems from the response to the 1995 proposal by Shell to sink the Brent Spar oil storage platform in the North Sea. The plan was abandoned after widespread protests by environmentalists.
Decommissioning experts said to meet cost targets, more infrastructure may in future need to be left in the North Sea.
“One way of spending 35% less is doing 35% less. If the public purse is getting involved, we owe the public to look at it and not to dismiss it out of hand,” one industry source said.
The trade body Oil and Gas UK said it was “wholly committed” to making decommissioning cost-effective and environmentally responsible.
The government said it was working to reduce costs. “By providing tax relief on decommissioning, we are attracting continued investment into our reserves – supporting jobs, boosting the economy and protecting our energy supply,” a spokesperson said.
