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North Sea deal activity faces decommissioning costs of £9b

Posted: 10 February 2004

Energy experts at Ernst & Young believe that high costs associated with the decommissioning of North Sea infrastructure could pose a threat to the future of asset deals in the North Sea.

“With the estimated cumulative costs of decommissioning already touching £9 billion and rising at approximately half a billion pounds a year, this is a seriously expensive problem. As mid-tier and small companies have to post security for abandonment, it places an additional strain on their borrowing facilities and can hamper deals,” said Derek Leith, Oil and Gas taxation leader at Ernst & Young addressing a major conference on the future of the sector in Aberdeen.

As the major oil players pull out of the North Sea and the future of the region lies increasingly with the smaller independent exploration and production companies, the vast sums required for decommissioning become more of a critical issue.

“Whereas major oil companies have the credit ratings to avoid any impact on their ability to borrow, less established players are not in such a favourable position,” said Leith.

The existing rules do not allow companies tax relief on the financial provisions made for decommissioning until the process actually starts - potentially decades later.

“We believe that this legislation, which was drawn up over twenty years ago when the prospects for the development of the North Sea and the players in it were very different, needs to be re-examined. Let's not have a reason to deter investment just at the time when it is most needed.

“To ease the pressure on the independents and allow the full development of the North Sea, with all the implications that it has for jobs and the economy, and not least of all for future higher tax revenues for the Treasury, a proper review of this issue must be undertaken,” said Leith.

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Posted by Richard Price, Editor

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