British taxpayers face £24bn bill for tax relief to oil and gas firms

British taxpayers face a £24bn bill for tax relief awarded to 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.

 

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