Decommissioning liability for offshore oil and gas installations: planning for a happy ending

Abstract

This extended abstract outlines the draconian statutory decommissioning liability regime for offshore installations in the UK Continental Shelf (UKCS), drawing comparisons with the other jurisdictions.

The impact of the regime on regulatory and contractual requirements for decommissioning security that creates barriers for new entrants into the UKCS is highlighted. One such barrier is the calculation of decommissioning security by reference to the pre-tax cost of decommissioning (i.e. without considering tax relief on decommissioning expenditure at the time it is incurred).

This extended abstract comments on recent novel proposals from the government to limit the amount of capital tied up in decommissioning security by adopting measures that will facilitate calculation of decommissioning security on a post-tax basis.

The UKCS is a mature province and the government is seeking to balance its desire to maximise economic recovery from the UKCS with its policy objective of ensuring that taxpayers are not responsible for decommissioning costs.

The proposals envisage that the government will enter decommissioning relief deeds with owners of offshore installations. This will provide certainty about the rate of relief they will achieve in relation to their own share of decommissioning expenditure; it also ensures relief is available where they incur such costs due to the default of other parties. In essence, the government is contemplating entering a form of stabilisation agreement that will provide redress in the event that future changes in law reduce the tax relief available for decommissioning expenditure. The proposals show a bold attempt to promote investment by addressing political risk in a highly developed jurisdiction.