Offshore Group in Last Plea for UK Tax Change
In the wake of the Serica-BP deal announced November 21, UK offshore lobby group Oil & Gas UK (OGUK) made a last call to finance minister Philip Hammond to change tax law on the eve of the UK Budget. It believes that transferable tax history (TTH) would enable more asset disposals, and so bring in new investors as the established players sell up in order to focus on higher-value returns elsewhere.
This is a major part of the government's objective of extracting the most value possible from the aging North Sea, which entails prolonging fields' production life and also meeting employment, energy security and other national objectives.
Companies are taxed on their overall profits, and pay additional taxes on some fields in the North Sea, but decommissioning costs – which will become a very big consideration as the province nears the end of its useful life – come partly from taxes paid by a company. New entrants do not have those tax histories to offset their decommissioning costs against, so buyers and sellers have to agree what would be the value of an asset including the cost of decommissioning as Serica and BP did with their Bruce field deal.
“The complexity of deals like the BP-Serica one announced today is indicative of the effort the industry has to make to ensure that the right assets are in the right hands for further development and extending field life," said OGUK CEO Deirdre Michie.
“This potential route for attracting fresh investment into existing fields is currently hampered by legislation which prevents TTH with the sale of assets. This means that new owners are not able to offset future decommissioning costs against historical production taxes paid.
“Treasury have previously consulted on the benefits of enabling TTH. This is a textbook example of the need for TTH which we believe would make deal-making simpler and quicker, helping to unlock new investment in the basin. We are hopeful of it being included as a measure in the Budget,” she said.
She said the deals announced were "very good news indeed for the UK’s offshore oil and gas sector. After three difficult years, they reinforce the gathering strength of belief in the future of the UK North Sea as we move slowly out of the downturn caused by the oil price slump.
“We believe there are up to 20bn barrels of oil and gas still to recover from Britain’s offshore regions. Today’s announcements will bolster the industry’s efforts to maximise recovery of a vital primary resource which helps to meet the country’s energy needs, secure jobs and generate wealth for the economy. They will also act as catalysts for fresh investment, reinvigorating activity in both new and existing portfolios and generating orders for companies in the UK’s world-class oil and gas supply chain."
Investment upstream has been languishing for the past few years, since the price of oil fell sharply in 2014, and drilling activity is at very low levels. Producers are even holding back on committing new funds to well-understood projects, with three still awaiting investment decisions: the Shell-operated Penguins and Fram projects; and Chevron's Rosebank, whose partners include Ineos and Siccar Point.
Ineos bought into more northerly prospects from Siccar Point in a deal announced November 21, reducing its reliance on the southern gas basin, its point of entry into the North Sea when it bought the Breagh and other assets from Russian-owned Letter One in a sale ordered by the UK government. Siccar Point believes there is potential for a gas hub north of Laggan Tormore, based on a 1.5 trillion ft³ reservoir in the west of Shetland.
As the Ineos deal did not include any production history, there is no tax history yet to worry about.
'BP's biggest UK upstream-only disposal since 2012'
Commenting on the deals, Wood Mackenzie said exploring could provide Ineos with their next growth project if a discovery is made. Of the Serica deal, WoodMac analyst Fiona Legate said it was "BP’s biggest disposal since 2012 – excluding midstream divestments – and fits with our belief that the major will look to sell all bar its core West of Shetland fields, which still have materiality and longevity."
Commenting on the sale November 21, BP said it remained committed to the UK North Sea, but the only fields it mentioned in that context were Quad 204 and Clair Ridge, both west of Shetland. In July, BP robustly denied a Wall St Journal report that suggested it might divest major UK assets, responding: "BP is committed to the UK North Sea and any rumours to the contrary are simply false." However on that occasion as well, it focused on West of Shetland assets, as well as pointing to its creation of a joint venture operator offshore Norway.
"The structure of the deal gives Serica protection from decommissioning liability, as well as an incentive to grow cash flow. It’s similar in structure to BP’s divestment of the Magnus Area and associated infrastructure in early 2017," WoodMac's Legate said. BP agreed January 2017 to divest interests in Magnus and related infrastructure to UK independent EnQuest for some $85mn, although expected to be met by EnQuest by sharing of future cash flows - as the deal does not include any upfront payment to BP.