UK allows tax-history transfer to spur oil and gas M&A
London, 22 November (Argus) — The UK government will from the end of next year allow sellers of offshore oil and gas assets to transfer some of their tax history to buyers, in a move aimed at boosting mergers and acquisitions activity in the basin and deferring the decommissioning of late-life fields.
"From November 2018, we will introduce transferable tax history for transfers of oil and gas fields in the North Sea, an innovative tax policy that will encourage new entrants to bring fresh investment to a basing that still holds up to 20bn bl of oil [and gas]," UK finance minister Philip Hammond said today.
Current rules permit operators to claim relief on decommissioning expenses, based on taxes paid on past profits. This means buyers of mature fields can struggle to accumulate enough tax history to claim full relief, while smaller firms shy away from acquisitions because of decommissioning costs.
The absence of tax-history transfers has made companies look into more creative ways to structure M&A deals. BP yesterday said it agreed to sell stakes in the Bruce field and its tie-backs Keith and Rhum it operates in the UK North Sea to London-listed independent Serica Energy, but kept a 1pc interest in Bruce. This 1pc will allow BP to "oversee its interests", because "the structure of the agreement is based on staged payments to BP that depend on the operational and financial performance of the assets in future years", and it guarantees the rollover of its tax history.
"BP will retain financial liability for decommissioning of the assets but planning and execution of decommissioning activity will be undertaken by Serica," BP said.
Industry body OGUK said last week: "OGUK analysis of 23 UK asset transfers since 2011 reveal that deals have extended field life by almost five years on average. Some fields have gone on producing for up to an extra 14 years."
OGUK acknowledged that prior to today's announcement, the UK government "has done a great deal to improve the fiscal regime and helped to make the UK Continental Shelf one of the most fiscally competitive oil and gas regimes in the world." But the mature basin has been struggling in competition for investment with other basins because of higher costs.