UK allows tax-history transfer for oil, gas M&A: Update
London, 22 November (Argus) — The UK government will from 1 November 2018 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 (M&A) activity in the basin and deferring the decommissioning of late-life fields.
"We will introduce transferable tax history (TTH) 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.
"TTH would permit a seller to transfer an appropriate amount of their tax history along with an asset. This would provide the buyer with certainty that they will be able to access tax relief on their decommissioning costs, putting them on a similar footing to the seller," the government said.
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 Oil and Gas Authority estimates the total cost of decommissioning over the next four decades at just under £60bn ($80bn). The UK government said that extending the productive lives of late-life oil and gas fields is likely to be "supported, increasingly, by late-life specialist companies, different sources of finance and new entrants to the UK continental shelf."
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.
The government also said that in the past year, there "have been few instances of straightforward deals where the buyer has only acquired the asset", while most of the deals have either been "corporate deals, or acquisitions where the seller has agreed to retain some or all of the liability for decommissioning."
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."
The measures included the effective abolition of the petroleum revenue tax, the reduction of supplementary charge to 10pc from 32pc and the introduction of new investment and cluster area allowances.
But the mature basin has been struggling in competition for investment with other basins because of higher costs.
The government said today that "transferring tax history between companies is unprecedented in UK corporation tax and the mechanism will necessitate a degree of legislative complexity."
"The draft legislation will require technical consultation before its inclusion in Finance Bill 2018 to 2019," it said.
The government estimates the policy decision will give the budget an extra £5mn in the 2018-19 financial year and £10mn-25mn/yr in the next four years.