Britain faces a £24 billion ($29.2 billion) bill for decommissioning ageing infrastructure in the North Sea oil industry — something that will be mandatory in a few years time, according to energy research group Wood Mackenzie, cited by The Financial Times.
Decommissioning is when companies dismantle and remove structures for oil and gas operations that are no longer in use.
Wood Mackenzie said that on its current projections, it will cost the Treasury 50% more than what it originally forecasted at £16 billion. This is because oil companies are set to spend £53 billion from 2017 but claim back almost half of this through tax relief.
In other words, while oil companies are set to pay for decommissioning, the taxpayer will bear a large brunt of the costs because the energy groups will get their money back through beneficial tax reliefs.
Fiona Legate, analyst at Wood Mackenzie told the FT that the North Sea will be “a significant annual expenditure for government, rather than a provider of income” for the next few decades.
Decommissioning — the ticking time bomb
Decommissioning is one of the biggest problems that the North Sea oil industry faces at the moment.
Dr. Dougie Youngson, research director in oil and gas for UK-based broker Finncap told Business Insider in November last year that decommissioning could put off companies investing in the sector and prevent new projects being set up to drill for oil.
“The whole decommissioning situation is significant for the industry and is a huge growth area for the service sector. There are quite a few projects that are very mature and who pays for this decommissioning isn’t particularly transparent,” said Youngson to BI.
Over the next 5-10 years a lot of infrastructure needs to be taken apart and at the moment it is a bit of a wrestling match between the government and industry
“But decommissioning is something the service sector is desperate for. Over the next 5-10 years a lot of infrastructure needs to be taken apart and at the moment it is a bit of a wrestling match between the government and industry.”
The North Sea oil and gas industry has generated £330 billion ($407 billion) in tax revenue over almost fifty years and as Youngson notes in his quarterly report to clients, “it saved the country from an even worse recession in the 1980s and made the UK a global technology leader in the sector.”
He added the one of the biggest issues surrounding this is the lack transparency over who will foot the bill is a problem. Youngson estimates that decommissioning will cost the industry £17 billion across five years.
“There are environmental drivers around this. You can’t just leave an unused pipeline doing nothing on a sea bed. [As an operator of a project] you don’t want to deal with it rotting in a path, on the way to a rig. All these remain a constant that the industry has to get a grip of,” said Youngson.