UK: An Exceptional Outcome For The UKCS

Today, in his budget the Chancellor announced two developments which should pave the way for billions of pounds of future investment into the North Sea. After the shock of the 2011 increase in the supplementary charge, the 2012 budget represents the outcome of a much more positive engagement over the last year between Government and industry to tackle the issues of working in a mature basin.

Decommissioning security – the impact of uncertainty over tax relief

Decommissioning presents one of the largest challenges for companies wishing to invest in North Sea oil exploration and production.  Future costs are currently estimated at around £30 billion, as many offshore installations near the end of their working lives. Certainty over tax relief will ensure that the North Sea remains attractive to investors and is likely to be welcomed in an industry where fiscal instability has led to concerns over growth and where exploration activity has halved and annual production activity has fallen by 18 per cent over the past year alone.

Within the UK, in order to ensure that older structures are decommissioned, legislation provides that all of the owners of an installation are jointly and severally liable to decommission it at the end of its life, and if they fail to do so the Government can look to former owners (and other associated parties) to meet the cost. Because of this joint and several liability owners often enter into a decommissioning security agreement with each other, to ensure they can meet their individual liabilities for decommissioning costs or, if they sell out, enter into similar agreements with the purchaser of their interest in the field to ensure they are never called back to fund decommissioning if the purchaser defaults.

Under such agreements, each partner (or the purchaser in a sale situation) must provide security to meet its decommissioning liabilities, often by way of letter of credit, which will be held until such time as it may be needed to meet decommissioning costs. Banks issuing letters of credit will very often require the party giving security to provide collateral, tying up funds which could otherwise be invested in oil and gas developments.

The current UK tax regime allows for tax relief on decommissioning costs only at the time that decommissioning takes place. This provides little comfort for industry players seeking security since they have no guarantee that the rules will still allow such relief when decommissioning of their field occurs, and if so to what extent, and what the eligibility criteria for tax relief may be at that time. It is also a concern that companies may not have sufficient taxable profits in the UK at the time of decommissioning in order to be able to claim tax relief.

Therefore they require security to be provided on a pre-tax or "gross" basis without taking account of the potential for tax relief to ensure that adequate funding for decommissioning exists in the event of changes to the current taxation regime. This means that those providing security have to provide much larger letters of credit than would be the case if the tax regime were stable, consequently tying up even more funds in collateral.  The uncertainty also affects those considering whether to invest in their existing assets who will apply cautious assumptions as to the net costs of decommissioning when valuing those investments. 

Proposal for contracts to guarantee tax relief

Today, George Osborne has announced plans to 'lock in' current rates of tax relief through the introduction of contracts to be entered into between oil companies and the Government. Under such contracts, which were developed by an industry working group in consultation with the Treasury, the entity with which the Government is contracting will effectively be provided with an undertaking that the Government will indemnify them against any future unfavourable changes to the decommissioning tax regime. The contracts could also enable a company with insufficient taxable profits in the UK to claim relief at the time of decommissioning.

The Chancellor has announced plans to begin a public consultation shortly and legislation is expected in the Finance Bill 2013. In an environment where the volume of asset transfers and market liquidity has decreased, such contracts will provide an incentive for lenders to provide finance to companies, free up much needed investment capital for exploration and production and ensure that North Sea asset transfers remain attractive, providing a valuable source of revenue for the Treasury. Oil & Gas UK's analysis demonstrates that decommissioning certainty will unlock new investment of circa £40 billion, generate an additional 1.7 billion barrels of oil and gas and, over the next five years alone, the Exchequer could receive an extra billion pounds in tax revenue.

Field Allowances extended

The Chancellor also announced today a package of changes to the field allowances, which reduce the amount of profits on which the supplementary charge is imposed.  This package is designed to increase investment in fields which would otherwise be commercially marginal; they involve doubling the amount of the small field allowance from £75 million to £150 million at the same time as increasing the size of fields qualifying for the maximum small field allowance to 45mboe (tapering to zero allowance at 50mboe), the introduction of a new £3 billion field allowance targeted at the West of Shetland area (based on water depth and reserve size criteria), and the extension of the allowances to fields that have already received development approval. These changes are expected to take effect following the enactment of secondary legislation and the Finance Bill 2012 later this year.

Judith Aldersey-Williams was part of the Oil and Gas UK Working Group which developed the decommissioning tax relief proposal.

CMS Cameron McKenna has more than 20 UK based energy partners working in its London, Aberdeen and Edinburgh offices.

This article was written for Law-Now, CMS Cameron McKenna's free online information service. To register for Law-Now, please go to

Law-Now information is for general purposes and guidance only. The information and opinions expressed in all Law-Now articles are not necessarily comprehensive and do not purport to give professional or legal advice. All Law-Now information relates to circumstances prevailing at the date of its original publication and may not have been updated to reflect subsequent developments.

The original publication date for this article was 21/03/2012.

To print this article, all you need is to be registered on

Click to Login as an existing user or Register so you can print this article.

In association with
Related Video
Up-coming Events Search
Font Size:
Mondaq on Twitter
Register for Access and our Free Biweekly Alert for
This service is completely free. Access 250,000 archived articles from 100+ countries and get a personalised email twice a week covering developments (and yes, our lawyers like to think you’ve read our Disclaimer).
Email Address
Company Name
Confirm Password
Mondaq Topics -- Select your Interests
 Law Performance
 Law Practice
 Media & IT
 Real Estate
 Wealth Mgt
Asia Pacific
European Union
Latin America
Middle East
United States
Worldwide Updates
Check to state you have read and
agree to our Terms and Conditions

Terms & Conditions and Privacy Statement (the Website) is owned and managed by Mondaq Ltd and as a user you are granted a non-exclusive, revocable license to access the Website under its terms and conditions of use. Your use of the Website constitutes your agreement to the following terms and conditions of use. Mondaq Ltd may terminate your use of the Website if you are in breach of these terms and conditions or if Mondaq Ltd decides to terminate your license of use for whatever reason.

Use of

You may use the Website but are required to register as a user if you wish to read the full text of the content and articles available (the Content). You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these terms & conditions or with the prior written consent of Mondaq Ltd. You may not use electronic or other means to extract details or information about’s content, users or contributors in order to offer them any services or products which compete directly or indirectly with Mondaq Ltd’s services and products.


Mondaq Ltd and/or its respective suppliers make no representations about the suitability of the information contained in the documents and related graphics published on this server for any purpose. All such documents and related graphics are provided "as is" without warranty of any kind. Mondaq Ltd and/or its respective suppliers hereby disclaim all warranties and conditions with regard to this information, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. In no event shall Mondaq Ltd and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use or performance of information available from this server.

The documents and related graphics published on this server could include technical inaccuracies or typographical errors. Changes are periodically added to the information herein. Mondaq Ltd and/or its respective suppliers may make improvements and/or changes in the product(s) and/or the program(s) described herein at any time.


Mondaq Ltd requires you to register and provide information that personally identifies you, including what sort of information you are interested in, for three primary purposes:

  • To allow you to personalize the Mondaq websites you are visiting.
  • To enable features such as password reminder, newsletter alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our information providers who provide information free for your use.

Mondaq (and its affiliate sites) do not sell or provide your details to third parties other than information providers. The reason we provide our information providers with this information is so that they can measure the response their articles are receiving and provide you with information about their products and services.

If you do not want us to provide your name and email address you may opt out by clicking here .

If you do not wish to receive any future announcements of products and services offered by Mondaq by clicking here .

Information Collection and Use

We require site users to register with Mondaq (and its affiliate sites) to view the free information on the site. We also collect information from our users at several different points on the websites: this is so that we can customise the sites according to individual usage, provide 'session-aware' functionality, and ensure that content is acquired and developed appropriately. This gives us an overall picture of our user profiles, which in turn shows to our Editorial Contributors the type of person they are reaching by posting articles on Mondaq (and its affiliate sites) – meaning more free content for registered users.

We are only able to provide the material on the Mondaq (and its affiliate sites) site free to site visitors because we can pass on information about the pages that users are viewing and the personal information users provide to us (e.g. email addresses) to reputable contributing firms such as law firms who author those pages. We do not sell or rent information to anyone else other than the authors of those pages, who may change from time to time. Should you wish us not to disclose your details to any of these parties, please tick the box above or tick the box marked "Opt out of Registration Information Disclosure" on the Your Profile page. We and our author organisations may only contact you via email or other means if you allow us to do so. Users can opt out of contact when they register on the site, or send an email to with “no disclosure” in the subject heading

Mondaq News Alerts

In order to receive Mondaq News Alerts, users have to complete a separate registration form. This is a personalised service where users choose regions and topics of interest and we send it only to those users who have requested it. Users can stop receiving these Alerts by going to the Mondaq News Alerts page and deselecting all interest areas. In the same way users can amend their personal preferences to add or remove subject areas.


A cookie is a small text file written to a user’s hard drive that contains an identifying user number. The cookies do not contain any personal information about users. We use the cookie so users do not have to log in every time they use the service and the cookie will automatically expire if you do not visit the Mondaq website (or its affiliate sites) for 12 months. We also use the cookie to personalise a user's experience of the site (for example to show information specific to a user's region). As the Mondaq sites are fully personalised and cookies are essential to its core technology the site will function unpredictably with browsers that do not support cookies - or where cookies are disabled (in these circumstances we advise you to attempt to locate the information you require elsewhere on the web). However if you are concerned about the presence of a Mondaq cookie on your machine you can also choose to expire the cookie immediately (remove it) by selecting the 'Log Off' menu option as the last thing you do when you use the site.

Some of our business partners may use cookies on our site (for example, advertisers). However, we have no access to or control over these cookies and we are not aware of any at present that do so.

Log Files

We use IP addresses to analyse trends, administer the site, track movement, and gather broad demographic information for aggregate use. IP addresses are not linked to personally identifiable information.


This web site contains links to other sites. Please be aware that Mondaq (or its affiliate sites) are not responsible for the privacy practices of such other sites. We encourage our users to be aware when they leave our site and to read the privacy statements of these third party sites. This privacy statement applies solely to information collected by this Web site.

Surveys & Contests

From time-to-time our site requests information from users via surveys or contests. Participation in these surveys or contests is completely voluntary and the user therefore has a choice whether or not to disclose any information requested. Information requested may include contact information (such as name and delivery address), and demographic information (such as postcode, age level). Contact information will be used to notify the winners and award prizes. Survey information will be used for purposes of monitoring or improving the functionality of the site.


If a user elects to use our referral service for informing a friend about our site, we ask them for the friend’s name and email address. Mondaq stores this information and may contact the friend to invite them to register with Mondaq, but they will not be contacted more than once. The friend may contact Mondaq to request the removal of this information from our database.


This website takes every reasonable precaution to protect our users’ information. When users submit sensitive information via the website, your information is protected using firewalls and other security technology. If you have any questions about the security at our website, you can send an email to

Correcting/Updating Personal Information

If a user’s personally identifiable information changes (such as postcode), or if a user no longer desires our service, we will endeavour to provide a way to correct, update or remove that user’s personal data provided to us. This can usually be done at the “Your Profile” page or by sending an email to

Notification of Changes

If we decide to change our Terms & Conditions or Privacy Policy, we will post those changes on our site so our users are always aware of what information we collect, how we use it, and under what circumstances, if any, we disclose it. If at any point we decide to use personally identifiable information in a manner different from that stated at the time it was collected, we will notify users by way of an email. Users will have a choice as to whether or not we use their information in this different manner. We will use information in accordance with the privacy policy under which the information was collected.

How to contact Mondaq

You can contact us with comments or queries at

If for some reason you believe Mondaq Ltd. has not adhered to these principles, please notify us by e-mail at and we will use commercially reasonable efforts to determine and correct the problem promptly.