UK taxpayers to spend at least £24bn cleaning up after oil companies in the North Sea

The full cost to the public purse of decommissioning offshore oil rigs built in the 1970s may not be known until the 2060s, warns auditor.

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The National Audit Office (NAO) will publish a report today which highlights the “highly uncertain” cost to the taxpayer of decommissioning the 320 rigs and other installations extracting oil and gas from the UK’s North Sea oilfields.

Taxpayers are liable for the costs of decommissioning in the North Sea through significant tax reliefs granted to oil companies by HMRC, which allows operators to deduct up to 75 per cent of their spending on decommissioning from their tax. This can include reclaiming corporation tax paid since 2002. The government is also liable for the total cost of decommissioning oil rigs owned by operators that go bankrupt, or lack the funds to decommission them themselves.

The Oil and Gas Authority (OGA) told the NAO that the total cost of decommissioning the North Sea’s oil and gas infrastructure could be up to £77bn. HMRC’s current estimate of the cost to the public through tax relief is £24bn, including £12.9bn in repayments of taxes previously collected. However, the NAO found that figure was “subject to significant uncertainty”, because some operators’ decommissioning costs could increase by as much as 100 per cent and other factors, such as oil prices, decommissioning costs and exchange rates, could vary significantly. The NAO notes that the Department for Business, Energy and Industrial Strategy (BEIS) views the risk that the government may itself have to take on the costs of decommissioning as “an unquantifiable remote contingent liability”, and that the potential cost of bailing out operators that fail “cannot be forecast reliably.” However, the report says that the Treasury has already committed £344m of support to one operator "because it was meeting a partner operator’s share of decommissioning costs".

Low oil prices in the year 2016-17 reduced oil companies’ tax revenues to the extent that, after decommissioning relief was taken into account, HMRC recouped no tax whatsoever from the oil and gas industry, and actually lost £290m to operators in repaid taxes.   

Green Party MP Caroline Lucas told Spotlight: "Even as climate breakdown accelerates, fossil fuel corporations continue to make billions in profit every year. Handing the clean-up bill to the taxpayer is a twist of the knife from an industry that has spent decades casting doubt on climate science and delaying crucial action on the greatest threat we face.

"Just days after a study showed the UK spends more on fossil fuel subsidies than any other country in Europe, this is even more evidence that our government has got its priorities all wrong. Ministers must stand up to these reckless corporations and force them to clean up their own mess."

Tax relief for decommissioning is intended to stimulate investment by the oil and gas industry, which employs 300,000 people in the UK. However, the NAO reports that the Treasury “has not been able to separate out the impact of individual tax changes given the wide range of factors that influence oil and gas production”, and that the Treasury does not know how much, if any, of the money saved by oil companies so far has been reinvested in the UK’s energy industry.

Will Dunn edits the New Statesman's regular policy supplement, Spotlight.