Better yet, the taxpayer is picking up the bill. Sounds great, doesn’t it? Well, it does, until I put some context around it. You see, the free money I’m telling you about is actually the personal allowance we get before income tax kicks in. Important context, this. Without it, people can easily be misled.
Did you see the headlines last week about those big oil companies making billions of pounds in profits? It gets worse – according to Channel 4 News – who told us that these oil companies are also currently “receiving money from the taxpayer” to pay for decommissioning work as older North Sea fields cease production. Outrageous.
Or so it appears, until a little context is placed around the claims, which are being pedalled by the campaign group Uplift. So here is that context. Currently oil and gas fields are ‘ring fenced’ for tax purposes and as such effectively operate as individual profit and loss centres. Each field therefore has its own ‘tax account’ within the tax system.
Owing to the fact that decommissioning tax reliefs can only be claimed when decommissioning spends are incurred companies will, over their productive life, effectively have ‘overpaid taxes’ and so will be in a ‘tax credit’ situation at cessation of production.
Filing for these tax reliefs in recent years when income streams have been low has attracted tax rebates against previous taxes on profits, paid in line with standard business taxation practices. This can give the appearance that the government is paying towards decommissioning, but it is actually just a ‘rebalancing’ of the tax accounts. It is not cost, it is cashflow.
What Uplift did, with a knowing wink, was juxtaposition annual global earnings of oil majors against aggregated UK tax paid over the latter stages of operation, which is not just unfair, but intentionally misleading.
These reliefs should be viewed in the context of taxes paid over the lifetime of a field. The UK Government has received net tax revenues of over £330billion from the oil and gas sector since 1970, although the industry has “contributed nothing” according to Uplift. To me, it seems pretty clear that the industry has, in fact, made an unprecedented contribution to the UK Exchequer over the last five decades.
A balanced report on Channel 4 would have also outlined that between £45bn and £77bn of decommissioning costs are being directly borne by operators, with a further £24bn of reliefs making up the smaller portion of the estimated bill (National Audit Office figures). Of this £24bn figure, £12.9bn is tax which has effectively been overpaid by operators and needs rebalanced, as outlined above.
The rest of that sum (£11.1bn) is future tax revenue which will be forgone because of operators’ profits being reduced by decommissioning expenditure, which is classed as capital expenditure. This is essentially monies that were never due, so to characterise them as having been paid out to oil companies is, again, misleading.
An easy comparison would be the £12,570 personal allowance referenced earlier. Would you class this as money “paid to you” by the taxpayer, or tax you were never required to pay? It is, of course, the latter.
The picture painted by Uplift was designed to support the flawed case for a windfall tax on North Sea operators. But it totally misses the point that these very same oil businesses are those that have the capital and are investing at scale in the new solutions like CCS, hydrogen and offshore wind that will see this country playing a leading role in the energy transition enabling carbon targets to be achieved.
Aberdeen & Grampian Chamber of Commerce has repeatedly called for a reasoned debate about the future of the UK’s domestic energy sector. That will never happen in the absence of proper context and where we have major broadcasters running unbalanced puff pieces based on the opinion of protest groups without doing the necessary due diligence on the content.
Russell Borthwick is chief executive of Aberdeen & Grampian Chamber of Commerce