The approach to the allocation of dismantling commitments between sellers and buyers in recent transactions on the UK Continental Shelf (UKCS) and possible future changes to the rules on the availability of tax breaks for dismantling expenditure will free up a new research and development activity within the UKCS. We are looking at how this can be done and we may be supporting the main objective of maximising the economic recovery by the UKCS (MER). Maintaining a seller`s closure liability for the sale of licence interest immediately mitigates or eliminates the problem of a lack of buyer capacity to obtain tax relief for dismantling expenses. To the extent that the seller, not the buyer, bears the costs of dismantling, the tax relief of these costs is a problem for the seller and not for the buyer. For Shell and BP, the fact that their operations are structured to preserve their ability to claim the corresponding tax breaks is an essential feature of their ability to capitally on the costs associated with dismantling expenses. From a tax rule perspective, the important point is that the seller pays for the dismantling of facilities and machinery including an offshore facility or pipeline that has been commissioned for circular fencing and which, on the whole, conducts upstream oil and gas activities. For this reason, and for other simple economic reasons, the maintenance of decommissioning liability is generally limited to facilities in force at the time of sale and does not extend to the dismantling of facilities that the purchaser adds after that date. Expenditures must be made under an approved demolition program or in accordance with a condition imposed by the Secretary of State prior to the agreement of a demolition program. In the case of mineral oil tax (PRT) fields, the seller must retain a participation in the land licence at the time of closure in order to benefit from the decommissioning relief. This is not the case for non-PRT fields. There is some uncertainty as to whether a seller would be entitled to tax relief if the buyer assumes primary responsibility for the dismantling costs and is then compensated or reimbursed by the seller. At the time of the 2016 budget, HMRC indicated that a seller had to pay dismantling expenses directly in order to benefit from the landfill. Clearly, this still leaves many ambiguities and it may be desirable that facilities be available at each confirmation of the transaction structure given by HMRC.
Structuring an operation to maintain decommissioning responsibility is not just a matter of tax relief. When the buyer takes possession of the assets and fulfills the dismantling obligations, but the seller pays for all or a substantial portion of the costs, governance also becomes a central concern when the buzzing amounts are essential. What participation does the seller need in the decisions of the buyer and, if so, of his co-investors with respect to the decommissioning? If part of the economic justification for the transaction is the potential for the buyer to decommission for less than the seller, improper monitoring or interference from the seller may affect that result. On the other hand, few organizations are pleased that another spends tens or hundreds of millions of dollars without adequate participation. Sellers will also be concerned that the way assets are exploited can effectively increase decommissioning commitments and reputational exposure in the event of a problem during decommissioning operations.