North Sea oil tax regime leaves tax payers footing the bill for decommissioning

17 Feb 2020 admin

Author: Gabrielle Jeliazkov (Just Transition, Lead Campaigner) 

Boué’s forensic analysis of the UK’s North Sea oil tax regime explains how tax arrangements have redefined the economic frontiers of the State, handed super-profits to international oil companies and left the taxpayer footing the bill for decommissioning.

The report starts in the 1970s, endeavouring to understand how the quest to break the power of OPEC shaped the British tax regime. The new status quo, built on a liberalisation of petroleum and company profits as the exclusive centre of attention, would “seek to redefine the manner in which states approached the exercise of their private property rights over the hydrocarbon resources within their territories, above all at the level of the fiscal regime applicable to upstream oil and gas activities.”

There are a few important takeaways from Boué’s analysis of British financing decisions. For one, the government’s departure from a proprietary understanding of resource extraction means that they believe that the value of oil and gas resources can only be realized through investment. In doing so, the government casts themselves as consumers of capital, rather than holding ownership over the resources within their land. The sovereignty over Crown resources is then reduced to bargains struck while inducing investment. 

Boué finds that the result, which is essentially the government propping up industry, does not translate into increased exploratory drilling activity or higher rates of profit reinvestment than other places with higher taxation. From 2002-2015, the difference between the hydrocarbon taxes actually levied by the UK government and the fiscal yield if the UK had achieved the same effective tax ratios as Norway was a staggering 324 billion dollars. The UK reduced its sovereignty over Crown resources and does not benefit from the taxing of industry, but does not experience the expected higher investment they used to justify this decision. 

The other takeaway is how important government intention is in energy production. The government has pushed the development of North Sea oil with absolutely no regard for the financial future of taxpayers contractually bound to pay decommissioning costs or the profitability of government subsidising industry exploration. If this entire revolution of the fiscal regime and redefinition of state sovereignty is possible in the name of oil exploration, then a concerted effort by the British government to transition to renewable energy immediately, and do so justly through worker consultation and oversight, is an easily achievable task in comparison. 

Boué’s report is a must-read for anyone interested in understanding how the British oil industry came into existence and why its fiscal policies have developed the way they have. 

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