What Is A Decommissioning Security Agreement
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. Over the past 24 to 36 months, we have discussed a series of UKCS transactions, in which a proposal has been submitted to the seller to maintain all or part of the closure liability related to the relevant interests of the licences. In some of these cases, the proposal was not accepted, while in other cases it was not the preferred option. As far as we know, there has been no other agreement. It is clear from this experience that this is not in MER`s interest.