North Sea tax credits are not subsidies
By Paul Homewood
London, 8 August – A new paper from the Global Warming Policy Foundation aims to explain the way North Sea oil and gas projects are taxed and corrects the widespread confusion over the tax credits that accrue to oil and gas fields at the end of their lifetimes.
While environmental activists like to paint so-called tax credits as “subsidies”, they are in fact nothing of the sort. They arise because the government has forbidden energy companies from putting money away against the eventual decommissioning of oil and gas fields.
The paper’s author, economics writer Tim Worstall, explains the effect on their tax bills.
“The companies pay extra tax during the life of the field, but when the field is decommissioned, there is no income to offset the cost against. This leaves them with a tax credit – and less revenue for the Treasury.”
GWPF director Benny Peiser emphasises the point.
“The special rules for North Sea oil and fields mean that taxes are paid earlier rather than later, but the amount of tax paid is the same. Thus, it’s not a subsidy. It’s just another way the government of the day tries to maximise tax revenues now while leaving a big hole for future balance sheets – long after ministers have retired.”
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NOT A LOT OF PEOPLE KNOW THAT 
Everything about AGW, renewables especially and all the rest of the in fact nongreen rubbish like EVs and air heatcrs, is fake, i.e, not fit for purpose and totally wasted.
Since the UK is broke already, the whole net zero programme is crazy.
May have been fomented by the Russian agents said to abound in UK and certainly by the CCP.
Sorry to be a bit of a thicky, I don’t doubt the sincerity/truth with regards to the paragraphs but are you saying energy compnaies are given tax-credits (subsidies to the eco-mentalists) which are then taxed-back to the Government? Think that ranks along side not allowing energy companies to establish reserves for eventual decomissioning (plain stupid). Perhas an explanitory diagram would work? Otherwise keep up the fantactic work.
No, what happens is that Corporation Tax is calculated on profits, ie revenue less costs.
It is standard accounting practice to make provisions for long term liabilities, like decommissioning costs, offset against operating profit. If you don’t do that, you overstate Net Assets.
However the Govt won’t allow oil companies to offset these provisions against profits for tax purposes. They are only allowed to be used when they are actually incurred. As this is by definition after the oil stops flowing there is no operating profit to offset against
Therefore the govt refunds the tax which has in effect been overpaid already.
The reason for this arrangement is that successive govts wanted all of their tax revenue upfront.
Spot on Paul.
Hi Paul. Thanks for that quick and succinct reply – much clearer and I am an Independent Financial Adviser. I will stick with Private Client work and avoid Coproarate Taxation advice! Still it is a shame that this lie of a “subsidy” situation is not better explained but it is indeed a “complicated” subject/situation for Joe Public to grasp/accept, 100% blanked and not helped by MSN….
No revenue from that field, but very few oil companies have only one producing field. And the offset was rarely, if ever, actual cash put in escrow or secured by a bond (unlike many mines for example).
The government did not trust oil companies to actually build up a decommissioning reserve, thinking they would simply abandon projects and leave the cleanup to someone else. When oil majors started selling up in the UKCS they were required to offer guarantees that they would step in to handle decommissioning if the companies they sold to defaulted.
Government nominally guaranteed that PRT would be refunded during decommissioning, but welshed on the deal by lowering the PRT rate, reducing the refund . In essence the government got an interest free loan for the decommissioning fund, and then failed to pay back what they originally promised.
Tax credits are a reduction in theft.
A reduction in the timing of theft.
Unfortunately I don’t understand any of the article. I can’t even find out when an oil/gas license has been issued and the products are flowing out of the ground by a private company who actually owns the product then and who can use it and who can sell it. Google search has no answers to those questions.
It is said, on MSM, that it is all sold on the intl. market (by whom?). Does this happen with producers like the US, S. Arabia, Russia, Burma etc. and whose govts. have no say in the matter and cannot use those resources themselves at a cheaper price than the world price?
In terms of the oil and gas in the ground, all of it is owned by the UK.
No oil company owns any of the oil per se, all they have is a licence to exploit the resources (a Production Licence). All of the business investment cost in this process, from winning the initial Exploration Licence competition, gathering the exploration data, hiring the drilling rig, drilling the well, assessing the discovery (if any), planning the building and operation of the production facility, all of this is done with private investment risk capital.
Does this business model sound like the parasitic magic energy industry?
You decide which business model makes the nation wealthy and which business model destroys society.
A trillion dollars sitting in Norway’s sovereign wealth fund suggests that the subsidies travel the other way.
Colin,
Do you have any understanding of how material wealth creation happens?
Thanks for that. But my query was who owns the oil when it is out out of the ground? If it is still owned by the UK presumably they can sell it but do they sell it all at the world market rate for that type or can the UK keep some back to sell it to UK companies a little cheaper? I keep hearing that UK North Sea oil doesn’t help the UK in any way as it is all sold at world market rates and the UK has to buy its oil needs at that rate – I query that – is it true or not?
Wrinkle,
To answer your question you need to focus on the Downstream sector of the oil business.
https://en.wikipedia.org/wiki/Downstream_%28petroleum_industry%29
Public companies are obligated to maximise the profits for their shareholders and so will sell the product they produce to the highest bidder.
Colin, that’s simply a function of the population of Norway and the vastness of its oil industry on comparison to its other industries.
A partial truth. Oil companies have to pay the government for a licence to find and extract the oil that’s down there. Then, if the oil company actually finds economic reserves the government will take a larger proportion of the profits than would typically be the case for any other industry.
Government could just pay oil companies to find and extract the reserves and then just use, sell the oil as it sees fit, this certainly doesn’t happen with UK oil.
My “partial truth” starts from the fact that all UK oil and gas minerals in the ground were nationalised by the Petroleum (Production) Act 1934.
So basically theft.
>>nationalised
Colin. Norway has a population of about 5 million, and had more oil production than the UK. They had so much money coming in that they really had no alternative to investing it. Oil taxes in the UK only ever covered a small proportion of government spending. Brown’s QE blowout after the financial crisis spent all the tax revenue to date in one year. The Sunak covid QE was even bigger.
It’s all there. I suggest the UK government as a source. Most oil is sold at one or two points because it comes ashore via pipelines(some is taken off by tankers) and is sold to refiners at prices linked to the global market price – there are differences based on sulphur content and the fractional content – thus most North Sea oil is priced at a premium or discount to Brent. It is sold by hge companies owning the licence.
Philip – I read the Wiki page but no answers for me there.
The ‘It is sold by hge companies owning the licence.’ That at least is a lead – thanks.
The oil produced under licence is owned by the members of the consortium. The consortium may well be a mixture of public, private and state owned companies. The operator of the licence is one member of the consortium who is the lead company.
Its complicated.
These downstream marketing issues you are asking about are outwith my area of expertise. You will need to ask further and find a marketing expert as these questions are consortium specific and not generalities.
I know a bit about downstream, having worked in it. North Sea Oil (e.g. Brent Crude) is mostly exported because it’s of higher quality (low in sulphur, or “sweet”) and so higher value. For example, the crude oil produced from Poole Harbour is exported to the Far East.
UK oil refining has to be considered as part of the European oil industry and not in isolation. European refineries were designed to run on cheaper high sulphur “sour” crudes from the Gulf and Russia. These are more challenging to run but of course offer more attractive margins.
Refineries run a cocktail of various crudes tailored to optimise production of various fuels (LPG, petrol, diesel, home heating oil, bitumen, etc.) to maximise profitability. Ultimately the consumer benefits through competition, provided sufficient capacity exists. This is under threat from governments losing interest in maintaining this sector in the face of green lobbying, and a number of companies have shut down their refining operations.
Philip is broadly correct. It used to be the case that the government retained the right to sell various chunks of the oil – royalty oil (12.5%) and participation oil (up to 51%). That was done by BNOC, who paid for participation oil at the BNOC price: that income was of course subject to taxes, but royalty was a straight tax. Royalty was sometimes paid in cash if BNOC found it inconvenient to sell small quantities arising from minority field stakes. Oil companies with UK refineries mostly got to repurchase participation oil so the transactions were a wash with just cross invoicing periodically: they had no effect otherwise. However, BNOC had to find markets for royalty in kind oil and participation oil from upstream only producers.
When the oil market softened in 1985/6, BNOC was faced with customers not renewing or simply terminating the term contract sales they had relied on previously. That left them having to sell into spot markets at a discount to BNOC price. To begin with, they allocated their royalty entitlements to these spot sales, but eventually the volume of cancelled term deals got too big, and they were forced to take losses on participation oil. Nigel Lawson as Chancellor decided to end the charade with participation oil (instigated by Tony Benn) to stem the losses for tax payers, renaming BNOC to the Oil and Pipelines Agency, leaving it just handling Royalty oil. BNOC originally operated government owned Britoil which did have a handful of equity stakes in oilfields which were spun off and privatised. Eventually, royalty oil too was removed from the equation, leaving equity holders (the investors in each field project – sometimes just one, sometimes a joint venture to spread risk) responsible for selling all their oil entitlements – and also paying all their upstream ring fenced taxes.
Legislation does require all oil and gas be landed in the UK unless an export dispensation is given. Hence the major terminals at Sullom Voe, Hound Point, Flotta etc. Offshore production evacuated by tanker requires a special licence for non-UK discharge, though these are usually easily obtained. Since shuttle tankers need to get back to their field fairly quickly for the next load in practice this limits destinations to nearby Europe. Oil that passes through an onshore UK terminal can be exported without a further licence.
Things have changed over time with whether the UK uses its own oil. During the miners’ strike in 1984/5 there was high demand for heavy fuel oil for power stations, which the government stockpiled ahead of time as well. The result was that light, sweet North Sea oils were exported, while refineries imported heavy gungy oils to make the fuel. In fact, this ready supply of North Sea oil and the breakup of the term contract market for BNOC kick started the Brent market and turned Brent into the global marker price grade it still nominally is today. Arthur Scargill helped create the Brent market.
However, as the original light, sweet fields became depleted (including Brent itself), more of the production became heavier and more sulphurous. UK refineries also found themselves facing ever tighter regulation on sulphur content, which is expensive to remove, using hydrogen in vast quantities. Instead of investing in extra plant to achieve the ultra low sulphur specifications from heavier, more sulphurous crudes, many UK refineries simply closed, unable to justify the cost. Those that remain depend mainly on low sulphur grades, now extensively imported from the US – the byproduct of fracking in Texas. UK oil is now mostly exported, often to the US which has the refineries able to handle it, built originally to handle heavy Venezuelan crude. It’s a strange reversal from the days when VLCCs used to load at Sullom Voe to discharge at the Louisiana Offshore Oil Port, or LOOP – or even go all the way to Japan on occasion.
The refinery where I worked did invest in plants to remove sulphur and is currently building a hydrogen plant to expand desulphurisation capacity. This probably explains why it’s still operating, running those gungy sour crudes.
I don’t doubt for a moment your personal experiences, but I’m not sure how recently you were working at the refinery. If you check out the data from Energy Trends, you will find they support what I have said:
https://www.gov.uk/government/statistics/oil-and-oil-products-section-3-energy-trends
Table 3.10 shows the sharp decline in refinery use of indigenous production, and its disposal in exports, while imports fill the refinery runs.
Table 3.12 allows the cut of the barrel of refinery production to be calculated back to 1995. There has been a continued decline in fuel oil and bitumen (and the state of our roads shows that!) normally produced from heavier crudes. Whilst refineries have innovated by using long residue as cat cracker feedstock to try to increase gas oil production, there are limitations of catalyst poisoning and low cetane of cycle oils on what can be done.
Table 3.14 can be analysed to show the recent trends in import sources of crude oil and feedstocks (mainly gas oil rich long residues). Norway has been the top import source, but the US is now overtaking it: between them they account for roughly 70% of imports. Nigeria, Libya and Canada (Hibernia blend) are other sources of sweet crudes.
Oil majors either closed or sold off almost all their refineries to independents. Closures include Grain, Coryton, Shellhaven, Teesside, PIP, Heysham, Ardrossan, Belfast, Esso Milford Haven, Amoco/Murco Milford Haven, Gulf Milford Haven, Llandarcy. Some of the refinery sites are still used as oil distribution terminals. Refineries that remain are Esso Fawley, Valero Pembroke, Essar Stanlow, PetroIneos Grangemouth, Prax Lindsey and Phillip66 Killingholme.
Because unreliable generation has always had to have massive subsidies to exist , the Green Loonies have always tried to claim that Oil / Gas etc companies have subsidies .
A couple of times questions have been asked in Parliament , and the reply in Hansard , [ which by law must be true ,] has always been that ” There are no fossil fuel subsidies ” in the UK .
But it does have much higher taxes for the public than most other things .
What is the position for onshore, offshore windfarms and solar farms. You cant leave an old oil rig in the N. Sea, what about abandoned windfarms? Do they have tobe removed? Who pays?
Wind farms produce free electricity for ever. /sarc
I will give you 3 guesses as to who gets the clear up bill…
Near here is a 32 x 2 MW ‘array’ each with about 200 cubic meters of concrete and rebar as foundations, so about 500 tons per tower.
It’s been there for over a decade now with a demonstrated capacity to generate a – no surprise – quarter of rated nameplate.
Meantime, the landowner, by dint of estate lease, accrues about a £Million a year, or roughly put, £120/hr – for what is believed to be – a 25 year contract.
Re decommissioning, which will happen, is a good question.
What’s certain is there’s a looming 16,000+ tons of future scrap littering a few hundred acres of rural Scottish hillside but so what, really, it’s all being done in order to save the planet.
Good luck with persuading eco zealots that tax credits aren’t subsidies.
If you delve deeply into their numbers you’ll find that 5% VAT on your power is counted as a fossil fuel subsidy because this hasn’t been taxed at 17.5%. Also red diesel is a subsidy. World wide there are a lot of countries that actually do subsidise petrol and diesel as a form of welfare, the money doesn’t go to the fossil fuels companies. Most egregious of all is the trillions of damage the fossil fuels companies are doing to environment, supposedly! I’ve seen clever chaps add up the numbers and conclude that the fossil fuel companies are getting six trillion a year, now we’re talking serious money!
Colin. you have made the point I was going to about Vat. Perhaps the Greens would prefer the full rate to be applied as not only would it stop the so called ‘subsidy’ but fuel would become so expensive that people would use less of it. A green win/win!
It’s already too expensive so not much scope there.
Less than half a dozen countries actually do that. Most countries, particularly those in Europe, make the price at the pump much more expensive than it should be. Look at the tax element of the actual price at point of sale.
>> countries that actually do subsidise petrol and diesel
Correct. Having lived in Oman, petrol in 20212 was 17p / l, now increased to 50p / l. Effectively subsidised, and that is what eco -ists like to claim as a subsidy given to oil / gas companies.
Subsidies are when public money is physically paid to a recipient such as EV manufacturers, wind and solar
Offsetting expenses / costs against tax is certainly NOT a “subsidy”
Only yesterday, Emily Gosden in The Times pointed out BP’s plans for “subsidy-free” wind farms.
Ergo, tax breaks cannot be construed as a ‘subsidy’. 🤣🤣🤣
https://www.thetimes.co.uk/article/bp-plan-for-subsidy-free-wind-farms-7xmsbt769
It might help if the link to the paper was provided.
Click to access Worstall-North-Sea-Tax-.pdf
For some reason hidden on NetZeroWatch / GWPF website.
Found on Tim Worstall’s site.
One to save on the old hard drive. And backup.
The Guvmint won’t want you to read it!
I think Tim Worsthall isn’t quite correct. Taxation in the North Sea in generally ring fenced, which means you cannot offset losses in one field against profits at another except in rare circumstances. You can claim back taxes paid earlier if the field later runs at a loss (obviously the case when it is decomissioned). However, what the government did was to set PRT at high rates early on – up to 75%, later reduced to 50%, before dropping them to zero (in 2016) and limiting the rate of claim on losses, also for later post 1993 start up fields not subject to the PRT regime. That leave tax offset at just the CT rate.
https://www.gov.uk/guidance/oil-gas-and-mining-petroleum-revenue-tax