Taxation Guidelines for Worldwide Decommissioning

UN Committee of Experts on International Cooperation in Tax Matters, Tenth Session30th October 2014, Geneva

Taxation Guidelines for Worldwide Decommissioning.

U.N. Dep of Economic and Social Affairs.Tenth Session of the Committee of Experts on International Cooperation in Tax MattersGeneva,Switzerland. 27-31 October 2014

Mr Olav Fjellså, Petrad, Norway [email protected]

Dr Brian Twomey, Reverse Engineering Services Ltd, [email protected]


Decommissioning Is the Last Phase in the Life Cycle of Oil & Gas Production

1902 2009


Worldwide Oil & Gas Field Closure & Decommissioning


Example of Abandoned Near Shore Facilities 1 (Nov 2013)


Abandoned Near Shore Facilities 2 (Nov 2013)


Adjacent Abandoned Onshore Facilities (Nov 2013)


Abandoned Onshore Facilities (Mar 2013)

Wooden Cased Well from 1882


Worldwide Mine Closure & Decommissioning


Inappropriate Tailings Disposal Threatens Society and the Environment

Mining Pit Lake in SE Asia

Mining Tailings in Eastern EuropeMining Tailings in SE Asia


Potential Water Contamination from Tailings & Waste from Closed Mines

Mining Tailings River Contamination Mining Tailings in USA

Mining Tailings in Europe Mining Tailings in Australia


Potential Water Contamination from Closed Mines


Why is Decommissioning & Remediation Required?


Why is Decommissioning & Remediation Required?

Social ResponsibilityThe idea that companies should embrace its social responsibilities and not be solely focused on maximizing profits. Social responsibility entails developing businesses with a positive relationship to the society which they operate in.

Law & RegulationInternational law and regulation require that the oil or gas field is remediated to defined standards.

ReputationReputation is the way a company is viewed by other companies, governments, people and by the community and the way these people think of you and your organization.

LiabilityAmount of a decommissioning liability associated with a legal obligation that an organization incurs when it constructs or operates an oil or gas asset that must eventually be withdrawn from active service.


Key drivers;

Politics, Public Concern and Reputation

Legal Requirements

Cost and Economics

Taxation framework

Technical Feasibility

Health, Risk and Safety

Environmental Impact

Other Users of the land and the sea


Scale Worldwide Oil & Gas Field Operations


102

3759

7 in StateWaters

105

8 ?

9

?

?

?

3 30+?

6+?

Worldwide Offshore Decommissioning

~83

72

1?


Scale of Offshore Decommissioning Projects

“The Office”

“Decommissioning is A Multi Trillion Dollar Global Market over next 20 years”


18th Sept 2011 London: Willis “Decommissioning are you Ready” seminar Gerry Borghesi, Exxon Mobil UK & Netherlands Production Manager & Chairman UK Oil & Gas Decommissioning Steering Group

Decommissioning Issues- Cost

2012 Bergen: DECC UK Regulator admits 3 to 4 time cost over runs in 2011 RESL work 2010 to 2013 on in North Sea, Asia Pacific, Africa & GOM (over

180 facilities & 1600 wells ) average under accrual in decommissioning costs 4 times to a worst case 10.5 times


Provisions versus cost estimate


Who is paying for the decommissioning and remediation costs ?

How much should each party pay ?

Taxation and Financial Security


Decommissioning and Remediation costs

International laws do not specify

Who pays and how much determineded by; National rules and regulations The Production Sharing Agreement JOA, unit agreement or other agreements

Key stakeholders; Government (tax payer), operator, JVP,..


Financial Security

Current cash flow/existing operations.

Parent Company guarantee.

Bank guarantee.

Letter of Credit.

Insurance guarentee

Decommissioning fund.


Tax

Decommissioning & remediation costs are in most countries considered a business expence and tax system allow deduction from taxable income.

The deductable share differes from country to country, and amongProduction Sharing Agreements.

Deduction may not be claimed before the decommissioning work take place.

Allocation to cover future removal costs are often not deductible.


Recommendations

Clarify the sectorial and national law, regulation & guidelines applicable to the extractive industries. Build flexibility in the legal framework & guidelines to quantify liabilities and to

develop the optimal solution.

Clarify who and how much decommissioning costs each party should contribute. Taxation Financial Security

Is there a need to develop taxation guideline for worldwidedecommissioning?


Thank you for your attention

Any Questions ?

Documents

Taxation Guidelines for Worldwide Decommissioning