Decommissioning and rehabilitation: what's tax got to do with it?

Abstract

The obligation to decommission oil and gas facilities and rehabilitate a petroleum operation area typically arises when a producer or titleholder wishes to exit the field or title. It is a costly but necessary condition and a consequence of being granted the right to extract the resource. The issue is not necessarily confined to the field life ending, but is also a pertinent consideration in an ownership transfer transaction that can happen at any stage of a project’s lifecycle. This is especially so given present regulatory uncertainty over a titleholder’s ongoing liability for any unsatisfied decommissioning responsibilities after transferring the title to another party. When considering decommissioning and rehabilitation options, strategies and timing, it is important to understand the Australian income tax and petroleum resource rent tax implications and their effect on the after-tax costs of undertaking those activities and the economics of the project as a whole. The Australian tax system makes general provision for decommissioning and rehabilitation (including environmental protection) costs to be tax-relieved. However, this paper demonstrates that there are several inefficiencies in the Australian tax regulations and in their administration, which can often restrict or impede the ability to obtain effective tax relief. A more responsive and progressive tax policy setting is urgently needed to better accommodate the evolving nature by which decommissioning obligations and risks associated with petroleum operations are managed by industry now and into the future.