Special Committee on the Finance Bill, 1992 díospóireacht -
Tuesday, 12 May 1992

SECTION 81.

Mr. B. Ahern

I move amendment No. 78:

In page 113, lines 27 to 37, to delete "subsection (4) and substitute the following:

"(4) So much of the abandonment losses, if any, incurred by a person on or before the day on which he permanently discontinues to carry on a petroleum trade (hereafter in this subsection referred to as ‘the first-mentioned trade') as would not, apart from this subsection, be allowed against, or treated as reducing, his or any person's income or profits, shall be treated as incurred by him in the first chargeable period of the first petroleum trade (hereafter in this section referred to as ‘the new trade') to be carried on by him after the permanent discontinuance of the first-mentioned trade as a trading expense of the new trade.".

Subsection (4) of section 81 ensures that where a company or unincorporated trader is unable to fully use up his tax relief in respect of abandonment expenditure before petroleum trade ceases, the unused balance can be carried forward or set off against the income of any new petroleum trade the company or trader may subsequently carry on. The amendment replaces the existing subsection (4) with a revised version of the subsection in order to clarify the intention of the subsection. While ensuring that unused balances of relief for abandonment expenditure may be carried forward to new trade, the revised subsection also eliminates the possibility of double relief in respect of that expenditure.

Mr. Noonan (Limerick East)

I would like to ask the Minister a question on the section. Would the Minister describe the scope of this? The Minister for Energy talked earlier about the success rate in the North Sea which was something in the region of one in four, and said that something over 100 wells had been drilled here. Does this section include the write off of expenditure incurred in a dry well against the profits of a fruitful well incurred by the same company? Is there any time limit on it? Does it have a historic impact? In other words, if the companies who have drilled unsuccessful wells in the past come in now, under the new arrangements, will they be able to write off historic expenditure of an abondonment nature?

Mr. Molloy

Where there is a dry well, the development costs can be written off against profits elsewhere, as provided for. Abandonment implies the end of the development of a well. Where all the oil or gas has been extracted, the well has come to the end of its production life and has been abandoned, then, obviously, no further profits emanate from it. There is no production. It is in that circumstance that the costs are allowable as provided here.

The cost of abandonment will be significant. It is also important from the point of view of the environment, that there should be proper disposal of any machinery, rigs or whatever, after a well has had its wealth extracted from it and has reached the end of its useful revenue earning life. As abandonment, in an acceptable form, will be a condition of every petroleum lease, these costs must be recognised as an integral expense in the petroleum trade. In nearly every case, abandonment costs will not arise until the trade has been completed. Consequently, there will not be any further income from it. Accordingly, and broadly in line with the approach adopted elsewhere, it is proposed, in this section, that, where a loss on abandonment occurs, a recalculation of the tax liability will be conducted for the relevant period and the three preceeding periods. If, at that stage, there remains any unused allowance, it is proposed that this may be utilised at the recommencement of the trade, that is, when a subsequent well is developed elsewhere.

Mr. Noonan (Limerick East)

That was my original understanding of it. Obviously, I have missed out some sections because I was not here for the full debate. I may be asking questions which will be regarded as inappropriate.

It seems there is only one productive well at the moment and that is the Kinsale Head well. Is that correct? Even though there was a find in Ballycotton, it is not in production.

Mr. Molloy

It is in production.

Mr. Noonan (Limerick East)

Ballycotton has gone into Kinsale?

Mr. Molloy

Ballycotton is in production since last year. It is connected into the Kinsale pipe.

Mr. Noonan (Limerick East)

We have two productive wells operating at the moment.

The general thrust of the legislation is to provide a more benign tax regime at 25 per cent, with all the write-offs and so on, but there is a time limit on that depending on the take up. Is that right?

Mr. Molloy

Three years.

Mr. Noonan (Limerick East)

There is a time limit.

Where does the abandonment come in? How can you match abandonment write-offs against concessions which are limited by such a strict timetable in circumstances where there are only two productive wells at the moment? Is it specifically directed at Marathon and Ballycotton?

Mr. Molloy

None of these provisions is specifically directed at any particular company. We are laying down a regime which will apply to all those who qualify. It is not being tailor made for any particular company. Just because we have only one company with production platforms here, one should not come to the conclusion that this is designed merely to facilitate that company. These terms will not apply to that particular company's production at Kinsale because it is being produced under the earlier terms.

Mr. Noonan (Limerick East)

But the provisions relating to abandonment would apply.

Mr. Molloy

No.

Mr. Noonan (Limerick East)

Is that a recent policy position or is that the way it is falling out in the Bill?

Mr. Molloy

It might be the way it is falling out. The well at Kinsale has been produced under the earlier Ambassador Oil Company agreement that they took over. These terms do not apply.

Mr. B. Ahern

From a tax point of view, if a company is involved in drilling a well that is unsuccessful and if they move to another well, they can write off those losses for 25 years if they continue on. Unsuccessful wells drilled for exploration can be written off for up to 25 years. We are talking about companies that are not likely to go out of business over one well. That is why they are in the exploration business.

Mr. Noonan (Limerick East)

How will the abandonment work in practice? If somebody strikes oil in the next three years under this chapter and after ten years the well dries up, can they get a rebate? Can they write it off against the profits of the existing well or is it a roll on situation in which they must be successful a second time before they get a write off? From an environmental point of view, it would be more fruitful if the abandonment costs could be set against the profits from the well while it was in production, rather than depending on striking it lucky a second time, which is how I understand the section.

Mr. B. Ahern

They can only bring back their profits for the period of three years.

Mr. Noonan (Limerick East)

Do you see the point I am making? Can they set it against the profits of the productive well? Abandonment comes at the end.

Mr. Molloy

They will not incur the abandonment costs until the end and then they will recalculate the tax liability for the preceding three years, which is adjusted to take account of the abandonment costs. If they do not use up all the allowance they can carry it on to the next well, if they happen to develop another one.

Mr. Noonan (Limerick East)

Is there no provision for a rebate from tax taken on profits for the previous years?

Mr. Molloy

Yes, they recalculate the tax on the previous three years.

Chairman

It is now 5.30 p.m. and I am required to put the following question in accordance with the Order of the Dáil of 12 May:

That the amendment set down by the Minister for Finance to Chapter VI of Part I of the Bill and not disposed of is hereby made to the Bill and in respect of each of the sections undisposed of in the said chapter that the section or, as appropriate, the section, as amended, is hereby agreed to.

Mr. Molloy

Is Deputy Quinn voting for the chapter because that would not be consistent with what he has stated during the debate.

Mr. Quinn

We have already recorded our dissent in respect of the amendment, but we are agreeing the chapter.

Question put and declared carried.