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MPs agree to roll over oil rig tax exemption

MPs agree to roll over oil rig tax exemption

First published in Energy and Environment on June 20, 2019.

MPs have agreed to extend the non-resident oil rig exemption of the Income Tax Act which was set to expire at the end of this year.

The move is part of the Taxation (Annual Rates for 2019–20, GST Offshore Supplier Registration, and Remedial Matters) Bill which reached its third reading in Parliament this week.

The exemption was introduced in 2004 to address an issue with seismic vessels and rigs used in petroleum exploration leaving NZ waters before the 183 day limit was reached so they would not be subject to NZ tax. This meant that in some cases a rig would leave before 183 days and a different rig was mobilised to complete the exploration programme. This “churning” of rigs within the 183 day increased the cost for companies engaged in exploration and delayed exploration drilling.

It also meant that there was no revenue collected from seismic vessels and rigs. Because of the limited supply of offshore drilling rigs, it could also result in exploration activity not taking place when it otherwise would.

The exemption granted non-resident drilling rig and seismic vessel owners from tax obligations for income from exploration and development activities in offshore permit areas.

The exemption has always been time limited and was due to expire again this December.

MPs said, “Going forward, we still see a continuing need to prevent unnecessary costs and emissions arising from “rig churn”. We therefore recommend that section CW 57 be extended for a further 5 years through the insertion of new clause 45B.”

The exemption will not please those opposed to new oil and gas exploration as it reduces impediments to those who currently hold exploration rights.

The last time the exemption was extended energy officials said after the exemption, between 2009 and 2012, there were three non-resident offshore rigs operating in NZ, with an average length of stay of around eight months. By contrast, between 2000 and 2005 (before the exemption was introduced), no rigs stayed in NZ waters beyond six months.

In the period analysed then there were 17 offshore wells drilled between 1 January 2009 and 30 June 2012. Only one well, the Manaia extended reach well drilled from the Maari platform, resulted in new reserves being brought to market. The Manaia well was drilled from the Ensco 107 jack-up which had been in New Zealand waters for well over six months when drilling at Manaia commenced (drilling commenced on 1 August 2009, but the Ensco 107 had been in NZ waters since October 2007). The well produced 2.3 million barrels of crude oil between 2009 and 2012, generating an estimated royalty take f $4.9 million and corporate tax of $5.5 million over the period.

“It is unlikely that this Crown revenue would have been generated as soon as it was without the existing tax exemption. In the absence of the exemption, it is likely that this revenue would have been generated at a later time, because of the impact of rig churning delaying exploration and production activity.”First published in

Energy and Environment on June 20, 2019.

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