Understanding Decommissioning & Rehabilitation

The activities of the extractive industry (mining, oil and gas) without a doubt have an impact on the environment after these activities have come to an end.

Natural resources are finite in nature (we won’t have these resources forever) and as such there will come a time when all the oil and mineral reserves available for extraction are no longer accessible or become uneconomic to extract. It is at this point that the operations will be closed or abandoned altogether.
The environment would by then have had its fair share of damage, ranging from oil spills in our seas, erosion, the formation of sinkholes, loss of biodiversity and contamination of both surface and groundwater.

This brings us to two very important terms – decommissioning and rehabilitation. To make this as simple as possible, let us say decommissioning is to oil and gas operations, as rehabilitation is to mineral and mining operations.

So all activities carried out after mining and extraction are over to restore the environment to as much as possible its natural state before the operations started and to uninstall all related machinery and equipment are referred to as decommissioning activities if they relate to oil and gas operations or rehabilitation activities if they relate to mining operations.

Due to the enormity of expenditure needed to carry out a successful decommissioning or rehabilitation activity, petroleum contractors and mineral license holders alike are required to regularly set aside money in a fund known as a Decommissioning Fund or Rehabilitation Fund. Let us now look at what the Income Tax Act, 2015 (Act 896) [as amended] has to say about these terms.

Section 76 of Act 896 defines a ‘Decommissioning Fund’ as “a fund established by a contractor of a petroleum agreement in accordance with an approved decommissioning plan.”
Approved decommissioning plan? Section 76 again defines an ‘Approved Decommissioning Plan’ as “a plan approved by the Minister responsible for petroleum for decommissioning the facilities used in petroleum operations upon cessation of those operations.”

Section 86 of Act 896 also defines an ‘Approved Rehabilitation Fund’ as “a fund established as required under any applicable mineral agreement or approved rehabilitation plan.” The Section again defines ‘Approved Rehabilitation Plan’ as “a plan for reclamation, rehabilitation and closure of the operations approved by the Minister responsible for Mines.”

Tax Treatment of Decommissioning and Rehabilitation Funds

The tax treatments of Decommissioning and Rehabilitation Funds are essentially the same. Sections 70 and 84 of Act 896 deal with the tax treatments of ‘Decommissioning Funds’ and ‘Approved Rehabilitation Funds’ respectively.

An amount accumulated in or withdrawn from a decommissioning fund or an approved rehabilitation fund for decommissioning or rehabilitation purposes is exempt from tax.

However, when there is a surplus in the decommissioning fund or approved rehabilitation fund after the person completes decommissioning or rehabilitation of a separate petroleum or mineral operation conducted by the person or when the person breaches the decommissioning or rehabilitation plan, that surplus shall be included in calculating the income of that person from the separate petroleum or mineral operation for that year of assessment.

When there is a deficit (that is, the expenditure incurred in carrying out the decommissioning or rehabilitation activity exceeds the amount of money in the decommissioning or rehabilitation funds respectively), there shall be allowed a deductible expense of that person in determining the chargeable (taxable) income of the person from the separate petroleum or mineral operation for that year of assessment.

Source: Michael Larbi Siaw