The point at issue was whether a provision to meet the future
costs of reconverting an oil rig, restoring tankers, capping oil
wells and removing sea bed installations was capital or revenue
(see
BIM62030).
The company had a 25% interest, under a consortium agreement,
in the Argyll field in the North Sea. The licence to exploit the
oil included certain statutory obligations to cap the wells and
clear the seabed of the gathering system when a well was abandoned.
The contract for the hire of a drilling rig, to convert into a
production platform, contained a requirement to reconvert it back
into a drilling rig at the end of the hire period. The tankers,
chartered to transport the oil from the platform to the refinery,
had to be modified for this purpose and the agreement contained a
requirement that they be restored at the end of the charter period.
Held that the provision was capital. Justice Vinelott noted
that:
"… the same provision will have to be
made whether the expenditure when incurred will be expenditure on
revenue account or capital account… The contract of
hire (for the rig)
is clearly a capital asset… the
charterparties (for the tankers)
are equally capital assets and the cost of
reconverting them… will be capital expenditure… the
manifold and the loading lines and buoy are again part of the
apparatus that had to be installed before the operation…
could begin… It makes no difference in this connection
whether the obligation to remove the clutter is seen as imposed by
the licence or by the legislation in pursuance of which the licence
was granted… I cannot see that any distinction can fairly be
drawn between the boreholes, well heads and flow lines on the one
hand and the rig, manifold and the loading lines on the other hand.
All are part of a comprehensive installation designed to obtain
access to and win and transport oil from the oilfield to onshore
facilities."
