Coalition faces Lib Dem revolt on £10bn oil tax

Published on Thursday 24 March 2011 17:39

GEORGE Osborne is facing a Liberal Democrat rebellion over his £10 billion tax raid on North Sea oil revenues, as industry leaders condemned the measure, claiming it would cost investment and jobs in Scotland.

A backlash against the windfall tax saw splits open up in the Conservative/Lib Dem coalition, while the oil companies lined up to attack the proposal, seen as the key announcement in the Chancellor's Budget this week.

Malcolm Bruce, the Lib Dem MP for Gordon, vowed to speak to Treasury ministers about the tax, adding: "I am certainly not going to support this measure".

The Scotsman understands that several other Lib Dem MPs are opposed to the plan, which was also criticised yesterday by prominent business figures, including Sir Ian Wood, the chairman of the the Aberdeen-based oil engineering Wood Group.

Sir Ian said the Chancellor's plan was a "real setback" for North Sea oil that would reduce investment in the industry and harm efforts to maximise the extraction of oil from the UK continental shelf.

Further criticism of the 2bn-a-year windfall levy came from one of Scotland's leading oil economists, Professor Alex Kemp, of Aberdeen University. Writing in today's Scotsman, Prof Kemp argues that Mr Osborne's tax will impair investment and oil exploration.

Before the Budget on Wednesday, it had been forecast that North Sea oil investment would increase by 60 per cent this year.

Sir Ian said: "The North Sea oil tax change announced in yesterday's Budget is a real setback for the UK's long-term objectives of maximising recovery from the North Sea.

"We are operating in a very competitive international environment, and there seems little doubt that this change will reduce investment in the North Sea over the next two or three critical years.

"It would have been so much better if government had consulted and given the industry the chance to express views. Increases in the oil price give higher revenues for the Treasury and sustaining investment in the North Sea means sustained tax revenues in the longer term."

He warned: "The change will have repercussions for Aberdeen's economy both in the short and long term."

Mr Bruce was also angered that the Chancellor appeared not to have consulted with oil experts before announcing his plans that will see oil companies being taxed between 62 per cent and 81 per cent of their profits. "I believe this completely undermines the objective of saying this is a budget for growth," he said.

"We were expecting substantial new investment in the North Sea and much of this could now come under review."

Under the arrangements introduced by the Chancellor this week, the tax will see the oil companies finance the Fair Fuel Stabiliser, promised by the Tories before the election.

As long as the price of oil exceeds $75 a barrel, fuel duty will not be increased beyond the level of inflation as measured by the Retail Prices Index, while oil companies will see a 12 per cent increase in the tax on their profits.

Should oil, which is currently $115 a barrel, fall below this $75 threshold, then the fuel duty escalator would be reintroduced and the tax levied on oil companies cut.

With oil companies benefiting from oil prices soaring by 35 per cent over the past five months, it was seen as a populist policy that would benefit the UK's 32 million motorists.

While the multinational companies exploiting the North Sea, such as BP and Shell, might be able to absorb the extra cost, the smaller companies argued that they would be hit hard.

Peter Buchanan, chief executive officer of one of those smaller companies, Valiant Petroleum, said: "The future of the North Sea, which supplies over half of UK's consumption, depends in part on independent companies which exploit smaller marginal fields. These fields have significantly higher break-even costs, so companies like Valiant Petroleum need a stable fiscal environment to encourage investment."Without these marginal fields coming on stream, the North Sea production will decline faster and the UK will import more oil and gas from parts of the world that contribute nothing to the Treasury."

Politicians north of the Border also stepped up their criticism of the Chancellor. John Swinney, the SNP finance secretary, said: "With record North Sea revenues of 13.4bn this coming year - an increase of over 4bn, and double last year's figure - it is abundantly clear that Scottish resources are bankrolling the Budget and the UK Treasury."

Lewis Macdonald, Labour candidate for Aberdeen Central, said: "Oil industry plans for investing in the North Sea will be hugely disrupted."

However, a Treasury spokeswoman said: "We do not expect this tax change to have a significant effect on production and investment - and therefore on jobs - in the coming years as profits are expected to remain high because of the oil price. Average post-tax profits per barrel are forecast to be higher in the next five years than the last five."