Martin Flanagan: Oil giant may be overstating what it has to Shell out after tax hike

ROYAL Dutch Shell's warning that it may scale back investment in the North Sea, and indeed sell assets there, because of the oil industry tax raid in the Budget might be taken with a pinch of salt by George Osborne.

The Chancellor may judge that big oil companies like Shell have to say that sort of thing just to keep up appearances in such extra tax-raising circumstances.

He could think it is akin perhaps to the banks, also under the special levy cosh, never quite ruling out that they might switch domicile overseas even while saying they are happy in Britain.

But, while the language used by Shell's chief financial officer, Simon Henry, was very measured, the figures he quoted about the hit to the company's earnings from the tax raid were far from peanuts.

At current oil prices, it amounts to almost $1 billion (600m) of charges in total in the next two years. Like BP, Shell says it still regards the North Sea as important, saying major projects such as the Clair and Schiehallion fields west of Shetland are unlikely to be affected by the tax changes.

But it is smaller, more marginal future North Sea projects that the group had been in the early stages of considering which might find themselves being binned amid the tighter tax regime for the region.

This is often the way with sizeable Budget tax changes in an industry. There is early sector rhetoric against the changes at the time, for instance the 5.5bn removal of tax relief for pension funds with Labour's accession to power in 1997, and the accompanying 5bn windfall tax on privatised utilities.

Then things calm down a bit. But who knows what projects those utilities, for instance, may have undertaken five or ten years down the line that were quietly shelved because of the impact of the tax raids?

It is not so much the law of unintended consequences as a "needs must…" political gamble. The politicians wonder what they can get away with in punitive action, particularly when economic times are tough, as now, but without killing the golden goose, whether it is oil, utilities, banking, the drinks industry, etc.

It is cold calculation by politicians faced with problems in the bigger picture. But just because there is no immediate dramatic scaling back by an industry put under the tax cosh it does not mean there are not potential drawbacks farther down the line. The negative ramifications might just take time to unwind.

In the wider picture, Shell, particularly compared with its beleaguered arch-rival BP, looks in good health. A 30 per cent rise in profits to $6.2bn in Q1, a far better performance in "downstream" refining and marketing operations, together with gearing (borrowing) levels going in the right southwards direction, all suggest reassurance on future divis for shareholders.It always pays to advertise your positives even in a downturn

ADVERTISING is an early indicator of bad economic times, and one of the first sectors out of downturns. As such, the upgrade to its outlook for 2011 by WPP, the world's largest advertising agency, will perhaps have some wider cheer than just for the media industry.

Sir Martin Sorrell, chief executive of WPP, and one of the more clear-eyed macro-economic commentators during previous recession-and-recovery cycles, says he is cautiously optimistic about this year and 2012.

The group now expects like-for-like revenue growth this year of 6 per cent, compared with an earlier forecast of 5 per cent growth.

Sorrell's optimism, also given his track record of forecasting, triggered a number of earnings upgrades in the City for WPP.

The group's like-for-like revenues in the first trading quarter rose 6.7 per cent, which is highly creditable given the battering the advertising industry has taken in the past few years.

It helps WPP to have blue-chip brand subsidiaries such as JWT and Ogilvy & Mather, with all indicators currently suggesting the group is outperforming big rivals such as Omnicom and Publicis.

The good news is that more mature advertising markets like the US and Germany are doing well, while faster-growing markets like Asia Pacific and Latin America are picking up the baton as well.

Analysts say WPP has probably reaped the benefits of cautious companies in the fragile economic recovery choosing to plough money into branding and advertising in order to protect market share rather than spend more heavily on riskier, longer-term investments.

In short, advertising has been used by businesses as a short-term hedge against longer-term corporate uncertainty.