Budget boost for Scottish oil

SCOTLAND'S oil industry will receive a massive Budget boost this week when Alistair Darling reveals plans to increase North Sea production by 20% over the next five years.

The Chancellor will unveil millions of pounds worth of incentives to the beleaguered oil industry to help extract up to two billion barrels of oil worth more than $100bn.

Darling hopes the extra tax revenue raised will help make a dent in the Government's debts, which he will confirm on Wednesday to be 175bn, much higher than the 118bn forecast in November and the worst deficit since the Second World War.

In one of the most important UK Budgets for generations, Darling will also reveal revised growth figures showing the UK economy will shrink by -3.7% in 2009, three times worse than the -1.24% slowdown predicted in November's Pre-Budget Report.

The Chancellor hopes that by giving a boost to the North Sea oil industry he will help stimulate the wider economy.

Twenty-five billion barrels of oil remain under the North Sea, but commercial plans are only in place to extract 10 billion of them because firms are reluctant to risk money on further exploration.

Darling wants to encourage investment in "economically viable but commercially marginal" oil fields, which have the potential to release two billion barrels of oil.

The measure has been welcomed by oil industry experts. The number of exploration wells drilled in the North Sea collapsed by 78% in the first quarter of 2009. At its peak in 1999, the North Sea was producing 4.5 million barrels per day, a figure that is expected to fall to 1.3 million per day by the end of this year.

Derek Henderson, senior partner in Deloittes, Aberdeen, who specialises in the oil economy. said: "In terms of the health of the oil industry, it is fantastic news. That's hopefully a 20% increase that will be realised. The oil industry is going through enough difficulties and needs all the help it can get."

An SNP spokesman said: "The SNP have been calling for exactly this kind of measure since the 2004 Budget. A very modest investment could generate significant additional activity in the North Sea. What this does show is just how dependent the UK exchequer remains on Scotland's oil revenue."

Elsewhere in his Budget, Darling is expected to say that the economy will begin to move forward at the turn of the year when he expects the first signs of growth to appear.

However, he has been forced to dramatically revise his Pre-Budget Report public borrowing forecast of 118bn for 2009/10 when he admits that Britain is set to go into debt by 175bn.

Experts had originally believed that Darling might have to revise his original prediction to around 160bn in 2009/10 and 167bn in 2010/11. The deterioration in the public finances has been blamed on the fact that growth and inflation will be much lower than the Chancellor expected.

"The thing that's really changed since the Pre-Budget Report has been the steepness of the economic slowdown. It has taken everyone by surprise," a Treasury source said.

Last night the Treasury indicated that the Chancellor would shy away from announcing any major tax rises in order to claw back public debt.

"We need to be very careful balancing the judgment about the speed at which we consolidate public finances," the source said. "We don't want to jeopardise the recovery. The wrong thing to do would be to over-tighten fiscal policy. There is a risk of over-reacting."

The Chancellor will also announce a funding boost for Britain's Job Centre network to build on the 1.3bn set aside in the Pre-Budget Report. He is also set to extend the freeze on stamp duty on properties up to 175,000 until the end of the year – a decision that will benefit nearly 35,000 first-time buyers.

The threshold was raised from 125,000 last September in a change that was initially planned to last for just one year. Incentives of between 2,000 and 5,000 to buy low carbon electric cars, will be a part of the environmental measures.