Tax grab takes the sheen off UK’s deep-sea treasure trove

THE government’s North Sea tax hike has created a “two speed” oil and gas industry in the development of the vast reserves still to be recovered in British waters, according to a new economic report.

Substantial projects with guaranteed yields are still proceeding while smaller, less robust projects are being put on hold. There is also a tranche of marginal fields that have been pushed below the required investment target, the report by Oil & Gas UK has revealed.

The report shows that investment in exploration and production in UK waters was in a healthy state last year, rising by a fifth last year to £14 billion – £6bn of which was put into new projects.

But it warns that some projects earmarked for development have been left in doubt by the Budget tax increase.

Malcolm Webb, chief executive of the pan industry trade body, said the report’s findings underlined the continuing significance of the oil and gas sector to the UK economy.

But he added: “In these difficult economic times, we must nurture this jewel in the UK economic crown.”

The report states that only eight new fields came into production last year, which account for 118 million barrels of oil equivalent (boe) of reserves – the lowest brought on-stream in the history of the UK continental shelf.

The figures show that the transfer of mature fields from the oil giants to smaller companies has “slowed to a trickle” in the last five years.

According to the report, the industry supports 440,000 jobs across the UK, with the Treasury reaping £6bn a year from income tax revenues and national insurance contributions and corporation tax paid by supply-chain companies – in addition to the £8.8bn gained on corporation tax on oil production.

But the Oil & Gas UK report forecasts that the controversial tax hike on North Sea profits, announced by Chancellor George Osborne in March to fund the 1p a litre cut in fuel duty, is likely to send the industry’s tax bill for the next financial year soaring to more than £13bn.

Mr Webb said: “It [North Sea production] certainly has the potential to continue for several decades to come. We believe that up to 24 billion boe remain to be produced here. The forecasts prepared at the start of 2011 showed that investment to develop these [fields] was set to increase dramatically to £8bn this year and be sustained at that rate for the next five years.

“Achieving this potential depends to a significant degree on whether the companies that are expected to invest tens of billions of pounds in an unstable price environment can at least achieve some certainty in their future tax treatment.

“In this regard, the confidence of the industry was severely shaken by March’s Budget, with the surprise announcement that the tax rate would increase to a new top rate of 81 per cent, while access to tax relief on decommissioning costs would be capped at old tax rates.

“The value of projects was reduced by a fifth overnight and the positive effect of new field allowances that had specifically been put in place by the Treasury to encourage investment in technically challenging, small or remote fields was completely undone.

“This is not to imply that investment this year or next will grind to a halt as a result. The predicted rise to £8bn in 2011 may well be realised – companies are already contractually and commercially committed to many developments.”

Mike Weir, the SNP’s Westminster energy spokesman, said: “The oil and gas industry continues to be a vital part of our economy and clearly there continues to be a long-term future for the industry, with as much as oil left around our shores as has already been extracted.

“Unfortunately, the present UK government has seen fit to damage the prospects of the present industry by sudden tax changes and the future industry by its watering down of attempts to create a greener economy.”

Richard Baker, Labour’s finance spokesman, said: “Increasing investment in exploration is crucial for the long-term future of the industry, and the Tory-led government should rethink tax changes which threaten projects.”

A spokesman for the Treasury said: “The Treasury values the hugely important contribution of the oil and gas industry to the UK economy. As Oil and Gas UK point out, investment in the North Sea is continuing and we are working positively with industry on a range of fiscal issues affecting investors, including decommissioning tax relief – on which we hope to say more at next year’s Budget.

“Though we understand the concerns of the industry about tax changes made at the Budget, our priority had to be to help families and businesses at a time when high oil prices were putting pressure on motorists at the pumps.

“We do not believe the changes will have a significant impact on investment, and indeed there have been a number of positive announcements on North Sea activity from companies such as BP, Statoil and Apache.”