UK producers hit by steep tax increase

Britain’s Chancellor has stunned producers on the UK shelf with a steep rise in petroleum tax.

Offshore staff

LONDON -- Britain’s Chancellor has stunned producers on the UK shelf with a steep rise in petroleum tax.

The increase could raise £10 billion ($16.2 billion) in revenue for the government over five years, and is designed to relieve the pressure on UK motorists, who would otherwise have faced a further rise in duty on fuel. Chancellor George Osborne said the tax rise would be rescinded if oil prices fell back to previous levels.

Malcolm Webb, CEO of industry association Oil & Gas, said: “In its first Budget nine months ago, the government recognized the importance of a ‘stable’ UK oil and gas tax regime which provided ‘certainty for investors’. Given that assurance, the industry is shocked to now be hit by a tax increase that raises the tax rate to at least 62%, with some of the most mature and therefore vulnerable fields now paying up to 81%.

“Today’s move in the Budget runs counter to the government’s stated desire to promote growth, jobs and exports – all of which this industry was delivering and will now find much more difficult to sustain. Importantly it will also most likely increase this country’s dependence on imported oil and gas and thus diminish its energy security.

“At a time when we could see investment recovering following the last period of fiscal instability, this further shock will only damage investor confidence and make many question whether the UK is an appropriate destination for their investment. Many of our members will now be reappraising their investment decisions.”

Webb forecast that the change in the tax regime would decrease investment, increase imports, and drive UK jobs to other parts of the world.

Derek Henderson, Deloitte’s Head of Tax in Scotland, said: “The shock news that the supplementary charge tax (SCT) rate has been increased up to 32% from 20% will be a disappointing surprise to the oil and gas industry. It now brings the North Sea marginal tax rate up to 81% from 75% (for PRT fields) and 62% (from 50% for non-PRT fields).

“These changes come at a time when the oil and gas industry is struggling to maintain investment and grant access to its North Sea infrastructure and suffering from reduced exploration and appraisal levels (activity down 9% in 2010 compared to 2009).

“The North Sea tax regime has suffered from constant change over the past 10 years and this ongoing instability is likely to be detrimental to investment. The UK continental Shelf needs to be attractive as it is competing against international oil and gas provinces and this latest change will not be helpful.”

Henderson added: “The news that tax relief for decommissioning costs has been restricted is unwelcome and will raise further doubts over whether the government will honour its future decommissioning obligations.”

Ian Bell, director of oil and gas engineering consultancy Optimus (Aberdeen), said: “The only part of the economy that was certain to deliver more jobs in 2011 was the offshore oil and gas industry. Every chief executive operating assets in the North Sea is going to put on hold any non-sanctioned project until they can establish how this will impact their profitability.

“The banking industry got the country into this mess, and the oil and gas industry is being lent upon to get us out of it. As a result, the growth in North Sea jobs that was being predicted before today seems a bit premature…

“Optimus is looking to deliver projects at lower costs than has historically been the case, so this move might generate some more work for us, but as far as the Northeast economy in particular and the Scottish economy in general is concerned that will be but a drop in the ocean to the £10-billion tsunami that Osborne has created. “I’d go as far as to predict the Chancellor has just brought the recession to Aberdeen. Thanks for nothing, George.”

Angelos Damaskos, CEO, Sector Investment Managers and Fund Adviser Junior Oils Trust said: “The introduction of a `fair-fuel stabilizer’ that increases taxes on North Sea oil producers when prices are high is an attempt by the government to reduce the inflationary effect of rising oil prices by distributing additional tax proceeds to the economy. It is unlikely it will have any effect on Brent oil prices which are driven by demand for reliably sourced energy on a global basis.

“Oil companies operating in the North Sea are likely to see a negative impact on their profitability which would, nevertheless, be reduced if the oil price dropped. In many cases, the incremental taxation can be deferred through exploration expenditure tax losses.”


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