Critics target UK's proposed 'tax grab' on oil, gas industry

Eric Watkins
OGJ Oil Diplomacy Editor

LOS ANGELES, Mar. 25 -- The British government’s proposed new tax on the country’s oil and gas industry has come under heavy criticism from a leading trade association, as well as opposition politicians.

“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%,” said Malcolm Webb, chief executive of Oil & Gas UK.

“In its first budget 9 months ago, the government recognized the importance of a ‘stable’ UK oil and gas tax regime, which provided ‘certainty for investors,’” Webb said.

But he said the new tax “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.”

Webb also said the new tax “will only damage investor confidence” and will “most likely increase this country’s dependence on imported oil and gas and thus diminish its energy security.”

“In summary, this change in the tax regime will decrease investment, increase imports, and drive UK jobs to other areas of the world,” Webb said, adding, “Many of our members will now be reappraising their investment decisions.”

‘Real setback’
Ian Wood, chairman of Aberdeen-based Wood Group, said the government tax plan represented “real setback” for North Sea oil that would reduce investment in the industry and harm efforts to maximize the extraction of oil from the UK continental shelf.

"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,” Wood told The Scotsman newspaper.

“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 said.

That view also was shared by Leo Koot, managing director of Taqa Bratani, the UK arm of the Abu Dhabi national energy company, which has invested heavily in mature producing fields in the North Sea and operates the Brent pipeline system in the East Shetland basin.

Koot said the UK had become one of the least fiscally competitive upstream regimes for mature fields in the world and the uncertainty faced by investors can only be detrimental to any future investment decisions.

Britain’s Chancellor of the Exchequer George Osborne introduced the measure earlier this week, saying that families and small businesses had been badly hit by soaring gasoline prices and that had decided to help by ending automatic "escalator" increases imposed by the previous Labour government.

"The fuel duty escalator that adds an extra penny on top of inflation every year will be cancelled—not just for this year, or next year—but for the rest of this parliament. To pay for those measures, oil and gas production will be targeted," he explained.

A "fair fuel stabilizer" is to be introduced under which the oil companies would see North Sea taxes rise from 20 pence to 32 pence—although this could be reduced if crude prices dropped to $75/bbl from current levels of $116/bbl.

A Treasury spokeswoman defended the new measure, saying, “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 posttax profits per barrel are forecast to be higher in the next 5 years than the last 5 [years].”

Contact Eric Watkins at hippalus@yahoo.com.

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