IOCs: UK tax hike threatens investment, economy

Eric Watkins
OGJ Oil Diplomacy Editor

LOS ANGELES, May 6 -- International oil companies operating in the UK voiced their displeasure with recently announced tax hikes, writing in a collective letter to London’s The Times that investor confidence has been damaged by the increases.

"Investor confidence has been severely damaged by this policy," said chief executives and senior executives of companies, including Centrica PLC, E.On AG, Total SA, Royal Dutch Shell PLC, and BG Group PLC.

"We believe that the UK natural gas production industry cannot bear the burden of the increased taxation and the consequences of this will be disproportionately damaging,” the letter said.

The companies called on the British government to rectify the issue in order to protect investment and maintain the UK's security of energy supply.

The letter followed efforts by government officials to defend the new tax policy, telling members of Parliament (MPs) that its analysis suggested the impact on industry investment would be marginal.

The government justified the tax increase on the basis of higher oil prices, but gas producers on the UK's Continental Shelf argue they will be hit harder as gas prices have not risen as much as those for oil.

"Gas needs separate and special attention. How that precisely works, we need to sit down and agree with the Treasury the best way to operate that," said Malcolm Webb, chief executive of Oil & Gas UK, told MPs in an earlier session.

However, the UK’s Energy and Climate Change Sec. Chris Huhne told MPs that he disagreed with the industry's assertion that the difference in the prices of natural gas and oil should see them decoupled for tax purposes.

"Obviously, it is possible we will see the same substantial divergence,” said Huhne. But he insisted that, “we haven't seen it yet because of anticipation in the markets post-Fukushima that the Japanese will have to buy substantial additional LNG cargoes from our suppliers in Qatar among others.

More to the point, Huhne said, “In the Far East there has been no delinking of the gas and oil prices.”

Justine Greening, economic secretary to the Treasury, likewise argued to fellow MPs that the impact on the industry would be “marginal” given current high oil prices averaging well over $100/bbl this year.

"It clearly has an impact on investment at the margin," Greening said when asked the tax rises. "We of course want to work with the industry to make sure that we can mitigate that,” she said.

“This government has already taken steps to introduce improved field allowances and that's what we want to continue to do over the coming months," Greening told the MPs.

The British government has faced strong lobbying from the oil and gas industry since March when it unexpectedly announced the increase to the supplementary rate on oil and gas production profits to 32% from 20%.

Earlier this week, Centrica PLC said it may permanently close its Morecombe Bay natural gas field, described as the UK’s largest, due to the new tax rates recently imposed by the British government.

"Following the increase in supplementary corporation tax in the Budget, UK oil and gas fields are now subject to some of the highest levels of tax in the world—our South Morecambe field is now taxed at 81%,” said a Centrica spokesman (OGJ Online, May 4, 2011).

Contact Eric Watkins at hippalus@yahoo.com.

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