The worst thing about the UK government's new supplementary tax on North Sea oil and gas profits is what business people hate most: uncertainty.
Imposition of the tax surprised the industry. Effects on the oldest North Sea fields are unsettled. And the motive-other than money-is unclear.
In effect, the move raises the corporate tax rate for North Sea producers to 40% from 30%. Easing the blow for some is an increase in capital allowances for first-year North Sea investments. The government will consider abolishing the 12.5% royalty on production from fields approved for development before April 1982.
The changes might help operators with heavy investments in new UK North Sea projects. They'll hurt operators with production in the region but little new investment there. As long as royalty stays in effect, production from old fields will carry a very heavy tax load.
If investment were declining, it might make sense to use taxation to encourage recycling of production profits into development of the mature UK North Sea resource. But investment isn't declining. The UK Offshore Operators Association (UKOOA) reported this month that 2001 capital in vestment was up 25% from a year earlier and that the number of new-field ap provals for the year reached a 6-year high.
Spending on exploration and appraisal activity alone also was up last year-a good sign for an aging area. There were 14 new-field start-ups.
Capital flight doesn't warrant an upset to the UK's offshore fiscal regime. To sustain interest in the venerable North Sea, the government needs most to offer political stability. Sudden tax increases have the opposite effect.
UKOOA expressed "surprise and concern" about the tax.
BP PLC Chief Executive John Browne called the change "wrong" and said, "I don't think any other country in the world has increased production taxes in this way over the last 10 years-with two exceptions: Venezuela and Argentina."
For companies assessing oil and gas projects, tax rates and write-offs are vital considerations, of course. But susceptibility of the fiscal structure to surprise-especially the unpleasant kind-can be just as important.
(Online Apr. 26, 2002; author's e-mail: [email protected])
