You don’t have to live in a banana republic to observe the effect of greedy taxmen on the oil industry. Just take a look at the UK, where Chancellor of the Exchequer Gordon Brown has upped tax on the oil industry to a whopping 50%.
Malcolm Webb, chief executive of the UK Offshore Operators Association, said it would “cost this country heavily in terms of jobs, inward investment, balance of trade, security of supply, and ultimate tax revenues. It can only have a depressant effect on investment in UK oil and gas.”
“At a single stroke,” said Webb, “the Treasury has rewritten the industry’s future. It will severely undermine business confidence in the UK continental shelf.”
That view was shared by others, too.
Widespread concern
The tax increase “sounds surprisingly large,” said Wilf Gobert, vice-chairman at Peters & Co. “At a minimum, it sounds like it’s going to truncate the size of [oil] reserve that will be judged to be economic because there will be a certain size of reserve that will no longer be profitable to go after.”
David Mann, a spokesman for Talisman Energy Inc., concurred, saying that the tax increase could have an impact on future investments in the UK, where the company derives 37% of its production.
“We are disappointed, but you can’t be a company facing an increase in tax and not be,” he said. “There won’t be a material impact on cash flows, particularly in 2006, but it forces us to look at the attractiveness of a marginal UK project compared to an alternative investment in Western Canada or Southeast Asia.”
Brown, who has no experience in UK oil or gas, denied the charges by attacking Webb and the industry as a “pressure group”-forgetting along the way that his 10 percentage point tax increase of 2002 reduced exploration and development drilling, pushed capital investment down 13%, and halved the number of entrants into the North Sea.
Political posturing
Instead, Brown said, “The balance has to be struck between the consumers who pay for fuel and heating and the producers. In striking that balance, I think I have done it in a fair way, so we can freeze fuel prices this year, we can give pensioners a winter fuel allowance each year of the coming parliament, we can bring in new incentives for energy efficiency and for environmentally efficient fuel.”
Kevin Finn, a spokesman for Nexen Inc., seems to have it right, saying that oil and gas companies are easy targets for tax increases because “we seem to be the fattest cow at this point.” The move, he said, “plays well to the electorate.”
It does sound like Brown is more interested in votes than in the health of the UK oil and gas industry. Indeed, as more than one political observer notes, the chancellor hopes to take over from Tony Blair as the UK’s prime minister in 2009.✦
