British Prime Minister Tony Blair last week was urged to reverse the proposed increase in North Sea taxation or risk seeing Britain’s offshore oil industry decimated as fields are sold off and exploration spending moves elsewhere.
A delegation of business and community leaders from Northeast Scotland, led by the Conservative Member of Parliament (MP) for West Aberdeenshire and Kincardine Sir Robert Smith, told the prime minister that the doubling of supplementary corporation tax on North Sea profits to 20% has created an unstable climate, which threatens jobs and investment.
The UK offshore industry supports 260,000 jobs and will contribute more than £10 billion in taxes to the Exchequer this year. But it will cost an estimated £200 billion to exploit the 16-27 billion bbl of recoverable oil thought to be left in the North Sea.
The delegation told Blair that this investment could go elsewhere unless his government’s tax regime is made less punitive.
Timely opportunity
“This meeting with Tony Blair is a timely opportunity to reinforce the message that when the oil price falls there needs to be a quick response from the government,” said Sir Robert.
The increase, announced in December’s prebudget report, will leave some North Sea operators facing a marginal tax rate of 75%. BP PLC, Europe’s biggest oil company, said its first-quarter profit dropped 15% after taxes rose and hurricanes in the Gulf of Mexico hurt production.
BP’s net income fell to $5.62 billion, or 27¢/share, from $6.6 billion, or 30¢/share, a year earlier.
“Our first-quarter effective tax rate was 35%, significantly up year-on-year,” BP Chief Executive John Browne said. “At current price levels we expect the full-year rate to be higher as a result of the impact of yet to be enacted increases in North Sea taxes.”
Assets for sale
In fact, Brown expects BP to be hit with a $600 million one-time deferred tax charge once the new tax increase is approved by government-assuming that it is approved.
BP previously said that given the long lead times involved, 2006 activity would not be affected by the increases in North Sea taxes. But a spokesman said the company was reviewing how tax changes would affect activity in 2007 and beyond.
If that was not enough to give Blair pause for thought, Byron Grote-a contender for the top job at BP after Brown’s retirement-signaled that the company might indeed dispose of its North Sea fields.
Grote, BP’s finance director, said the oil and gas giant would continue to offload assets that were “immaterial, nonstrategic, or mature” after being delighted by the prices it had achieved for recent disposals.
One observer of the UK scene noted: These are adjectives that sector-watchers believe executives might decide apply to all but the biggest of BP’s assets in the North Sea.
Are you listening, Mr. Blair? ✦
