A tax bonanza from the soaring value of North Sea oil has fueled bumper revenues from British companies for Chancellor of the Exchequer Gordon Brown.
Corporation tax receipts surged by more than 50% due, as well, to a change in the timing of oil groups’ tax payments from April to January.
Analysts agreed that the data strengthened the UK’s public finances, but they questioned the effects on the UK North Sea oil industry.
One economist warned that Brown’s tax hike on oil company profits could lead directly to a £2 billion cut in investment and the loss of almost 4,000 jobs if prices fall to $30/bbl.
Tony Mackay said oil prices would need to remain at $60/bbl or more for the 10% tax rise to have a minimal impact on jobs and capital expenditure.
Likely impacts
Mackay was commissioned by Scottish Enterprise Grampian to produce a report on the likely economic impact of Brown’s decision to double the supplementary tax on oil company profits to 20%.
He said, “Because virtually all the fields are profitable at about $40/bbl, we reckon that if prices stay at about $60/bbl then the tax increase is going to have a negligible effect, but if it falls below $40/bbl then there will be substantial cuts in capital expenditure and jobs.”
His report concludes that, in the most pessimistic scenario of a return to $30/bbl, capital expenditure in the North Sea could plunge by £1,995 million over the next 5 years, leading to the loss of 3,990 jobs.
Supply chain threat
That’s one view. Another is that more than 3,000 companies in the oil and gas industry supply chain will be affected by Brown’s plans to raise North Sea taxes.
This was the warning from Tom Smith, managing director of oil and gas industry telecommunications specialist Nessco.
Smith said Brown’s corporate tax team had clearly thought the tax increase would affect only around 120 oil and gas explorers and producers, but he said it would have much wider and deeper implications than that.
Referring to Brown’s prebudget report, Smith said the ripple effect on the supply chain had been overlooked.
In particular, he said there was potential damage to exploration activity as operators might see the North Sea as too risky given the reduced level of return.
He added that the UK continental shelf needed to be attractive to suppliers as well as operators.
Smith said Brown’s prebudget statement did not spell the end of the UK Continental Shelf, but exploration and the fiscal regime were critical over the next few years.
“We need to grab the golden opportunity of high prices to maximize value for the long term,” he said. “We need to think of innovative ways of working with the government to give us a springboard into the future.”
How about a tax cut? ✦
