Watching the World: Chevron says UK 'unstable'

April 25, 2011
The oil and gas industry isn't averse to airing its views as Chevron Corp. Chairman and Chief Executive Officer John Watson showed in the UK last week when he spoke loudly and clearly in opposition to new taxes.

The oil and gas industry isn't averse to airing its views as Chevron Corp. Chairman and Chief Executive Officer John Watson showed in the UK last week when he spoke loudly and clearly in opposition to new taxes.

"It was very disappointing to see the tax hike," said Watson, referring to the decision by Britain's Chancellor of the Exchequer George Osborne to increase the country's supplementary oil and gas levy to 32% from 20%.

"It was done without consultation with the industry," Watson told the Financial Times. "It's the third tax hike in 10 years, making the UK one of the more unstable investment climates for our business."

The UK is "unstable" as an investment climate? Is the country on the verge of becoming a banana republic? Perhaps Watson arrived at the wrong airport? Maybe he meant some other North Sea.

Stability and predictability

However, in words that will echo all the way through Parliament to the prime minister's house on Downing Street, Watson said, "My biggest concern is not just the level of tax. It's the stability and the predictability of the tax."

Watson then weighed in with what some observers might call a veiled threat.

"When you increase taxes every few years, particularly without consulting with industry, there will be unintended consequences of that in terms of where we choose to invest," said Watson.

That's ominous, especially when added to the fact that "Chevron produces oil and gas in 26 different countries…. We choose venues that have the right geologic and fiscal terms," Watson said.

He told the paper, "What should I assume the fiscal terms should be 5 years out? Are they going to change again? We take enormous risk drilling exploration wells."

Geologic risk

"The geologic risk is one in five, one in 10 in many cases. In order to pay for those unsuccessful wells we have to capture a solid return on those that are successful. And if the upside is clipped off every few years, that makes it a very difficult investment climate," he said.

Watson's remarks follow those made by other industry executives since Osborne announced the increase in the supplementary tax rate levied on oil and gas production—a move that increased the effective tax rate to at least 62%.

Members of Parliament even cautioned that the take hike could undermine the government's credibility, especially after Osborne a year ago promised the oil and gas industry a stable tax regime.

But the government has shown no signs of reversing this decision. That reversal probably won't be considered until someone eventually computes just how many votes will disappear in the next election after investors depart the North Sea.

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