Wriggle room on offshore tax
Is there an escape route for George Osborne since his tax raid on oil and gas producers backfired?
It seems the government may be looking for one - if only a bit of wriggle room, because the big picture shows that extra £2bn is needed each year to make the Treasury's sums add up.
It looked a decisive and populist Big Oil-bashing move to increase the supplementary add-on to corporation tax from oil and gas producers - up from 20% to 32%. That's on top of a 30% corporation tax rate for the sector.
It looked a bit less decisive today, after industry body Oil and Gas UK met no fewer than four Whitehall ministers. With representatives of the Treasury, energy ministry and Scotland Office, the number attending suggests this backlash - apparently unforeseen, or at least under-estimated - is being taken seriously.
The oil industry said it was "a full and frank exchange of views". Ministers said it was "constructive and forward-looking", suggesting the full and frank parts were in one direction.
The business lobby is still absorbing the shock of the tax increase, putting the marginal tax rates on some fields up to 81%. Already, Statoil, Valiant, Faroe and Centrica, have stalled investments, or announced they're under review.
The sector's warning investment is threatened in increasingly expensive and hard-to-get mature and new fields. It's pointed out this is an industry that doesn't have to invest in UK waters when there's so much else to exploit elsewhere.
So why not hold on to Britain's reserves until peak oil forces prices higher? That, argues the industry, would compromise the infrastructure of platforms and pipelines necessary to keep squeezing hydrocarbons out the North Sea. Fail to keep investing in them, and you'd need impossibly expensive new infrastructure some years over the horizon.
The industry argument is also that basing the tax increase on the profits from higher oil prices fails to recognise that oil and gas prices have become decoupled.
Because supply is eased by Liquid Natural Gas options and by the development of shale deposits, gas has become much cheaper than oil, and gas is nearly half of what comes out the North Sea at present.
The energy-equivalent price for gas if it were converted into oil is about $60 per barrel, while Brent crude was trading today above $116.
But George Osborne's reckoning last week was that high oil means high profits, and so the higher tax can be aligned with the oil price. Perhaps the wriggle room could extend to different tax rates for oil and gas - though that raises the question of what you do in fields that produce both.
The chancellor justified his budget surprise last week by pointing out that the previous tax rate was set when oil was about $66 per barrel. And he suggested that the tax rate could come down if it falls in future from $116 to a threshold of $75, and if it stays there. For how long, and how far the rate might fall, he didn't say.
What Environment Secretary Chris Huhne was emphasising after today's meeting is that that threshold for reducing the 32% rate is open for consultation. That's where a little wriggle room might be, without the government having to concede its £2bn annual tax take.
But even if it came down, the unpredictability of such a tax regime doesn't much impress those doing investment analysis, when the tax rate might alter on the basis of a highly volatile commodity price - and in the case of gas, the price of a commodity they're not actually producing.
And another thing: decommissioning. Watch out for this as a coming issue. Estimates of the cost of scrapping and recycling all that dirty kit in the North Sea is put at between £20bn and £30bn over the next 30 years.
That's a big business opportunity for some. But there's uncertainty on a vast scale on how it gets paid for.
Offshore companies are obliged to pay, and if smaller companies working the mature fields turn out to be too small to do so over coming decades - if they go bust, for instance - the obligation reverts to previous field operators. They're often the Big Oil companies.
To cover that, companies selling on assets are looking for letters of credit from the buyers at 150% of liability. Even if they can provide that, it means a big constraint on the new owners' ability to keep investing in the fields. If you assume decommissioning will cost £30bn, it suggests £45bn is potentially being tied up.
What the industry wants from the Treasury, which could reduce that bill hugely, is clarity on tax write-offs. It expects there will be some, but how much?
Depending on when oil and gas fields started producing (and I should pay due credit to Derek Leith of Ernst and Young for explaining this to me) the tax relief should be between 50% and 75% of the bill.
Last week's tax rise came with a warning that it won't mean an increase in tax relief potential.
And George Osborne promised there would be clarity on the issue by next year's budget.
There may well be more clarity. But after last week's budget shock announcement on the supplementary charge, and some unwelcome tax surprises before that, the offshore sector's asking whether future chancellors can be relied upon to stick with that clarity?