BBC BLOGS - Douglas Fraser's Ledger
« Previous | Main | Next »

Wriggle room on offshore tax

Douglas Fraser | 19:52 UK time, Thursday, 31 March 2011

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.

Squeezed hydrocarbons

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.

Volatile prices

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.

Dirty kit

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?


  • Comment number 1.

    So I hope the ignorant Chris Huhne got a good lesson in the economics of the oil industry. I hope he also passes this lesson on to the arrogant George Osborne and Danny Alexander.

    Now we will find out how much respect there is for Scotland and Scottish jobs.

    Nice to know that George Osborne thinks "It's our oil". Aye right.

    We may have an argument over that when Scotland declares it's desire for independence following the May election.

    As for expecting clarity from any westminster chancellor - dream on.

  • Comment number 2.

    X_Sticks - The new tax rate is still somewhat lower than that of every nationalists favourite country, Norway (62% in the UK (the figure of 80% is for aging oil fields), while it's 78% in Norway).

    I agree that raising the tax on oil companies to pay for a pointless reduction in fuel duty is pretty asinine. But the oil industries reaction sounds like a lot of bluster to me (playing the 'we'll walk and you'll have list jobs' line), which all multinational industries try when they face increased taxation.

  • Comment number 3.

    Yes Denno, but in Norway, the government manages its oil industry for the good of the country and the longevity of the industry. They have ensured that the people of Norway will benfit long term from their oil fund (currently $525 billion!) and while the tax regime is higher than ours it is stable.

    The oil companies can plan ahead with security. Their projects are not put under threat by ignorant politicians with no understanding of the industry who decide to raise the tax on our oil companies with absolutely no discussion or warning.

    As I have said before on Douglas' blog, be under no illusion, this will cost Scottish oil jobs, and have serious repercussions not just to the oil companies, but all the services companies as well.

    What really jerks my chain is the callous and uncaring way that Scotland ONCE AGAIN bales out a westminster government who don't give a toss about Scottish jobs, only that their voting motorists in middle England are placated.

  • Comment number 4.

    Why do all the Scots think it is 'their' Oil ? It's British oil. End of. I suppose I'm 'English' because I was born down south, but I have only ever thought of myself as British. Scots may rail against 'Westminster' but remember that recently Parliament has been run by an awful lot of Scots who have say over 'English' matters though the English seem to have precious little say over 'Scottish' matters. Is that fair ??

    Ah, I know. So if the oil is Scottish, then you have loads of money to play with and can fund your independence, but without it you can fund errrrrr...... what exactly ?

    Why can't we all stop bickering and just get along together ? There is enough fighting in the world already. At the end of the day we are all HUMAN. That's the most important thing.

    What I particularly like is the note about the clean up afterwards. So if you are a little company, you can drill and sell oil, make loads of money, and then walk over the horizon for someone else to pick up the cleaning up tab. Doesn't really sound fair to me ?

  • Comment number 5.

    X_Sticks - Very true regarding the oil fund, and the UK governments lack of forward planning is always breathtaking. However, I believe I read (I can't remember where), that 30% of the Norwegian governments revenues come from the oil industry, and they are very susceptible to fluctuations in the price of oil, and being over reliant on a single industry is always bad news (step forward the UK (banking)). Lets not get carried away and assume that Norway is the land of milk and honey.

    'What really jerks my chain is the callous and uncaring way that Scotland ONCE AGAIN bales out a westminster government who don't give a toss about Scottish jobs, only that their voting motorists in middle England are placated.'

    Jobs are threatened in other parts of the UK by increase in taxes. The banking sector has been hit to bail out Westminster with the raise in the banking levy (much maligned as they are, they do contribute a large amount to the UK economy and provide jobs). There isn't some conspiracy to hit Scotland and the 'friendly' oil industry. Just politicians jumbling through and making there usual mess all over the place.

  • Comment number 6.

    Before oil was discovered Norway was one of the poor men of Europe.

    Investing oil cash was the only chance they had of not returning to the bad old days as they have no other resources to tap.

  • Comment number 7.

    #4 reetspetit, afternoon, here is a wee help if we discount oil and gas we still have , water,hydro power ,wind power , tidal and wave power. trying to compare England & Scotland on most things is like trying to compere apples and oranges Scotland pop 5 million ,England 55 million
    Scotland "exports" power to England as it is, despite being charged thru the nose for the privelage!!!
    if you see yourself as British that's up to you .I never have and never will so we will just need to agree to disagree sorry, Sid


BBC © 2014 The BBC is not responsible for the content of external sites. Read more.

This page is best viewed in an up-to-date web browser with style sheets (CSS) enabled. While you will be able to view the content of this page in your current browser, you will not be able to get the full visual experience. Please consider upgrading your browser software or enabling style sheets (CSS) if you are able to do so.