Lloyds List: Tax rises will hit investment, oil bosses warn chancellor: “The UK's largest companies, BP and Shell, plus a host of listed oil firms including BG Group and Venture Production, will be hit hardest by the tax rises from next year.”: Wednesday December 07, 2005
Field developments and infrastructure upgrades may suffer as Brown takes action to cut budget deficit, writes Martyn Wingrove
BRITAIN's oil industry has blasted Chancellor of the Exchequer Gordon Brown for raising taxes on North Sea producers, warning that it will hit confidence and investment.
The UK's largest companies, BP and Shell, plus a host of listed oil firms including BG Group and Venture Production, will be hit hardest by the tax rises from next year.
Mr Brown said he would double supplementary corporation tax to 20%, raising total tax on fields producing since 1993 to 50%, to help pay back a growing budget deficit.
The move would bring the UK's tax in line with other oil provinces, including the US Gulf of Mexico and Norway, he said in the pre-budget report on Monday.
But the industry expects that the move will defer investment in new field developments and upgrades to maturing infrastructure.
Comdemnation of Mr Brown's additional 10% tax on oil profits was led by the UK Offshore Operators Association.
Analysts also slammed the chancellor for undermining the good work done by the Department of Trade and Industry to attract new investment.
'I am staggered that the chancellor, who speaks of the need for stability and long-term investment, should take this action against UK oil and gas producers,' said UKOOA's chief executive Malcolm Webb.
'It is almost beyond comprehension that the government has failed to grasp the vulnerability of the industry's future in the UK.
'It will deter investment in new fields and make older fields less attractive for increased recovery. The impact will be felt significantly by smaller oil and gas producers.'
UKOOA thinks the government has not learnt the lessons of 2002, when the chancellor introduced the 10% supplementary corporation tax and investment in the North Sea slumped until this year.
Exploration and development activity in the UK sector fell to record low levels as investment dried up because profit margins were slashed by higher taxes.
Mr Brown's moves will take an extra GBP6.5bn ($11bn) out of the industry over the next three years, even though the Treasury already has already reaped GBP11bn in tax revenues this year, double the amount paid in 2004.
'Mr Brown's decision to increase the rate of tax is a body blow for an industry just recovering from the corporation tax increases introduced in 2002,' said Derek Leith, head of oil at Ernst ' Young. 'The chancellor has sent a signal to investors that the UK will continually adjust the tax rate on oil and gas resources, so cannot be seen as a jurisdiction with fiscal stability.'
Mr Leith thinks this will mean that the UK can no longer maintain its stance as a stable fiscal regime for investors.
Zac Phillips, oil analyst with Ambrian, said: 'This tax rise essentially undoes all the good work done by the DTI in generating interest in the region.
'The next question is whether this is the thin end of the wedge or a one-off.'
Speculation that the chancellor was about to increase taxes on oil producers was building weeks before he published the pre-budget report.
The industry was already braced for the worst after a year of sky-high energy prices and bumper profits for the oil majors, but the rise was higher than the 5% predicted by analysts.
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