Oil firms rail against Osborne's North Sea tax
The UK government's surprise £2 billion tax raid on the UK North Sea oil and gas industry in this year's Budget has been met with fierce opposition.
In the wake of the plans to raise the supplementary charge on oil and gas production from 20% to 32%, industry body Oil & Gas UK expressed shock at the tax increase, claiming it will decrease investment, increase imports and drive UK jobs to other areas of the world.
Get more on yesterday's speech by the chancellor in our Budget 2011 spotlight.
Chief executive Malcolm Webb launched a scathing attack on the unexpected Budget proposal stating that it runs counter to the government's earlier desire to recognise the importance of a stable UK oil and gas tax regime and provide certainty for investors.
"At a time when we could see investment recovering following the last period of fiscal instability, this further shock will only damage investor confidence and make many question whether the UK is an appropriate destination for their investment. Many of our members will now be reappraising their investment decisions," Webb warned.
Chancellor George Osborne dealt the blow to the industry during yesterday's Budget in a bid to alleviate price pressure at the petrol pumps. As such, fuel duty was also cut by 1p per litre from yesterday evening and the loathed fuel duty accelerator scrapped in favour of fair-fuel stabiliser which should ease the cost of motoring.
The rationale behind his decision was the eye-watering prices at the pump, which has seen the cost of filling up a family car rise by £10 in the last six months.
Oil prices have risen sharply, with a barrel of the black stuff now fetching around 50% more than in June last year, in part reflecting instability seen across the Middle East and North Africa (MENA).
For Ken Fisher's view on the impact unrest in the region could have on stockmarkets, read: Making sense of MENA.
Changing the tune
But oil and gas partner Derek Leith at Ernst & Young says the government is now singing from a different songsheet to previously.
"Recent discussions between the oil and gas industry and tax policy makers in government have been encouraging and appeared to be leading to a common ground. However, it would appear that script has been disregarded. The shock announcement will undermine much of what it hopes to achieve and demonstrate to industry an unambiguous fashion that there is no real concept of fiscal stability in the UK."
He says it is a hard pill to swallow for the mature oil and gas fields, which already pay petroleum revenue tax as well as corporation tax, will now suffer a marginal tax rate of 81%.
"Many companies will now be frantically re-appraising their plans for capital investment in the UKCS in the coming days."
Osborne's pledge to reduce the supplementary charge back towards 20% should the oil price fall sharply from its current levels of $166 per barrel to below $75 per barrel offers little consolation.
"The prospect that the rate will reduce if the oil price falls before a certain level, and the possibility of some measure of relief for new gas fields will carry little weight with oil companies in the light of such a significant increase in tax," Leith added.
The UK offshore industry currently accounts for a third of total industrial investment in the country, and Centrica (CNA), a significant North Sea producer, hailed it disappointing to increase further what it dubs as "already high levels of tax" on UK oil and gas production.
"With more than 50% of Britain's gas now imported, it is vital for our energy security and for the company that investment is maintained to ensure we extract all of the untapped hydrocarbons we can. This tax hike could have a chilling impact on future investment in the North Sea," managing director Mark Hanafin said.
The company's shares fell over 8p to 317.7p in the wake of the announcement yesterday afternoon.
Minnows' shares take a hit
Indeed, shares in fellow North Sea companies took a hit across the board, with Premier Oil (PMO), Nautical Petroleum (NPE), Xcite Energy (XEL) and Valiant Petroleum (VPP) all nursing losses in the aftermath, while North Sea specialist EnQuest (ENQ) saw 12% wiped off its market value as investors grew jittery at the news.
However, the UK's two largest oil companies, BP (BP.) and Royal Dutch Shell (RDSB), are seen as more cushioned from the blow as a result of their global exposure.
Broking group VSA Capital confirmed in a note: "This introduction will have little impact on the majors, who have large operations in the region, but which are small compared to their overall asset portfolios.
"The real impact be on the smaller independents such as EnQuest, Valiant and Nautical and this will undoubtedly hit investor confidence in companies operating in the region. It is these companies that are driving North Sea exploration and development as many of the majors have moved their focus to developing regions.
"If investors do decide to reconsider their positions in these companies, it could mean the end of the North Sea as producing region sooner than expected."
David Hart, analyst at Westhouse Securities, commented: "So while BP is a large producer in the area, the impact is more modest relative to its global production than, say EnQuest, where operations are completely focused on the UKCS. Pre-production companies are less impacted, as the tax will decline over the coming years, in line with corporate tax rates which are due to be cut 2% next month."
Meanwhile, tax partner David Raistrick at Deloitte warned that the measures to reduce prices at the pump may not have much effect.
There is a further 3.02p per litre increase still planned on 1 January 2012, he said, with a further increase as of 1 August 2012.
"The UK will continue to have the highest rates of fuel duty in the EU, being twice that of some other member states. Whilst the current decrease is obviously positive for business, we need to remember that fuel duty has increased by just over 25% over the last two and a half years and (yesterday's) reduction has a limited impact on this."
