North Sea Investment Undermined By New Tax

Gordon Browns surprise ten per cent surcharge on North Sea oil profits ?could undermine investor confidence in the long-term viability of the North Sea?, the main oil industry association warned yesterday.
The UK Offshore Operators Association (UKOOA), which represents the thirty biggest of the seventy licence holders active in the North Sea, said it was disappointed at the chancellor's decision, particularly because it had been working with the government to boost investment so as to squeeze more oil and gas out of the UK's maturing oil province.
Oil shares fell on news of Mr Brown's decision, apparently made to raise revenue without increasing road fuel duty and to exploit the high world price for crude. BP shares were down 7p to 598p by the close, while Shell slipped 8p to 507p.
The UKOOA said it welcomed the chancellor's offsetting move to increase capital allowances from 25 to 100 per cent on first year investments in the North Sea, as well as Mr Brown's proposal to consult the industry on abolishing the 12.5 per cent royalty tax. But industry officials said royalties were only levied on output from the relatively few fields given development consent before 1982.
BP said on Wednesday night: "Since we produce some 20 per cent of the UK's oil gas, based on the government's extra take of GBP600m ($866m), when the tax fully bites, we think the changes will cost us around GBP120m in cash. There is a big risk it will discourage investment over the longer term."
Shell Expro, the second biggest company in the North Sea which combines operations of Shell and Esso there, said that while it welcomes the increased capital allowance and possible phasing out of royalties, these "are not expected to come close to offsetting the supplementary charge".
Roy Franklin, chairman of Brindex, the UK independent oil explorers' association and chief executive of Paladin Resources, commented: "On the face of it a higher tax rate will result in fewer discoveries being potentially commercial".
Although Mr Brown said he wanted to support investment in the North Sea, his oil tax changes might discourage newcomers while suiting some existing operators in the North Sea.
The Treasury said the new tax should raise an additional GBP100m in revenue in the year to March 2003, net of the increased capital allowances. This would rise to GBP450m the following year and GBP600m the next year.
One London oil analyst said that the additional tax would be easily absorbed by large oil companies. "Even looking at this in the worst case scenario, it would only shave 1 per cent from the valuation of a company like Shell, and we have already seen that reaction from the market."
The oil industry had thought it was safe because in recent years, Mr Brown has ignored calls from fuel price protesters for a windfall profits tax on oil.
"I guess the chancellor had to make sure the price of petrol stayed below the 80p a litre level, which seems to be the point that would have triggered protests," said one oil industry executive.
The oil industry paid GBP4.3bn in upstream oil taxes in 2000/2001 and a total of GBP175bn since the North Sea was first developed in the mid-196Os. The existing tax rates varies from 30 to nearly 70 per cent, and is calculated from the 12.5 per cent royalty tax on pre-1982 fields' output, a petroleum revenue tax of 50 per cent on profits from pre-1993 fields and 30 per cent corporation tax.

Author: Neftegaz.ru