A resurgent UK offshore oil & gas sector is mired in fresh uncertainty following the coalition government's surprise imposition of what is, in all but name, a windfall tax on North Sea production. David Morgan reports.
In his Budget speech last month, chancellor George Osborne raised the supplementary charge levied on oil & gas production from 20% to 32% with immediate effect – a move thought likely to put an extra £10 billion in the government coffers over five years. In apparent mitigation, Osborne referred to the ‘unexpected profits' North Sea operators were making on oil prices much higher than those prevailing when they made their investment decisions.
Unsurprisingly, the move brought a frosty response from industry leaders. And it stunned analysts who not long before had been talking up the UK continental shelf's recent return to fiscal rectitude after a decade of tax regime tinkering.
Hannon Westwood director Jim Hannon said the changes would be costly for small emerging oil companies. ‘We are already seeing their share prices tumble as the investment market downgrades the value of future new oil production,' he noted. ‘What this means is that we are undermining the fabric of the next wave of capital investment from a growing band of small companies that have spent much of the past ten years highlighting and securing a major part of our future UK offshore oil and gas potential production, and with it, tens of thousands of jobs and a worldwide skills base.'
Hannon said the industry would now be looking for ‘some retrospective and targeted government action beyond this tax measure' that would restore confidence towards the UK as a place to invest funds in new oil and gas.
Oil & Gas UK chief executive Malcolm Webb reminded the government that its first Budget just nine months earlier had acknowledged the importance of a stable UK oil and gas tax regime which provided certainty for investors. ‘Given that assurance,' he declared, ‘the industry is shocked to now be hit by a tax increase that raises the tax rate to at least 62%, with some of the most mature and therefore vulnerable fields now paying up to 81%.'
Webb added: ‘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.'
‘Thanks for nothing George,' was how Ian Bell, director of Aberdeen oil & gas engineering consultancy Optimus, greeted the news.
Suggesting that the chancellor may at a stroke have visited recession on the Granite City, Bell said: ‘The only part of the [UK] economy that was certain to deliver more jobs in 2011 was the offshore oil & gas industry. Every chief executive operating assets in the North Sea is going to put on hold any non-sanctioned project until they can establish how this will impact their profitability.' OE
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