Home / UK Treasury sweetens bitter North Sea oil tax hike


UK Treasury sweetens bitter North Sea oil tax hike

by Patrick Osgood on Jul 5, 2011


George Osborne has managed to avert $10 billion of immediate disinvestment in the North Sea, though the tax hike still riles many in the industry. GET
George Osborne has managed to avert $10 billion of immediate disinvestment in the North Sea, though the tax hike still riles many in the industry. GET

Britain will increase the level of tax support for North Sea oil companies to help firms operating in smaller, less profitable oil fields.

The Treasury has announced that it will raise the annual rate of the Ring Fence Expenditure Supplement to 10% from 6%.

It also said it would continue to consult with oil companies on finding new categories of field allowance.

The move follows the surprise tax hike on North Sea oil profits announced in the Chancellor George Osborne's 2011 budget. North Sea oil and gas producers are facing an increase in the tax rate on their profits from 20% to 32% to offset lower fuel duty for motorists.

The hike prompted furious reaction from the industry. Mark Hanafin, director of Centrica Energy, told the Telegraph: "the North Sea is the second-largest oil-producing region in the world after Saudi Arabia. It's a national treasure for the UK. The government is utterly destroying that. I wish people would step up and say you just can't do this. Capital is leaving the country and going elsewhere".

There was also lukewarm, somewhat equivocal support for North Sea oil from senior members of international companies at a recent Commons Select Committee hearing. 

The sweeteners follow talks with the industry in a government bid to prevent the hastening of premature disinvestment in the North Sea. As recently as 1999, the UK was producing as much oil as Kuwait. Oil revenue still raises the equivalent of 2p on the rate of UK income tax, and has been seen as an easy target for previous governments.

Kenneth McKellar, Middle East Energy & Resources Leader at international professional services firm Deloitte, speaking exclusively to Oil & Gas Middle East, said: "the UK, believe it or not, is one of the most volatile fiscal regimes in the world".

"I calculated that since North Sea oil was discovered, the fiscal regime for North Sea has changed every year [...] It’s not the amount of tax that worries [oil companies] so much as how often changes occur during the period of a licence," McKellar said.

It is estimated that average costs of North Sea production are around $65 a barrel, which is set to increase as mature reservoirs deplete further.

"Today's change demonstrates our commitment to ensure current allowances work effectively and equitably and lays the groundwork for further constructive discussions on field allowances," said Treasury minister Justine Greening, in a Treasury statement.

In response, Statoil suspended $10 billion worth of projects off Britain, and utility Centrica said it had idled a gas field as profits had become marginal.

Statoil will now resume it's preliminary investment program, according to a Reuters report, before making a final decision on full investment later in the year. "With this announcement today, the negative tax impact has been neutralised," a Statoil spokesman told Reuters.

The Treasury said the new allowance would cost around 50 million pounds ($80 million) a year by fiscal year 2015/16, small beer compared to the estimated 10 billion pound ($16.1 billion) windfall from the 12% hike.

The supplement was introduced by the previous government in 2006 and currently allows companies to increase the value of losses they carry over from one period to the next by 6% for a maximum of six years.


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