UK Chancellor of the Exchequer, Gordon Brown will leave the tax rate for companies operating in the North Sea unchanged, exacerbating production troubles for operators, which have been hit hard by other recent cost increases.
Responding to the recent Budget, the UK Offshore Operators Association (UKOOA), the representative body for North Sea production companies, accused the Treasury of turning a blind eye to the urgent needs of the UK’s offshore oil and gas industry.
“The Treasury clearly recognises that lower taxes are good for business, but unfortunately fails to apply that principle to our industry,” said Malcolm Webb, UKOOA’s CEO.
While the Chancellor said corporation tax rates would be reduced from 30% to 28% from 2008-2009, he admitted rates payable on North Sea profits would remain the same. This will widen the gap between tax rates payable by firms in the North Sea and those in other sectors from 20% to 22%. It is the latest wave of controversy, which has rages since 2002, when Brown imposed a 10% tax premium on companies’ North Sea profits.
“UK offshore oil and gas producers have not been given any reduction in corporation tax and still continue to suffer under a punitive 50% rate for corporation tax and a total tax rate of 75% on the production from its older assets,” added Webb. “The Chancellor was quick to raise the tax take from this industry when he saw oil and gas prices rising towards US $60 a barrel. But now that the price of gas (which makes up almost half of total UK production) has fallen to the equivalent of US $20 per barrel, he sits on his hands.
“With cash flows from UK gas fields now under severe pressure and the average cost of new developments running at US $25 per barrel, doing nothing is simply not good enough. The Treasury needs to wake up to current realities.”
The latest tax hike has sparked fears that firms may withdraw investment in the deep waters off UK coasts, where operating costs are higher than in some areas. Sustained investment will be needed to maintain exploration for new oil and gas discoveries and to maximize the recovery of the UK’s reserves.
“Sharply rising industry costs are a global phenomenon but they leave the mature UK sector increasingly exposed to lower oil and gas prices,” said Mike Tholen, UKOOA’s economics and commercial director. “The situation regarding gas is becoming particularly acute.”
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