Interactive Investor

Osborne launches tax raid on North Sea oil

23rd March 2011 15:18

by Fiona Bond from interactive investor

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The North Sea oil and gas industry became the unlikely victim of Chancellor George Osborne's Budget as he unveiled plans to hike tax rates in a bid to alleviate price pressure at the petrol pumps.

Get all the news and reaction on today's Budgetin our guide to Budget 2011.

In a move that will squeeze the profits of oil and gas producers in the region and is likely to raise fierce opposition, the chancellor plans to raise the supplementary charge on oil and gas production from 20% to 32% from midnight tonight in order to net the government a further £2 billion.

As such, fuel duty will be cut by 1p per litre from 6pm this evening and the loathed fuel duty accelerator scrapped in favour of a fair-fuel stabiliser which should ease the cost of motoring.

The decision was prompted by 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 North Africa and the Middle East.

Osborne explained: "The North Sea Oil tax regime was most recently changed in 2006, when the price of oil stood at $66. It is now almost double that amount.

"That means the oil companies are making unexpected profits on oil prices that are far higher than those they based their investment decisions on."

While other oil-producing countries entertain a tax regime that automatically regulates returns when prices rise, the UK does not and the North Sea is deemed too mature to introduce such a regime, hence the government's decision to raise the supplementary charge.

However, in an effort not to deter future investment in the North Sea oil industry, Osborne vowed to reverse the measures should the oil price fall sharply from its current levels of $116 per barrel to below $75 per barrel.

"In future years, if the oil price falls below a set trigger price on a sustained basis, the government will reduce the supplementary charge back towards 20% on a staged and affordable basis while prices remain low," Osborne said.

At present, Britain's offshore oil and gas industry is going from strength to strength, according to the sector's annual business survey published last month.

UK Oil and Gas said capital investment in exploration and production has increased by 60% over the last two years, significantly slowing the rate of production decline from the UK continental shelf.

In 2010, the UK produced 850 million barrels of oil and gas equivalent per day, according to the industry body.

Angelos Damaskos, chief executive, Sector Investment Managers: "The introduction of a 'fair-fuel stabiliser' that increases taxes on North Sea oil producers when prices are high is an attempt by the government to reduce the inflationary effect of rising oil prices by distributing additional tax proceeds to the economy.

"It is unlikely it will have any effect on Brent oil prices which are driven by demand for reliably sourced energy on a global basis. Oil companies operating in the North Sea are likely to see a negative impact on their profitability which would, nevertheless, be reduced if the oil price dropped. In many cases, the incremental taxation can be deferred through exploration expenditure tax losses."

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