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north-sea-gas-taxes-are-sloppy-thinking

The announcement in the Budget of a supplementary tax on North Sea oil and gas producers has gone down badly. Exploration and Production (E&P) businesses are distinctly unhappy, although the strong oil price provides some justification for the Treasury’s controversial decision. At a general level, the Government should be seeking to cut taxes rather than increasing them. Its efforts to deliver meaningful cuts in public expenditure, despite all the hype, remain disappointing – there are still billions of pounds of potential savings.

Hence, expenditure cuts should take priority over tax increases – unless there is a quite compelling case. Strangely perhaps, oil prices are currently strong – at around $117 per barrel of Brent crude – in apparent contrast to the severe weakness of many EU economies. But E & P investors have to assess their potential returns on a long-term basis, rather than on the prevailing spot price.

Such investors, given the inherent risks of E & P activities, also welcome consistency – rather than constant changes – on the tax front. Given that the comparative trading value of gas per unit is around halve that of oil, the case for higher gas taxation is much weaker. With North Sea gas supplies running down, there are real concerns about future gas investment, which is desperately needed as the UK’s electricity generation requirements, post Fukushima, become increasingly dependent on gas-fired plants.

Recently, Centrica, which supplies almost half of the domestic gas market under the British Gas brand, confirmed it is reassessing the future of its key Morecambe South gas-field. Following the supplementary charge imposed by the March Budget, the gas taxation percentage for this field has risen to a whopping 81%. No wonder, Centrica is baffled by the Treasury’s thinking, with such penal rates bringing back memories of the 83%/98% (earned/unearned) maximum income tax rates under the 1970s Labour Government. North Sea gas taxation needs an urgent re-think.