In this month’s edition of Energy, I had planned to tell you of the new and exciting approaches being taken by the diverse range of companies that have been attracted to invest in the UK Continental Shelf.
Despite this being a mature and relatively high cost province, our forecasts showed that our oil & gas company members had a new and growing confidence in the stability of the UK regime and, as a result, were investing £8billion this year, and had plans to invest £40billion or more over the next five years, in order to develop more of the UK’s oil & gas reserves.
One impact of this increasing investment would be a significant reduction of the production decline rate over the next five years. This, I felt, was important because in a time of economic difficulty and uncertainty over energy supply, higher UK production would have meant more tax revenues for the Treasury and less reliance on fuel imports.
It was also important because the sector’s role as the country’s biggest industrial investor, largest corporate taxpayer and most significant source of energy security was seemingly assured. Moreover, but also very importantly, at a time of high and rising unemployment, tens of thousands of new jobs were due to be created in an industry that was helping to lead the UK out of recession.
Evidently, the coalition government did not see it the same way. Despite assuring the country just nine months ago, in his first Budget speech, that he recognised the importance of a stable UK oil & gas tax regime which provided certainty for investors, last week in a surprise (I would say “shocking”) move, the Chancellor of the Exchequer, George Osborne, slammed a top tax rate of 81% and a lower limit of 62% on UK oil & gas production.
The logic behind the construction of the tax change is also difficult to fathom. The new super-tax regime applies to all production – even to fields that only produce gas – for so long as the international price of oil is above $75 per barrel.
In fact almost half of the UK’s production is gas and it is currently fetching a price around the equivalent of $55 per barrel and shows no sign of an early or significant rise. So why on earth is it being taxed at a super-rate related to a $75 per barrel oil price?
It’s like setting a super-tax on the price of beef because the price of lamb is considered too high.
The high tax rate applying to UK oil & gas production was already giving the government a good deal more than half of the profit.
Additionally, the recent higher oil prices meant the Treasury was going to receive a windfall worth between £3billion and £4billion this year alone.
I fear that various government voices have sought to shrug off the impact which this proposal for a new super-tax has had and will have on the UK oil & gas industry.
They have suggested that the industry is crying wolf and that the super-tax can be easily afforded and will have little or no impact.
If the government really does think that then it is making another serious mistake. It should realise that the shock and dismay voiced by the industry since that Budget announcement is real and will have real, long-lasting and serious consequences.
Furthermore and most importantly, trust has been severely shaken. It may have been lost. Trust is a precious commodity and one which is vital for good and sustainable business. Trust is built up over time through clear, consistent and reliable words and actions. Once it has been lost, it can take a considerable time for that trust to be restored.
Previous governments have imposed instability on the industry and after an initial drop in investment, the sector managed to recover.
However, now the UK Continental Shelf is rather more mature and increasingly challenging from a technical viewpoint.
The UK has to fight even harder to attract investment and having a reputation for fiscal instability will not help. Evidence of fiscal instability caused by one administration is a problem. Evidence of fiscal instability that spans two very different administrations is really quite a big problem.
The last period of fiscal instability led to investment falling by a quarter and an acceleration of the production decline rate. Oil & Gas UK’s members are now re-appraising their investment decisions.
I am afraid we can only expect a similar result this time.
Lower investment will in time filter through to lower production, less UK tax revenue and reduced employment.
The only increase will be in this country’s dependence on imported oil & gas, which in turn will diminish our energy security and widen the deficit on the balance of trade.
These impacts will do nothing to aid the government’s objective of business-led growth. The UK oil & gas industry stands ready to see how this change can be undone and the damage it threatens avoided.
The country simply cannot afford to leave this matter unresolved.
To borrow a phrase, what a difference a day in politics can make.
Malcolm Webb is chief executive of Oil & Gas UK