A top energy expert has warned that Chancellor George Osborne’s North Sea tax raid could cost the offshore industry more than £50billion.
Professor Alex Kemp said the chancellor’s decision to take an extra £10billion from oil and gas firms over the next five years could hurt the sector for decades.
Last night one industry analyst said there had been fears that offshore operators were “scaremongering” to put pressure on Mr Osborne – but he admitted those concerns had been dismissed by Prof Kemp’s report.
On a visit to the Highlands yesterday, Prime Minister David Cameron backed his chancellor’s tax move, and pledged to continue a dialogue with the vital oil and gas sector.
But one north-east business leader urged Mr Osborne and his colleagues in the coalition UK Government to take a “good, hard look” at Prof Kemp’s findings.
In a report published today, the professor of petroleum economics at Aberdeen University said the number of new developments in the North Sea could be cut by more than 35% in the next three decades as a direct result of Mr Osborne’s shock Budget announcement.
He added that there were nearly 400 undeveloped fields on the UK continental shelf (UKCS), but some would now “fall at the first hurdle” as companies assessed whether they were economically viable.
Prof Kemp said that if the price of a barrel of oil was $90 (£54.85) the total expenditure in the vital offshore industry would drop by £52.2billion over the next 30 years.
His report also revealed the UK’s oil and gas production could fall by 2.25billion barrels because of Mr Osborne’s new tax regime, which was introduced to fund a 1p cut in fuel duty.
“We are talking about a lot of oil and gas that will not be produced here that we would then have to import,” Prof Kemp said.
“If we leave things as they are this effect will go a long way into the future – it will not just be with us for a few years before everything goes back to normal.
“I am concerned that the Budget only looks at the next five years, with a plan to get as much money out of the industry as possible.”
Mike Tholen, economics director at industry body Oil and Gas UK, which confronted Mr Osborne on his decision for the first time at a meeting earlier this week, said he was not surprised by Prof Kemp’s report.
“This kind of impact is wholly expected following the sudden change which resulted in producers paying between 62-81% tax on UK oil and gas production,” he said.
“The tax change has damaged the industry’s confidence and trust in the tax regime and that trust will take a long time to rebuild.
“Oil and Gas UK can only work with the government to find ways to minimise the effects on investment, production, energy security and jobs.”
One analyst said that as firms began to review or even cancel their North Sea operations in the fallout from Mr Osborne’s announcement, there were fears that they were exaggerating the damage the tax rise would do just to put pressure on the chancellor.
Martin Findlay, head of oil and gas tax for KPMG in Aberdeen, said: “There were some observers who thought that the oil companies were scaremongering.
“This report, prepared by a respected and largely apolitical expert, proves to me that they were not scaremongering and it highlights that there are developments that simply will not go ahead.
“The government and industry really need to work hard to find a solution where the government preserves some additional revenue but under a different system.”
Aberdeen and Grampian Chamber of Commerce chief executive Bob Collier said: “We hope the chancellor will take a good, hard look at this report from a well- respected economist, who is widely acknowledged as an expert in this field. The oil and gas sector, backed up by the wider business community, has said from the outset that this is an ill-thought-out tax, delivered without any real consultation, which will seriously jeopardise the continuing and future development of the North Sea.”
Brian Moran, partner and head of oil and gas at accountants Johnston Car- michael, said: “The report does not make cheerful reading and confirms many of the fears raised by other leading industry bodies since the tax change was announced in the Budget.
“A reduced level of expenditure in the UKCS will have the obvious direct impact throughout all levels of the supply chain and also wider implications for the region, both as a centre of excellence and in terms of disposable income available.”
Another analyst said he was confident that if some companies decided to pull out of the North Sea other firms would be willing to step in and continue investment, however.
Alan Barr, a director with accountancy firm PwC in Aberdeen, said: “If someone sells their assets in the North Sea then someone else will be buying into it.
“Where one company might think an investment is not viable because of the tax increase, another company will be ready to take it on.”