We told you so, Osborne

Chancellor George Osborne
Jeremy Cresswell

So the Treasury has screwed up big-time over its North Sea tax grab; or at least that’s how it seems.

In December the Treasury downgraded its forecast for the tax it would collect on oil and gas production in 2011-12 by £2.3billion; this despite the highest sustained oil prices ever experienced in the history of UK offshore production.

Energy warned immediately after the shock Selective Corporation Tax (SCT) hike announced in last year’s national budget that this would backfire. And I believe it has.

Moreover, the full impact of this stupidity on the part of chancellor George Osborne and Treasury first secretary Danny Alexander has yet to be felt; which suggests that revenues for 2012-13 will also plummet below expectation as I fully expect a further sharp drop in UK oil and gas output this year.

I’ve little doubt that Osborne and Alexander rubbished criticism directed at them through the pages of this paper at various times last year, but if they’re being honest with themselves, if no-one else, then they must surely come clean – in public – that they screwed up badly.

I said in my post-2012 budget commentary that the North Sea industry had been especially duped by Osborne who, during his time in opposition to Labour, had carped about fiscal instability and that the Tories would change that once in power.

That 12% hike in SCT to 32% failed in that regard. So I suppose there is a deserved rough justice in that the Treasury has been forced to downgrade its tax take from the North Sea by £2.3billion for 2011-12.

The tax grab measure had been designed to deliver an extra £2billion in the current fiscal year; and the next for that matter.

I said in April that all it would take to damage production and dent tax revenues was for companies to cancel the drilling of a few new production wells designed to sustain output and push back decommissioning, but which had been rendered uneconomic by the SCT leap.

OK, you might say, prove it. But I can’t. I don’t think anyone can. Who can truly know just how many wells were quietly parked in 2011-12? Estimates will be made; but how accurate? Can even Oil & Gas UK extract that level of information?

You can bet your life that there are production wells that, pre-March 2011, were mapped in for drilling during 2012, but which will not happen either. Their purpose is to help slow the inevitable decline of UK output. And if they don’t get drilled, they don’t flow and so aren’t available to help act as a braking mechanism, so decline accelerates.

Meanwhile, having got over some of the mistrust that the 2012 budget shock generated, at least Oil & Gas UK and Treasury are on speaking terms again and a forum for dialogue established, with an extension of the field allowances system and the manner in which decommissioning as core topics.

But my belief remains that a tax cut is imperative, or proper confidence will never be restored. Anything else is tinkering around the edges.

On the other hand, the global upstream oil and gas industry is used to life on the edge. Just look at the disarray in Iraq, yet a host of international and some national oil companies too have fixed rate per barrel service contracts in place in the south, while others have opted to do production sharing deals in Kurdistan, even though new Iraqi oil laws agreed in principle three years ago have still not been ratified.

In particular, look at the game ExxonMobil especially is playing, as it seeks to build a relationship in Kurdistan that is quite distinct from the production contract arrangement in southern Iraq that it has signed with the Iraqi government.

Of course, aside from the UK’s chronic fiscal instability, we’re also faced with the possibility of Scotland regaining her independence. The cross-border war of words on that has barely started and one can be certain that Cameron and Clegg will crank up the scaremongering rhetoric in the run up to the referendum, all designed to frighten business out of Scotland.

However, I believe that the current Holyrood government will make sure that the strategically vital energy industry north of the border is cared for. That will mean an offshore fiscal regime that is more progressive and attractive than the current London-driven shambles.

Meanwhile, as Britain slides backwards into recession again, I do wonder whether we might have been in a slightly better position had those idiots in the Treasury and the coalition not hammered the North Sea the way they did nearly a year ago.

After all, the resilient North Sea industry would have simply ploughed on, building on the precious momentum recovered since the deep downturn of the late 1990s and brief slide post-2008 “global” credit crunch.

That would have delivered better taxable returns for the current year, the Treasury would not now be forecasting a lower tax take than it had banked on and 2012-13 would be great for everyone too.

Finally, in a letter to Malcolm Webb, CEO of trade body Oil & Gas UK, dated February 1, regarding Scottish independence and the uncertainty that it could cause to his members, Energy Minister Charles Hendry claimed: “I would like to assure you that the UK Government will act in the best interest of the union by continuing to lay the foundations for a profitable future for UKCS investment.”

What tosh!

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