George Osborne repeated one of Gordon Brown's favourite tricks as Chancellor by funding a high profile and voter friendly giveaway through a raid on the North Sea oil and gas industry. And paying for a reduction in fuel duty, which benefits the hard-pressed motorist, by hiking up tax on the North Sea oil and gas industry, which is currently benefiting from soaring oil prices, is likely to be welcomed by the majority.
The fuel duty escalator will be abolished and replaced with a "fair duty stabiliser" - paid for by an increase in the supplementary charge on North Sea oil and gas production from 20 per cent to 32 per cent. The charge was introduced in 2002 at a rate of 10 per cent and doubled in 2006 to 20 per cent.
Mature oil and gas fields already pay petroleum revenue tax as well as corporation tax and will now suffer a marginal tax rate of 81 per cent, points out Derek Leith, oil and gas partner at accountants Ernst & Young. That won't significantly impact oil majors, which will still enjoy healthy margins with oil at around $115 per barrel. But the North Sea is nowadays more the domain of small and medium-sized firms, and these will suffer from the higher tax. The impact of the higher tax on project economics might make it harder for them to finance new developments. "Many companies will be frantically re-appraising their plans for capital investment in the UK Continental Shelf in the coming days," commented Mr Leith.
Despite the chancellor building in a mechanism to reverse the tax hike should oil fall back below $75, the proposal comes at the wrong time for the industry. North Sea firms will incur rising costs just as the industry faces "a compelling need for serious investment", according to Jim Hannon of North Sea consultants Hannon Westwood.
The North Sea has witnessed increased, and successful, drilling activity over the past decade. But Mr Hannon points to a rising stock of discoveries that smaller, cash-strapped companies haven't been able to develop, particularly given looming decommissioning liabilities and ageing pipelines. He estimates that the industry needs to invest $35bn (£21.5bn) over the next five years to exploit these undeveloped discoveries. Without this finance, the industry could end up leaving in the ground a substantial proportion of the estimated 4.4bn barrels of oil and gas that the small and medium-sized firms are looking to develop.
