The Business Online: Shell blames Brown for its new North Sea cuts: "Shell has interests in about 50 oil and gas platforms in the North Sea and owns 21 outright. It has not ruled out more cuts.": Sunday December 18, 2005

ENERGY giant Shell has slashed investment in its future North Sea oil drilling programmes by a third, blaming the doubling in oil production taxes announced by Chancellor Gordon Brown in his recent Pre-Budget Report.

The move is the first indication that Brown’s tax raid on oil companies would hit North Sea investment. Shell told The Business it had been planning to hire three drilling rigs a day to cover its North Sea exploration projects over the next few years. After the news of the tax hike, it had decided to cut that to two – saving almost $100m (£56m, E84m) a year.

A spokesman for Shell in Aberdeen said: “We had been tendering to hire three rigs for some months, but following the Pre-Budget Report we had to conduct an investment review. The decision at this time is to reduce the contract to two rigs.”

On 5 December, the Chancellor outraged the UK oil industry by doubling corporation tax on North Sea producers from 10% to 20%. Oil executives warned that international companies would be discouraged from investing in the region because of uncertainty about the tax regime. The tax rise will cost the UK oil industry an extra £2bn (E3bn, $3.5bn) a year.

The United Kingdom Offshore Operators’ Association (UKOOA), the industry body of which Shell is a member, said: “This bears out what we have been saying. Companies are taking the steps they deem necessary to cope with the higher taxes and it means some marginal projects will not go ahead. Shell’s decision is the first tangible illustration of the impact of this ill-judged move.”

Shell has interests in about 50 oil and gas platforms in the North Sea and owns 21 outright. It has not ruled out more cuts. Its exploration drilling has been reduced in recent years, leaving only three rigs in operation in the region. The three extra rigs were being booked for undetermined future projects, but the programme has now been hastily redrawn.

The industry supports more than 260,000 jobs, and the fear is that the tax increase will speed up the rate of decline in North Sea oil and gas fields in which output has already passed its peak levels. As news of Shell’s cutbacks were revealed this weekend, union leaders called for the Department of Trade and Industry to demand that Shell reveal more details of its new drilling plans and force the company to revoke some of its North Sea licences.

Graham Tran, regional organiser at trade union Amicus, said: “I will be writing to the energy minister Malcolm Wicks on Monday to ask him to use his department’s power to make Shell identify which licence blocks the company is now no longer planning to drill.

“If there are any blocks that fall under the government’s new initiatives to protect North Sea investment, we should set the clock ticking and get them out of Shell’s hands as soon as possible.” The DTI strengthened its powers over North Sea oil companies earlier this year.

The new system means any block undrilled for two years has to be handed back to government. The process was designed to ensure older North Sea blocks would be developed to their full potential by speeding up the programme of UK asset sales that the majors began several years ago.

Drilling rigs are in short supply due to worldwide demand, and the cost of hiring them has soared. Industry sources said in June they were paying around $150,000 a day for a rig, but fees have since soared to between $225,000 and $250,000. UKOOA said it expected more exploration projects to be abandoned in future months.

In 2002 – the last time Brown imposed a tax rise on the North Sea – the number of new exploration wells slumped. In 2001, oil and gas companies drilled 60 developments, but by 2003 this had fallen to 45.

In addition to corporation tax of 20%, oil and gas companies also pay an extra 30% in Petroleum Revenue Tax. It means half of all North Sea-generated revenues end up in the Treasury’s coffers.