Financial Times: Oil and gas industry fears Brown's efforts to fuel his revenue: “Industry speculation that Gordon Brown, the chancellor, could raise taxes on oil and natural gas companies this autumn intensified this week after a 68 per cent increase in third-quarter profits for Shell and a 27 per cent rise for BP.”: Saturday 29 October 2005
By Christopher Adams
Published: October 29 2005
The future of North Sea oil and gas taxation, one of the biggest sources of business revenue for the Exchequer, can be expected to come under Treasury scrutiny in coming months after big rises in energy prices and a bumper year for producers.
Industry speculation that Gordon Brown, the chancellor, could raise taxes on oil and natural gas companies this autumn intensified this week after a 68 per cent increase in third-quarter profits for Shell and a 27 per cent rise for BP.
Returns on exploration and production are soaring on the back of crude oil prices at more than $60 a barrel, making the North Sea a potentially attractive target for the Treasury as it looks at how to shore up the public finances ahead of the next Whitehall spending round. Independent economists argue taxes are likely to have to rise if the chancellor is to continue meeting his fiscal rules.
There are signs that officials are having a hard look at the fiscal regime in the North Sea.
Mr Brown, conscious that his own chances of winning the next election, should he succeed Tony Blair as Labour leader, will rest on his decisions over the next couple of years, will be deeply reluctant to raise personal taxes should he need to find extra money for the government's spending priorities.
However, with consumers paying bigger utility bills and higher petrol prices, the profitable oil and gas industry may provide a less politically contentious source of extra revenue.
After imposing supplementary corporation tax on the industry in 2002, adding 10 percentage points to a 40 per cent tax rate and raising £1.5bn in extra annual revenue, the Treasury pledged not to make any further changes to the North Sea tax regime for the rest of the last parliament.
In the event, the chancellor took steps to accelerate payment of ring-fenced corporation tax in this year's Budget, boosting cashflow into the Treasury by £1bn for the year. This, it can be argued, was not a change in tax rates.
Since the May election, though, officials have been making clear that the promise not to change the tax regime no longer applies. On the face of it, offshore operators would be well advised to prepared for a possible review.
Chris Sanger, a former Treasury adviser, who works for Ernst&Young, warned yesterday that a rise in taxes this autumn was "almost inevitable". Lobbyists, it seems, are resigned to some kind of Treasury action.
The pre-Budget report will be closely watched. If Mr Brown wishes, it will give him an opportunity to set out early thinking on future taxation.
He has several options. The first, and most drastic, would be to levy a "windfall" tax on the industry, making a one-off raid on corporate profits.
Labour has done this before, tapping utilities' profits to pay for its New Deal employment programme after winning power in 1997. While this might go down well with some of its backbenchers, it would cause uproar in the industry and risk putting off the investors whom the government has been trying to attract to develop smaller and trickier oil and gas fields.
There are more modest options. The chancellor could make changes to petroleum revenue tax, which is levied on all fields that won development consent before 1993. The tax is also charged on pipeline tariffs, though the government introduced breaks during the last parliament aimed at encouraging investment in more difficult areas.
There are allowances, too, that make first-year capital expenditure on new projects tax deductible. With the last round of exploration licences attracting record interest, there is arguably less need for these.
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