Financial Times: Chancellor's tax rise on oil profits has instant impact on groups: “The big integrated companies, such as Royal Dutch Shell and BP, which rely on the North Sea for less of their revenue stream, will see earnings per share fall between 1 per cent and 3 per cent next year, Deutsche Bank analysts estimated.”: Wednesday 7 December 2005

By Carola Hoyos

Published: December 7 2005

Gordon Brown's decision to raise corporation tax on North Sea oil profits had an instant impact on the oil groups with analysts warning that some could take hits as big as 7 per cent on earnings per share.

BG, the British oil and gas group that relies on the UK for 32 per cent of its production, and Amerada Hess, of the US, could be the biggest losers following the increase in corporation tax from 40 per cent to 50 per cent, analysts said.

The big integrated companies, such as Royal Dutch Shell and BP, which rely on the North Sea for less of their revenue stream, will see earnings per share fall between 1 per cent and 3 per cent next year, Deutsche Bank analysts estimated. The calculations reinforce the chancellor's gamble in raising the tax take, with some companies warning they may take their money elsewhere, leaving oil fields undiscovered and reducing revenues. However, Mr Brown's decision arguably brings the UK in line with other countries and gives the Exchequer a more appropriate share of revenues.

Predictions over whether Mr Brown's move will pay off depends on whom you ask, and on factors such as the future oil price, the cost of operating in the North Sea and the level of promise the region's aging fields are still perceived to hold.

The past gives some indication of just how quickly such an increase can turn away investors. Indeed, most oil companies active in the North Sea had exploration prospects elsewhere and could relatively easily redirect the rigs that explored for oil, said Graham Kellas, analyst at Wood Mackenzie, the Edinburgh-based consulting group. Analysts see the US Gulf and Angola as two of the North Sea's greatest competitors.

Mr Brown's 10 percentage point tax increase of 2002 reduced exploration and development drilling, pushed capital investment down 13 per cent and halved the number of entrants into the North Sea.

But the past three years illustrate that a rise in oil prices can quickly reverse any damage done by new taxes. Today, investment, exploration and new field development have rebounded to levels not seen in 10 years.

Mr Brown knows he cannot rely on oil prices. Predicting the future of prices is a fools game, warns Lord Browne, chief executive of BP and one of the industry's most astute figures. Instead of counting on another rise in prices, Mr Brown justifies his new levy by pointing out the tax regime is less burdensome than that of many of its competitors.

But that comment is open to debate, with executives arguing that Mr Brown is not comparing like-for-like.

Oil executives concede the share of profits the government has demanded from them in the past has been relatively small compared with other countries.

However, the industry argues that this has been necessary because relatively few big discoveries have been made in the North Sea over the 15-20 years and the cost of operating there has increased.

In terms of taxes, the UK's system now lies somewhere near two of its closest competitors. Norway has higher taxes, but owns the less explored and, therefore, more promising parts of the North Sea. The US, which faces similar issues to the UK in the shallower waters of the Gulf of Mexico, has a similar tax and royalty burden. But the US boasts new, lucrative prospects in its deeper waters, an attraction Britain does not offer.

As for the immediate repercussions, analysts say changes in tax regimes highlight the advantages of size and scale. Whereas it is more difficult for the biggest of the majors to replace production with material finds, they are more able to withstand sudden changes in the investment climate in individual markets.

Shares, however, did not respond yesterday as drastically as might have been expected because the tax increase had been widely expected, analysts said.Additional reporting by Rebecca Bream

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