The Scotsman: Shell in North Sea cuts after tax hike: "ENERGY giant Shell has slashed investment in its future North Sea drilling programmes by a third - less than two weeks after Chancellor Gordon Brown levied his controversial tax hike on fuel production.": Saturday 17 December 2005

ENERGY giant Shell has slashed investment in its future North Sea drilling programmes by a third - less than two weeks after Chancellor Gordon Brown levied his controversial tax hike on fuel production.

The company told The Scotsman that it had been planning to hire three drilling rigs at a cost of up to $250,000 a day each to cover its exploration projects over the next few years, but following the shock news of the added tax it had decided to cut that to two.

The move comes 11 days after the Chancellor sparked industry outrage by doubling corporation tax on North Sea producers from 10 to 20 per cent. Oil executives said international companies would be put off investing in the region due to uncertainty surrounding the tax regime - potentially leaving billions of barrels stranded under the ground.

The United Kingdom Offshore Operators' Association (UKOOA), the industry body which counts Shell among its members, said: "This bears out with what we have been saying. Companies are taking the steps that 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."

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."

Shell has interests in about 50 oil and gas platforms in the North Sea, and owns 21 outright. However, its exploration drilling has been cut back in recent years, leaving only three rigs currently in operation in the region. The three extra rigs were being booked for as yet undetermined future exploration projects, but the programme has now been hastily redrawn.

The industry currently supports more than 260,000 jobs, which critics of Mr Brown say is likely to decline gradually as a result of his raids.

Alex Salmond, the SNP leader, said: "Gordon Brown has a lot of explaining to do. Scotland is now paying a heavy price for the Chancellor's damaging £2 billion tax grab.

"He has sacrificed Scottish jobs to protect his own career ambitions. His tax grab on the North Sea was a crude attempt to hide the black hole he has created in Britain's finances, and the cost is now being felt here in Scotland."

David Mundell, the shadow Scottish Secretary, added: "On the day of Gordon Brown's pre-Budget report, he was warned of the possible dire consequences of his massive raid on our oil companies. This news proves that the worst fears were justified."

Drilling rigs are already in short supply due to world-wide demand, and the cost of hiring them has soared in recent months. Industry sources said that in June they were paying around $150,000 a day for a rig, but fees have soared to between $225,000 and $250,000.

UKOOA said it "expected more" examples of abandoned exploration projects to emerge from oil companies in future months, but added that it "would not speculate on how many before we have concrete details".

In 2002 - the last time Mr Brown imposed a tax hike 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.

On top of corporation tax of 20 per cent, oil and gas companies also pay an extra 30 per cent in Petroleum Revenue Tax [PRT]. It means half of all North Sea-generated revenues end up in the Treasury coffers.

Ironically, the downturn in investment that followed the 2002 tax levy resulted in lower tax revenues. The Chancellor raked in £5.4 billion from the North Sea in the financial year 2001-2, but only £4.9 billion in the following period.

However, not every company is looking at cutting back on investment.

Mike Wagstaff, chief executive of Aberdeen-based Venture Production, said: "All our projects are based on $25-a- barrel oil, so the tax change does not make them sub- economic."

The high oil price was the excuse given by Mr Brown for raising taxes, as he said the returns generated from North Sea oil had risen from 13 per cent to 40 per cent. The price of oil in New York dipped slightly last night to $59.50.

Graham Tran, from the union Amicus, was furious at Shell's latest decision. "If Shell is cutting back due to the increase in supplementary tax I'd say its behaviour was immature," he said. "It is based purely on greed. We are talking about a company that made over £6 billion profit in the first nine months of this year. There is no place in the North Sea for people like Shell."

Related topic

• North Sea Oil & Gas
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Last updated: 17-Dec-05 00:46 GMT