FINANCIAL TIMES: Advancing payments may affect oil companies' cash flow: “While not entirely happy about another clever tax grab by the Treasury yesterday, oil companies put on a brave face over the decision to bring forward their tax payments on North Sea revenues.”: “Royal Dutch/Shell said: "We pay the same amount of tax, all it means is we pay it sooner." (ShellNews.net) 17 March 05

By James Boxell

Published: March 17 2005

While not entirely happy about another clever tax grab by the Treasury yesterday, oil companies put on a brave face over the decision to bring forward their tax payments on North Sea revenues.

The move equates to a £1.1bn windfall for the chancellor next year, but this is a tiny figure when compared with the record levels of cash flowing into the world's biggest oil companies.

Derek Leith, head of tax for the oil and gas industry at Ernst & Young, the professional services firm, said: "This change was opportune for the Treasury because of the high oil price, but the industry will be quite happy no other changes were made."

The UK Offshore Operators Association, the trade body for companies in the North Sea, said it was relaxed about the change.

BP, Britain's biggest company and the world's second-biggest listed oil group, alone generated net cash inflow from operations of $28.5bn (£14.8bn) last year as crude oil prices rose to more than $50 a barrel.

Prices have remained stubbornly above $50 this year because of surging demand from countries such as China and fears over oil consuming countries' increasing reliance on the Organisation of the Petroleum Exporting Countries.

Royal Dutch/Shell, the Anglo-Dutch oil group, and BP reported record yearly profits last month leading to calls from some politicians for a windfall tax on these "disgraceful profiteers". However, executives at both companies point out that only a proportion of their profits are made in the UK.

The Treasury has said it is not planning to impose a windfall tax on energy company profits, with higher oil prices already expected to lead to revenues for the Treasury of £6bn next year.

However, Mr Leith said concerns remained about whether the government might impose a more punitive North Sea tax after the forthcoming election.

The industry reacted in fury in 2002 when the Treasury raised the tax rate on North Sea revenues from 30 per cent to 40 per cent, saying the rise would stifle much-needed investment in a rapidly maturing province.

By contrast, one oil company said yesterday: "This isn't exactly what you mean by fiscal stability but it is certainly not a windfall tax."

Oil companies have threatened that any windfall tax could accelerate their departure from the North Sea, cutting off lucrative sources of revenue for the UK.

Companies said yesterday's change would affect only their cash flow.

Royal Dutch/Shell said: "We pay the same amount of tax, all it means is we pay it sooner."

BP said: "We've seen what is in the Budget statement and are not unduly concerned, but will need to look in greater detail to assess any impact."

Under previous Treasury guidelines, oil companies could pay their annual North Sea tax in four installments, with the last of those coming in the April of the following calendar year.

The new rules will force them to pay in three installments with final payment coming in January of the next year.

Julian Small, head of the oil and gas tax team at Deloitte, said the changes were another example of how the government treated the oil sector differently from other industries, which would not be forced to accelerate tax payments. "It's a stealth tax on the oil industry," said Mr Small.

He added: "It's quite clever in that it raises a one-off big benefit for the government, which does not have a huge financing cost for the companies. However, it does give them a cash flow disadvantage."

The justification for the change is that oil companies already pay tax monthly on fields that started producing before 1993. As the revenues from these fields have declined, the Treasury has argued that the tax from newer fields should be accelerated to make up for the shortfall.

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