Risk & Economy » Tax » North Sea ‘drowning in tax’, claim analysts

ONLY “RADICAL ACTION” on tax policy will salvage viable oil production in the North Sea Basin, industry analysts have claimed.

Last year, UK offshore oil and gas spent £5.3bn more than it earned, while the cost of extraction per barrel reached a new high of £18.50, industry body Oil & Gas UK found.

The sector is heavily taxed, with extractive companies facing an effective rate of 60% following last year’s Autumn Statement – down 2%. However, the government raised taxes on oil and gas businesses 12% in 2011.

In January Oil & Gas UK called on the government to bring down taxes “as quickly as they were raised”.

“If you are so swift to put things up, you have to be swift at bringing them down too,” Oil & Gas UK economics director Mike Tholen said at the time.

The industry is struggling in the face of plummeting oil prices, rising costs and the decline in production, with spending on new oil field developments projected to drop as low as £9.5bn, a sharp fall on the £14.8bn in 2014.

“It is vital that present and future governments take decisive action and far-reaching action to arrest or reverse these trends, no matter what kind of administration we end up with come 7 May. Up to a third of North Sea oil fields are estimated to be loss-making on a cash basis, which means many of them, operated by smaller producers, are not paying tax to the government anyway,” Allianz Global Investors analyst Christ Wheaton wrote in a column for City AM.

“Without leniency from their bank lenders, they may not survive to pay tax in the future. Subsequently, if operators start failing, the early decommissioning of North Sea fields becomes a real risk, stranding millions of barrels of oil under the sea and denying the Treasury billions in tax revenue.”