The growing dependence on foreign energy is having dire effects on Britain’s trade balance, now the worst of any major country in the industrial world.
The US Energy Department has issued a blistering indictment of the UK government’s tax raid on North Sea oil and gas revenues, warning that prohibitive costs threaten much of Britain’s energy industry.
Washington said the increase in Britain’s petroleum revenue tax to 81pc of profits for old fields and 62pc for newer ventures pushed through in 2011, along with other penalties and a cap on relief for winding down old fields, have choked North Sea exploration and paralysed a string of major projects.
“As a result of the significant increases in taxes, the UK Continental Shelf [UKCS] projects have become even less competitive,” said a report by the department’s research arm, the Energy Information Administration (EIA).
“Increases in operating costs coupled with higher taxes have resulted in decreased investment in both brownfields and new exploration. Even without the increased taxes, operating costs in the UKCS were prohibitively high, exacerbated by the high decommissioning costs of old facilities,” it added.
The EIA said the tax rises led to the suspension of Statoil’s Mariner and Chevron’s Bressay fields and other start-ups, and caused Centrica to launch a review of all of its exploration activities to calculate which projects were no longer viable.
The agency highlighted Britain’s worsening fortunes on the front of its webpage, noting that all key areas of energy are now in drastic decline. It said Britain become a net importer of refined petroleum products in 2013 for the first time in 30 years.
George Osborne, the Chancellor, imposed the tax rises to offset a popular cut in fuel duties for consumers, despite warnings that it would penalise investment and kill the goose that lays the golden egg. The sector typically furnishes a fifth of UK corporate tax revenues.
“Exploration wells fell by half in 2011 and that is not a coincidence. UK offshore is a very high-cost province and they need to lighten the tax burden,” said Malcolm Webb, head of Oil & Gas UK.
The higher taxes have not halted the collapse in revenues and are likely to make matters worse over time through the “Laffer Curve” effect, which posits that tax revenues will fall in absolute terms if the confiscation rate is pushed beyond a tipping point.
Data released by the UK Treasury last week showed that the tax take from oil and gas collapsed from £8.8bn in 2010-2011 to £4.7bn last year, the lowest share of GDP for a generation. The fall in revenues would make it even harder for Scotland’s Alex Salmond to cover his spending plans with North Sea revenues if the Scottish Nationalists win the referendum. The revenue slump occurred even though Brent crude prices have been above $100 a barrel, buoyed by supply disruptions in Iraq, Libya and parts of Africa.
Mr Osborne unveiled a fresh set of targeted concessions for certain fields and more relief for decommissioning in his last Budget, but the 81pc profit tax has not been repealed. It is unclear whether the latest relief goes far enough. Chevron says it may not go ahead with its $10bn Rosebank project off the Shetlands because of rising drilling costs.
The picture is complicated since investment in legacy development projects for existing fields – as opposed to new exploration – actually rose to a record £14bn last year. This had the effect of depressing Treasury revenues in the short term.
Yet the pattern is clear. A report on the North Sea’s future by former Wood Group chairman Sir Ian Wood said investment is likely to fall by half later this decade, and called for a complete overhaul of the tax and regulatory regime, “There is a clear consensus that exploration is at a critically low level and badly needs significant new initiatives,” he said.
The EIA said Britain became a net importer of crude oil in 2005 but remained in overall surplus due to exports of petroleum products, but even this turned negative last year. The growing dependence on foreign energy is having dire effects on Britain’s trade balance, now the worst of any major country in the industrial world.