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Sunday Telegraph: Cut tax if crude price falls, say oil firms

By Sylvia Pfeifer (Filed: 12/03/2006)
Senior oil executives have in recent weeks warned the Government that investment in the North Sea could be at risk in the event that crude prices fall from their current near-record levels, unless ministers rethink their £2bn-a-year tax raid.
With Gordon Brown, the chancellor, set to unveil his Budget in 10 days' time, executives are understood to have told Treasury officials that they want the Government to indicate that the tax will be reversed if oil prices tumble.
The warnings come after Brown's decision in December to double supplementary corporation tax on North Sea oil profits from 10 per cent to 20 per cent. Oil producers were already paying the standard 30 per cent corporation tax, so the 20 per cent supplementary charge has meant that they are now paying a tax rate of 50 per cent.
Brown's move will bring in around £6.5bn more revenue for the Treasury over three years and was announced after a year during which crude prices averaged around $55 a barrel.
“The Government has said it wants to consult with the industry anyway but what is the point of consulting with us on the fiscal regime in general if you ignore completely any consultation on the corporation tax,” said one senior oil company executive.
There is believed to be some disagreement among oil companies as to whether a fixed mechanism – whereby the tax rate would fall in line with the oil price – would be best.
Critics of this idea are concerned that a permanent mechanism would provide not just a floor but also a ceiling; in other words that the tax rate would also rise in line with the oil price.
In recent weeks, Lord Browne, the chief executive of BP, and Jeroen van der Veer, his opposite number at Royal Dutch Shell, have both voiced concerns over the tax increase.
“I do hope the chancellor will look for ways to mitigate the effect of these tax changes on future investment in the North Sea, especially when oil prices go down,” van der Veer told an industry conference last month.
“And a powerful step to encourage that investment would be a commitment to reverse the tax increase if the oil price falls,” he added.
Last night a spokeswoman for the United Kingdom Offshore Operators Association, whose members include industry heavyweights such as BP, Shell, Exxon-Mobil and Chevron, said: “We have made formal representations to the Treasury. We don't believe the current tax rate is sustainable when the oil price tumbles.
“The UK oil and gas province will be severely challenged. . . This is a mature province that faces unique challenges.”
She added that since 1965 there have been only five years (1980, 1981, 1982, 2004 and 2005) during which the oil price averaged over $30 per barrel, “so we cannot assume that we will not see another price tumble”.
The Government has so far rejected the industry's pleas. It has insisted that the tax rise was justified and would not be altered during the present Parliament.
“I would be very surprised if they concede anything,” said another senior oil executive.

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