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The Scotsman: Leader: North Sea tax begins to bite

Leader, The Scotsman – United Kingdom
Published: Jun 15, 2007

WITH the rise in oil prices, Aberdeen has been booming. Yet the oil business is a risky and volatile one, as is shown yet again by the surprise decision by Shell not only to sell off some of its mature oilfields in the British sector, but to cancel plans for a new GBP 25 million HQ in Aberdeen itself. What does this portend?

Shell is selling a number of its older North Sea oilfields, which are expensive to run, in order to concentrate development activities elsewhere. This move does not mean oil output from the North Sea will fall. These fields will be sold to smaller companies – some of them Scottish – who are experts in extracting the last drop of oil from mature wells. In fact, the outlook for Scottish oil companies and supply firms has never been healthier.

However, the outlook for the giant energy companies – the firms who have the cash to prospect for new oil and gas, as well as fund research in low-carbon technology – is less certain. Not only has Shell cancelled the planned expansion of its Aberdeen HQ but, last month, BP announced it was abandoning plans to build a prototype carbon capture and storage plant at Peterhead, after the Department of Trade and Industry yet again delayed a decision on helping to fund the project.

By global standards, the North Sea is an expensive place to prospect for fossil fuel or to extract it. Unfortunately, this is not always appreciated by the Treasury. In December 2005, Gordon Brown increased the corporation tax on North Sea oil production, in an attempt to make his books balance. In levying a punitive 50 per cent corporation tax on North Sea oil and gas, the Chancellor risked chasing the major energy companies away from the British sector of the North Sea.

The reasons behind Shell’s abrupt rethink about its Aberdeen HQ are still unclear. But at the time of the Chancellor’s tax hike, The Scotsman and other commentators warned that it could dissuade big companies from expanding their North Sea operations or even lead to them being cut.

Of greater concern here is the cancelling of the plans for Shell’s HQ extension, because any signal that planned investment in Aberdeen is being scrapped could reflect negatively on the city’s prestigious place in the oil world.

It is up to the government to create an environment that maximises the life of our oil industry, not to grab and run. North Sea oil is too important to the British economy to become a political football between London and Edinburgh. Holyrood and Westminster have to start treating the North Sea as a priority.

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