Osborne accused of destabilising oil industry after new tax raid plans revealed

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  By Martin Kelly
 
Anger is growing after it emerged UK Chancellor George Osborne is planning to hit the North Sea oil and gas sector with a fresh one billion pound tax hike.
 
According to the Press and Journal newspaper, the Tory Chancellor is set to introduce a tax hike on vessels and rigs in a move which industry chiefs have warned could destabilise the offshore sector, hitting investment and jobs.

The newspaper has revealed detailed communications between representatives of the UK Treasury and industry bodies Oil and Gas UK and the International Association of Drilling Contractors (IADC) which show the extent of the anger at the proposals and which blow apart claims by the Westminster Government that it can guarantee stability within the sector.

In a speech to parliament on December 5th last year, George Osborne stated he would “end the abuse of …offshore oil and gas contracting”.

Mr Osborne confirmed the plan in his Autumn Statement and explained the UK government would cap the amount deductible for intra-group leasing payments (bareboat chartering) for large offshore oil and gas assets, and introduce a new ring fence to protect the resulting revenue.  The Chancellor pledged to consult with the industry on the proposal.

However an IADC briefing written by Alan McRae, the head of taxation business advisory group PWC has slammed the move, and accused Mr Osborne of breaking his pledge to introduce fiscal stability: “Government policy promises fiscal stability and a considered process for changing tax policy. That has simply not happened.” he said.

Commenting on the bareboat plan, Mr McRae warned: “Double taxation could happen as a result of the UK and the asset owner’s home country both wanting to tax the profits from asset ownership.”

Mr McCrae also described the ring fence proposal as a “national embarrassment” after, he said, companies had been “lured to the UK” by the Chancellor’s promise of an “open for business” agenda.

The newspaper also highlighted a letter from Head of Oil and Gas UK, Malcolm Webb to the Treasury, in which the Chief Executive says “we strongly urge this proposed measure, announced in the recent autumn Statement, be withdrawn due to the serious adverse impact it will have on investor confidence.”

Last week, Mr Webb said that people were still “scarred” by the Treasury’s £10bn oil and gas tax grab in the 2011 budget.

In his annual report on the health of the sector, Mr Webb said: “Exploration slumped in 2011 and has yet to recover.”

Describing the UK’s fiscal regime as “overly complex, burdensome and uncompetitive” Mr Webb called for “the urgent implementation of a new and more dynamic approach to regulation and taxation,”.

Now the SNP has joined the senior oil industry figures in condemning what it called “another ill thought-out tax” on the industry, which was described as ‘tax piracy’ in the Press and Journal.  Maureen Watt MSP said that the Treasury’s bareboat charter taxation plan flies in the face of promises made by David Cameron just last week of fiscal stability for the oil and gas industry.

Commenting, Ms Watt, MSP for Aberdeen South and North Kincardine, said:

“The last thing our oil sector needs is yet another ill-thought out tax bombshell – it’s no wonder industry leaders are up in arms.

“These industry concerns come less than a week after the UK Cabinet flew into Aberdeen to promise fiscal stability for Scotland’s North Sea industry. It is notable that the Prime Minister didn’t mention this during his visit – even though he must have been aware of industry views.

“In just ten years there have been sixteen substantive changes to the fiscal regime in the North Sea – no industry can possibly operate at its best when faced with such challenges.

“These warnings come as we learn that the value of Norway’s oil fund has soared past the £500bn mark – serving as a stark reminder of how successive Westminster governments have squandered Scotland’s fantastic natural resources.”

Similar concerns over the UK’s fiscal regime were also voiced on Friday by James Edens – Managing Director of CNR international – who said:

“Ten years ago we invested 10% of our corporate capital in the UK basin, today it is 2%. We still think we are a significant player and a significant interest in investing here.  But the fiscal environment does not compete on a worldwide stage.”

He went on to say, “I have to stress that the opportunities here are there for the taking. It’s a mature basin and the price is robust. But it is now the only mature basin in the world that is not in a growth projection today. So I have to say that we are not getting it right here, and I have to say that it is the fiscal attractiveness which is causing that.”

The challenges faced by Scotland’s oil and gas industry are in stark contrast to near neighbour Norway which last week saw its oil fund reach an all time high, soaring to over £500bn.

The MSP added: “In contrast to the approach taken by Westminster, the Scottish Government is clear on the need for closer co-ordination and co-operation between the industry and relevant bodies.

“With independence Scotland will have the fiscal powers to support the industry ensuring it is no longer subject  to sudden and unexpected tax hikes by the UK Government, and will ensure the wealth from Scotland’s oil will no longer be squandered, but will benefit future generations through the establishment of an oil fund.”