UK Oil Production Tax to Increase by 32%

The supplementary charge for North Sea oil and gas will increase by 32% from midnight tonight, a move that could cost oil giants £2bn, according to the UK Government.

Speaking on Budget Day yesterday, Chancellor George Osborne said that UK oil and gas production is currently more profitable because prices are high, so “it is fair that companies should contribute more”.

But, according to strategy consultancy AT Kearney, the tax will have a negative impact on development, with either delays or cancellations of marginal projects.

In a statement, the firm’s partners Jim Pearce and Richard Forrest added, “For those with fewer options outside the North Sea the impact could be more severe. As we saw in Japan the market is global and has an immediate impact on gas prices in the UK, which is ultimately taken from the consumer. Overall, one has to ask if this tax is going to be beneficial for the UK. This may well prove to yield short-term gains but mid-term losses.”

Hannon Westwood director Jim Hannon also commented on the changes to taxation: “The effect of the Government’s changes in the North Sea will be costly for small emerging oil companies. We are already seeing their share prices tumble as the investment market downgrades the value of future new oil production.”

“We have about eight billion barrels in discoveries in new oil and gas, and much more in undrilled prospects, all capable of securing our UK energy supplies for years to come, and this latest move on tax take comes at a sensitive time when major capital investment is crucial.”

The Government said that if the oil price sustained a fall below $75, it would reintroduce the escalator and reduce the new oil tax in proportion.

Osborne also announced a 1p per litre cut in fuel duty in response to high oil prices.

He added that while he cannot stop oil companies putting up the price of fuel, he would be watching them “like a hawk” to make sure there was “no funny business”.