UK Budget: Oil & gas showdown for UK chancellor

London – Industry group Oil & Gas UK is to meet UK chancellor George Osborne in a bid to limit the investment fallout from last week’s Budget, which included an increase in tax to a top rate of 81% on production from mature fields.

The tax move has already halted major projects in the UK sector: The Press & Journal reporting that the Budget has forced Valiant Petroleum to declare a near-£100million project no longer viable, and Statoil to hit the brakes on £3billion-plus plans to bring the Mariner field into production.

The top-level showdown was arranged during a 31 March meeting of PILOT – a UK government-industry forum – which included the secretary of state for energy, secretary of state for Scotland, economic secretary to the treasury and energy minister.

Malcolm Webb, Oil & Gas UK’s chief executive, said industry representatives had a “full and frank” hearing. The meeting, he said, covered concerns over the new measures in the Budget for gas fields, new field developments, decommissioning, mature fields, infrastructure and the supply chain.

The Government, said Webb, wishes to engage with the industry to investigate whether the negative impacts of the tax increase can be mitigated. It has also agreed to work with industry with a view to ending the instability of the UK oil and gas tax regime and the problems of uncertainty around decommissioning reliefs by Budget 2012.

“The industry also advised that in late April 2011, it would publish a survey outlining the impact the tax increase would have on its members’ current and future investment if left unchanged,” said Webb.

Oil & Gas UK has warned that the tax change could introduce ’shocks’ to long-term, capital-intensive energy projects.

“The UK oil and gas industry believes that the tax change announced in last week’s Budget is ill-informed and was constructed hurriedly and without proper thought  of the potential impacts on investment, production and hence energy supply and employment,” Webb, stated prior to the 31 March meeting.

“As a result of this new and totally unexpected tax rise, and as we forecast, we have already seen some significant developments being halted,” he added. “This further example of extreme fiscal instability for major energy projects in the UK has severely damaged investor confidence.

Previous process sector reactions and EEF Budget fact file:

Volker Beckers CEO of RWE npower:

“A key announcement in today’s Budget was on carbon price support, which is proposed to be introduced at a far higher level than was presented in HMT’s consultation document.

“Whilst a carbon price floor of £16/t does not sound a significant increase compared with current carbon prices (currently already £16/t for Dec 2013 delivery), Government are actually proposing a tax of £4.94/t on top of current prices rising potentially to £9.86 in 2015/16.

“The introduction in 2013 will not encourage investment in new low carbon generation which will not be commissioned until 2018, and yet will hasten the closure of current fossil fuel plant that is vital for security of supply.

“HMT calculate the impact on household bills to be around £6 per year in 2013 increasing to £17 per year in 2016.”

Malcolm Webb, Oil & Gas UK’s chief executive:

“The industry is shocked to now be hit by a tax increase that raises the tax rate to at least 62 per cent, with some of the most mature and therefore vulnerable fields now paying up to 81% … Many of our members will now be reappraising their investment decisions.

“The UK offshore industry currently accounts for a third of total industrial investment in this country.  This investment supports nearly half a million jobs, drives major technological advances and makes us a global leader in the export of oilfield goods and services. 

“Last year, 60% of the UK’s total energy requirements were met by oil and gas produced from our own reserves. This change in the tax regime will decrease investment, increase imports and drive UK jobs to other areas of the world.”

Steve Elliot, chief executive of the Chemical Industries Association:

“Whilst the extension of the Climate Change Levy (CCL) Agreements until 2023 - the mechanism by which our sector’s energy efficiency has improved by 35% - and the restoring of previous CCL relief levels for power has provided some certainty, the Carbon Price Support (CPS) is bad news …

The CPS, as structured leaves energy intensive businesses such as chemicals at the mercy of unilaterally high energy costs for the next decade. the failure to consider the cumulative costs of energy policies will reduce competitiveness and threaten British jobs.

“The improvements in corporation tax, credit availability, confirmation of the patent box and research and development tax credits are all long-standing pillars of CIA lobbying - as such, we welcome them all.

“The new science facilities, the country’s first Technology and Innovation Centre for high value manufacturing and the Enterprise Zones offer tangible support for chemical businesses throughout the UK.”

“The new focus on technical education, increased numbers of apprenticeships and the university technical colleges arising from the Wolf Report are good news for our industry and for investment in our country.”

Andreas Goss, chief executive, Siemens plc:

“Siemens welcomes the announcement in the Budget of a new Enterprise Zone in London - we backed the call for an Enterprise Zone centred in Newham, where we are building the Siemens global centre for urban sustainability. If the incentives are right, this new zone could ensure sustainable employment and a lasting economic legacy for London.”

“Siemens is very pleased that the Chancellor has announced an additional £2bn of capital funding (to a maximum of £3bn) for the Green Investment Bank and accelerated its implementation to 2012. This should put the Bank on a secure footing, giving access to finance that is essential to for the deployment of low carbon, infrastructure projects.”

Juergen Maier, managing director, Siemens Industry Sector:

“Siemens welcomes the steps taken in the 2011 Budget to encourage investment within the manufacturing sector in new plant and machinery. Doubling the limit on capital allowances from 4yrs to 8yrs should help UK manufacturers invest to increase productivity and encourages the growth needed for the UK to maintain a competitive position in the global market.”

Graham Meeks, director of the Combined Heat and Power Association:

 “It is most important that the Chancellor has recognised the impact that the Carbon Price Floor would have on businesses and organisations using combined heat and power.

 “The commitment to provide relief from the carbon price floor will be welcome news to many energy consumers that already use CHP to control their energy costs, and to those that are planning new investments. It will prove critical to maintaining the competitiveness of many businesses that face difficult market conditions.

 “We will continue to work closely with HM Treasury to ensure that effect of the tax relief, in combination with the removal of the existing Climate Change Levy exemption, will continue to provide the incentives necessary to develop and operate this important energy-saving technology.”

Nelson Ogunshakin OBE, ACE chief executive:

“The government’s attempt to safeguard jobs in the construction sector by providing subsidised loans for first-time buyers is also a welcome first step in re-invigorating the housing market.

“A larger-than-expected 2% cut in corporation tax rates plus an extension of the business rates holiday will be welcomed by business.

“However, there was little attention paid to reform of regulated infrastructure to achieve lasting efficiencies. There are also questions over whether the proposed carbon price floors are high enough to drive investment in low-carbon energy.

“There is scope for further structural reforms to tax, procurement, planning and regulatory regimes, as well as prioritising education spending to support technical skills. All of this will help to encourage economic growth and prepare the UK for a low-carbon future. Business is keen to work with the government to make this happen.”