Tax hikes put hundreds of oil and gas projects at risk

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Posted by APM on 31st May 2011

The surprise government tax hike on oil and gas revenue has rendered hundreds of potential oil and gas projects ‘uneconomic’, according to a university study.

Following news of energy giant Centrica’s plans to extend the shut down of its gas facility at Morcambe Bay – responsible for six per cent of the UK’s annual gas requirements – the study by Aberdeen University lays bay the economic effects of tax increases over the next 30 years.

In all 350 undeveloped North Sea sites could be placed at risk, plus ‘very many potential incremental projects’, says the study.

The question mark now hanging over future production is a direct result of changes in the Budget earlier in the year, when Chancellor George Osborne announced an increase in supplementary corporation tax to offset the soaring cost of petrol for motorists.

Rates were increased from 75 per cent to 81 per cent on older, mature fields subject to petroleum revenue tax (PRT), and from 50 per cent to 62 per cent on fields not subject PRT.

Two of Centrica’s Morecambe fields – Rivers and Morecambe Bay North – are currently closed for a month's planned maintenance and will shortly be back on stream. But the older South Morecambe field, also due to be closed for planned works this month, could stay shut indefinitely as higher taxes raise the trigger point at which it becomes viable.

Alan Mclaughlin, head of Centrica’s media relations, said: “We can’t tell you that date at the moment because the trigger price, at which point we turn the asset on, has now changed because of the changes to the tax regime."

“We will make an economically rational decision at the end of that period as to whether we turn it on straight away or whether it’s better value to buy in the market and keep that gas in the ground.

The reduction in industry net cash flow is also likely to impact on medium and small enterprises, which rely on external finance to fund exploration and development projects.

Speaking at a Commons’ Energy Select Committee, Oil & Gas UK chief executive, Malcolm Webb said the measures would reduce the UK's relative attractiveness for investors, adding that “every £1 billion invested by our industry supports around 15,000 jobs”.

 

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