Britain Taxes Big Oil in a Big Way with Surprise Tax

Britain slapped a new 10 percent tax on North Sea oil profits on Wednesday in a surprise grab for extra revenue from an industry making big profits. Britain, home to two of the world's three biggest oil companies, BP (BP.L) and Royal Dutch/Shell (RD.AS), has in recent years resisted the temptation to raise taxes on its aging offshore industry, despite high crude prices. But, in his annual Budget, Chancellor of the Exchequer (finance minister) Gordon Brown announced the tax, which would fund improvements in creaking public services, despite the opposition of Big Oil.

Brown said it would be partly offset in the short term by higher allowances on new investment, and in the longer term by the eventual abolition of royalty payments, a 12.5 percent tax that applies to fields approved for development before March 1982.

"North Sea oil is vital to Britain," Brown said. "My aim is to deliver a tax regime which promotes long-term investment while giving a fair return to the British people."

But the policy angered the industry, which successfully fought off calls to tighten the world's most favourable crude production tax regime in 2000 and 2001.

"The UK offshore oil and gas industry is surprised and concerned at the decision," a statement from the industry body UKOOA said, adding that the move might "undermine investor confidence in the long-term viability of the North Sea."

In the past, oil executives have argued that jobs will suffer in Britain's aging oilfields, whose dwindling reservoirs are costly to operate relative to other oil producing areas.

They were a group Brown decided he could not afford to upset this time after the fuel protests that brought Britain to a standstill last year.

The new tax on crude will help make up for revenues lost in a freeze on fuel duties at the pump, also announced in Brown's budget, for the second year in a row.

Brown was adamant that he would protect the long term interests of the industry.

"To support new investment, I will raise first-year capital allowances from 25 percent to 100 percent and, subject to consultation, we will set a date for abolishing, in its entirety, the royalty on North Sea oil," he said.

The net impact of the changes will be to raise an extra 100 million pounds ($144.4 million) in the year to end-March 2003, increasing to 450 million and 600 million pounds respectively in the following two years, the government said.

Christopher Sanger, a tax expert at Andersen Consulting, said royalty payments currently deliver about 500 million to 600 million pounds a year to the government through a 12.5 percent tax on fields developed before 1982, and thus would fully offset the 10 percent tax increase when they are abolished.

"It's about raising revenue now and giving it back later," he said. Analysts said the industry could take the strain.

"Britain has had the weakest fiscal regime on oil in the world, and this will bring us more into line with international standards," said Ian Rutledge, an energy economist at Sheffield University. Shares in BP and Royal Dutch/Shell, Europe's two most profitable companies, fell about 1 percent to 1.5 percent in a knee jerk reaction.

Both are big players in the North Sea, but as global giants derive only a fraction of their earnings from the region.

"Shell is surprised," a spokesman for the company said, adding that the changes to capital allowances and the abolition of royalties "are not expected to come close to offsetting the supplementary charge."

BP, whose Chief Executive John Browne was last year appointed to Britain's House of Lords, had no immediate comment.