UK BUDGET Brown keeps North Sea taxes unchanged as revenues fall UPDATE

UK BUDGET Brown keeps North Sea taxes unchanged as revenues fall UPDATE

	Published : Wed, 21 Mar 2007 18:03 By : Agencies Print this Story

(Recasts with analyst, UKOOA reaction; detail of revenue shortfalls, more detail)

LONDON (AFX) - UK Chancellor Gordon Brown will leave the overall North Sea tax rate unchanged despite admitting North Sea oil tax revenues fell to 8 bln stg from 13 bln last year, ignoring the clamour of North Sea companies calling for a tax cut to help them cope with rising cost inflation.

However, the North Sea Fiscal Regime discussion paper, published alongside the Chancellor's budget today, concluded that the structure of the fiscal regime has 'no negative impact' on the level of exploration undertaken in the UK North Sea.

This is in stark contrast to concerns raised by industry body the UK Offshore Operators Association which published its own report in February that said production and investments are being undermined by cost and tax inflation.

'High costs combined with typically small opportunities and increased taxation are making it harder to attract investment into the UK Continental Shelf,' the UKOOA report said.

The government paper asserts that the main drivers of exploration are the current and projected future oil price and supply side constraints, 'and through these the risk the companies are willing to take to explore in certain geological areas'.

KBC Peel Hunt analyst Tony Alves agrees that it is not high taxes that are keeping companies from drilling exploration wells in the North Sea, but the very high costs, relatively low success rate and small quantities of oil found.

'If the tax rates were a little lower, this might decrease the threshold for which they would invest but it won't fundamentally change anything,' Alves said.

The Budget report today revealed that North Sea revenues for 2006-2007 are likely to be 1.3 bln stg below the previously forecast level because of a greater-than-expected decline in production -- 10 pct in 2006, rising capital and operating expenditure and a strengthening of the dollar-sterling exchange rate.

In reaction to the budget statement, the UKOOA accused the government of turning a blind eye to the needs of the UK's offshore oil and gas industry 'where production is being undermined by high costs and punitive tax.'

In particular, the association pointed to the fall in gas prices, to the equivalent of 20 usd per barrel, while the average cost of new developments is running at 25 usd per barrel.

Malcolm Webb, UKOOA's chief executive said: 'With cash flows from UK gas fields now under severe pressure and the average cost of new developments running at 25 usd per barrel, doing nothing is simply not good enough. The Treasury needs to wake up to current realities.'

In addition to keeping North Sea tax rates unchanged, corporation tax cuts of 2 pct announced in the budget will not apply to North Sea operators.

Derek Leith, Head of Oil & Gas Tax, Ernst & Young, said: 'the upstream North Sea sector has lost out with upstream corporation tax remaining at 30 pct -- in addition supplementary charges at 20 pct remains in place.'

'In light of Brown eying up his move next door, he has also decided to keep his options open on Petroleum Revenue Tax (PRT) and decommissioning costs, by announcing he welcomes the opportunity to discuss the issue with industry further.'

The North Sea Fiscal regime paper is intended to form the basis for further discussion on reform options for the UK upstream oil and gas sector and the next stage will last until September 2007.

kathy.sandler@thomson.com

ks/tc

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