Politicians come and go, but civil servants continue forever, especially Treasury ones. Therein lies the challenge faced by the North Sea oil and gas industry in responding to George Osborne’s £2billion a year Budget low blow.
We have now had more than a month of furious responses, dire warnings and thinly veiled threats. Drilling will decline. Some 40,000 jobs will be lost. Majors will pull out. Chevron, specifically, “will choose venues that have the right geological and fiscal terms”.
But is anyone in the Treasury listening, far less trembling in their elegant shoes? I doubt it. Because their response is so well practised.
“We have been here before – we have heard it all before – hold firm, minister, and the storm will pass,” they say.
And they will probably prevail. Danny Alexander, the chief hara-kiri practitioner of Scottish politics, has been particularly bullish in his defence of the rise in supplementary Corporation Tax from 20 to 32%.
“I certainly don’t apologise. I do understand the reaction but I don’t apologise for the decision. Not one bit,” he responded. Oil companies were making “very significant additional profits as a result of the high oil price”, Alexander argued, so why not share it around a little?
“A courageous stance, minister”, as Sir Humphrey might have said. And probably not a great vote winner in his own backyard. Certainly, his Liberal Democrat colleagues in the north-east who voted against the Budget measure don’t appear to think so.
But the problem for the industry is that the Treasury can indeed point to precedents. Twice within the past decade there have been unexpected tax increases affecting North Sea production. Each was met with exactly the same outcry as at present.
I was Energy Minister in 2002 when Gordon Brown announced a 10% increase in the rate of Corporation Tax, to 40%. It was a typical Treasury operation and certainly a very characteristic Brown one. Nobody in the DTI – including the Secretary of State – knew anything about it until a couple of hours before the Budget announcement.
We were then left to do the mopping up. I felt personally guilty about the perceived breach of faith because so much effort had gone into building relations through PILOT, the globally unique body which brought together government and industry in a shared effort to extend and prolong the life of the North Sea industry.
It was completely counter-cultural for some of the big players in the oil industry to engage in this kind of partnership working. And their scepticism seemed to be exonerated when this particular tax hike was sprung without warning.
Such niceties were of no interest to the Treasury. They needed money and they knew where to look for it – exactly as has happened now.
So George Osborne promised fiscal stability for the industry less than a year ago? The mandarins’ response would have been: “So what?” And Danny would have nodded in agreement.
Brown pulled the same trick in 2005 when Corporation Tax went up to 50%. The same cries of pain were heard. What is much more difficult to establish is whether any of them were followed through on, in terms of investment decisions, job losses and all round Doomsday. And that really is the crunch.
At the time of the 2005 increase, there were assertions that what happened three years earlier had reduced capital investment in the short term by 13%. But there was also the perception that this effect had largely been negated by the impact of rising oil prices. Same again now and the truth of the matter is as elusive as ever.
One thing is certain. Whatever reputation the UK ever had within the global oil industry for fiscal stability, it is dead and buried.
Three times within a decade does rather suggest a pattern, rather than a series of exceptions. Indeed, I guess that the perfidious nature of government – all governments – is firmly built into the assumptions of oil majors.
So it is not in any way to underestimate the significance of George Osborne’s latest tax increase to say that, in order to be credible where it matters, the industry responses have to be based more on reading the book and ensuring that ministers are familiar with the content, than on looking into the crystal ball in order to promise catastrophe.
As long as Treasury ministers can have scripts written for them that include words to the effect of “we have heard it all before and it didn’t happen”, then the more likely it is that the North Sea will continue to be seen as a soft touch for taxation, particularly at times of high oil prices.
How much hard chronicling has been done of the negative outcomes that actually flowed from the 2002 and 2005 tax increases?
Where is the evidence which demonstrates, on the basis of past experience, that screwing the oil companies in the North Sea is a counter-productive measure? If it exists in credible form, then surely it is long past time to pull it together more persuasively – and not just at moments of crisis.
Incidentally, the supposed rationale of the latest tax increases is to fund a 5p cut in the price of fuel at the pumps. I will believe that when I see it while confidently predicting that most of the 5p will soon get lost in increased margins before the fuel ever reaches the motorist.
Now retired from mainstream politics, Brian Wilson was a former UK Energy Minister, among other appointments, during the New Labour era
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