George Osborne’s latest tax raid on the North Sea will add 10% to drilling costs, according to government papers seen by the Press and Journal and Energy Voice.
The chancellor is facing mounting pressure over his decision to slap an extra tax on rigs and flotels coming into the North Sea to carry out work – a practice known as bareboat chartering.
The Treasury says this will cost the sector in the region of £175million a year – but industry insiders say it could cost up to £1billion in total.
The UK is already in the midst of an “exploration crisis” and industry chiefs fear the new tax will drive rigs away at a time they are needed more than ever.
A Treasury briefing paper claims that the tax will not have a significant impact on the industry – despite saying the measure could increase the day rates by up to 10% on new contracts for drilling rigs and accommodation vessels.
Last night, industry body Oil and Gas UK said increasing costs were the last thing firms needed as they arrested the slump in exploration.
The group’s fiscal policy manager, Brian Percival, said: “While the UK Government’s endorsement of the Wood Review has signalled strong support for the industry, this has been tempered by the new tax changes in respect of drilling rigs and accommodation vessels.
“We feel this move to be counter-intuitive. During Oil and Gas UK’s consultation with HM Treasury, the industry supplied compelling evidence of the negative impact this measure could have on UK exploration, which is now at a worryingly low level.
“There’s no denying the industry is facing its biggest exploration challenge in 50 years, with only 15 exploration wells drilled in 2013 – a steep downward trend since 2008, when 44 exploration wells were drilled. In addition, costs are on the increase.
“Fiscal predictability also remains of the utmost importance. We therefore look forward to playing a constructive role in the chancellor’s welcome review of the North Sea fiscal regime.”
Last night, the Treasury stood by the bareboat measure, which will come into force on April 1 next year.
“The government has clearly demonstrated its commitment to the oil and gas industry, with field allowances and decommissioning relief certainty generating record levels of investment last year.
“However, the government is also committed to making sure all companies involved in exploiting the UK’s oil and gas resources pay their fair share of tax.
“The government does not accept that an unfair tax system, which allows some companies making significant operating profits in the UK to move up to 90% of these profits overseas, is necessary to get the most value from the North Sea.
“The measure announced at Budget will amend the rules so that more of the profits made by these companies in the UK are subject to UK tax.”
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