North Sea companies welcome tax breaks

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North Sea oil and gas companies have welcomed new tax breaks in the Budget designed to stimulate investment, which has been battered by falling oil prices and a shortage of finance.

However, some companies in the sector warned that the measures were likely to have only a marginal effect, given the severity of the squeeze on the industry, and have urged the government to go further in future.

The Treasury revealed that it expected North Sea tax revenues to fall by almost half – from £12.9bn last year to £6.9bn this year.

It has also become gloomier about the long-term prospects for the region, forecasting that for the foreseeable future, tax revenues will be £1.5bn-£2bn a year lower than previously expected, because of a decline in investment in the industry.

In spite of this steep decline in tax payments, however, the oil and gas industry is still expected to be a vital contributor to the public finances, providing more than a quarter of all corporation tax revenues last year, and about a fifth this year.

Oil and Gas UK, the industry association, has warned that investment in the North Sea could halve from about £5bn last year to £2.5bn in 2010, as the fall in oil and gas prices makes some investment projects uneconomic, and many smaller companies find themselves unable to raise finance.

Malcolm Webb, Oil and Gas UK’s chief executive, described the Budget measures as “a step in the right direction”, adding: “The government has recognised that reducing the tax burden on UKCS [UK continental shelf] production will enhance the recovery of this nation’s indigenous oil and gas reserves and increase the overall economic benefit to the UK. This can only help to improve the outlook for the energy security of this country.”

The most important of the measures is the “field allowance”, which gives a tax reduction for companies developing new fields that are smaller – up to about 20m barrels of oil equivalent – or more technically challenging, with high pressures and temperatures or heavy oil that will not flow easily.

Steve Jenkins, chairman of the Oil & Gas Independents’ Association, said: “The government is not giving away a tax break today. They’re incentivising people sitting on assets to develop them.”

Mike Wagstaff, chief executive of Venture Production, a company focused on oil and gas development in the North Sea, particularly of smaller fields, said the new tax allowance would help his business.

“It improves the risk/reward ratio,” Mr Wagstaff said. “At the margin, it will give you the comfort to make a positive investment decision.”

Call to shake-up water industry

A radical shake-up of the water industry could be set in motion if government accepts recommendations to overhaul the distribution, regulation and consumption of water in the UK, writes William MacNamara.

The government-commissioned Cave Report targets the UK’s 21 regional water monopolies, claiming they will meet the demands of the population only if competition is introduced.

The report calls for businesses to be able to choose among water and wastewater retailers, instead of relying on the local incumbent with its Office of Water-sanctioned prices. “These measures will allow many non-household customers to choose the combination of service and price they prefer,” the report says.

In addition, the conditions for mergers between companies should be relaxed, the report advocates, to encourage consolidation among providers. While mergers are, in effect, discouraged between water companies with annual revenues above £10m, that threshold should be raised to £70m.

“The introduction of market forces could drive companies to share water resources, limiting the need for new assets, keeping bills down and reducing any impacts on the environment,” it adds.

The report, lead by Prof Martin Cave, puts the price tag of its recommendations at £2.5bn.

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