Smaller North Sea producers suffer tax blow UPDATED

George Osborne, the UK chancellor, has just announced his tax measures for the next year, and the biggest surprise came with a cut to fuel duty, to be funded by extra charges on North Sea oil producers if the oil price remains over a certain price somewhere around $75 a barrel. The supplementary charge for such companies will now go from 20 per cent to 32 per cent.

So the North Sea’s big oil and gas producers must be suffering, right? Well, no.

For the big companies this means little – the North Sea is a declining asset, which will not mean much in the long term, and the £2bn raised altogether from this tax is nothing compared to their incomes (for comparison, Shell’s pre-tax net income last year was $35.3bn, about £21.7bn). That’s why their share price hasn’t budged in reaction.

The pain is being suffered by the smaller producers in the region – players like Premier Oil, whose shares slumped more than 3 per cent on the news. Deloitte’s oil and tax partner Roman Webber, is appalled on behalf of such companies:

These changes come at a time when the oil and gas industry is struggling to maintain investment and grant access to its North Sea infrastructure and suffering from reduced exploration and appraisal levels.

The North Sea tax regime has suffered from constant change over the past 10 years and this ongoing instability is likely to be detrimental to investment.

But these smaller companies might be able to defer some of the effect, by writing it off against tax losses from new exploration. Angelos Damaskos, chief executive of Sector Investment Managers says:

If this tax stays in place, they will have to pay it but the immediate impact might not be so traumatic.

The other loser, of course, is the environment – once again budgetary constraints have got in the way of the government’s pledge to be the “greenest ever”.

UPDATE – BarCap’s Lydia Rainforth has produced a note on which companies could suffer how much from this tax. It is not published on BarCap’s website, but here is the table she has come up with:

% of production Upstream as % of profitability Increase in UK tax rate Est’d impact on profitability
PMO 40 100 24% 9.6%
BG 24 65 24% 3.7%
TOT 9 90 24% 2%
RDS 6 82 24% 1.2%
ENI 6 83 24% 1.2%
BP 6 89 24% 1.2%
XOM 5 85 24% 1%
CVX 5 95 24% 1.1%
STL 0 91 24% 0.1%

But, it is worth noting that these estimates are maximum impact, and don’t take into account any tax offsetting which is likely to happen.

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