Are North Sea taxes a greater investment risk than war in the Middle East?

North Sea oil rigThe tension between oil companies and George Osborne surrounding North Sea oil taxes has deepened.

But Statoil’s decision to put two projects on hold represents only one part of this clash. The other is from investors, who warn that it is not just current projects that are under threat, but long-term investment.

This argument was voiced on Tuesday by John Dodd, fund manager at Artemis, who is about to launch their energy fund. He told a room full of journalists:

The impact of the chancellor’s decision to levy taxes in the North Sea is much more than bombs or rockets going off in the Middle East.

It seems like an extraordinary claim. Would he as an investor really feel more comfortable investing in the Middle East, or for that matter, Nigeria or Russia, than the UK? Dodd stuck by his comments, saying, “People get used to the environments in which they operate.”

His argument is that there is always a risk when investing in countries with unstable regimes of licences being revoked or sudden demands for unpaid taxes. But he says the risk is avoidable by investing mainly in large players with good government connections (if not government-owned, which many of his picks are).

What rarely happens elsewhere, he said, is that the government makes a sudden move which takes the entire industry by surprise and leads to share price falls across the board.

But it has happened three times now in the North Sea in the last decade: first with the implementation of the supplementary tax in the first place, and then when it rose in 2005.

Valiant share price chartMr Osborne insists that the move will not jeopardise investment in the North Sea. He might be right: Dodd continues to hold stocks in Premier Oil, saying the company will cope with the tax rise. But by the time the fund launches, he may be unlikely still to hold Valiant: he warned the company’s stock may never recover from this tax shock.

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