Brown scraps plan to raise an extra pounds 3bn from oil tax

THE CHANCELLOR Gordon Brown last night suffered an embarrassing U-turn when he bowed to overwhelming pressure from the oil industry and dropped plans to raise up to pounds 3bn by tightening the North Sea tax regime.

The Government had intended to produce a consultation document for the oil and gas industries in the budget in March.

However, since then the oil price has continued to languish at 25-year lows, making it hard for the Government to persist with its arguments in favour of taxing an industry whose profits were already being badly squeezed.

"The Government has been monitoring changes in oil prices and I have concluded that at the current level of oil prices, it would not be right at this stage to proceed with reform of the regime," Mr Brown said.

The decision to shelve the review comes days before the closure of the 18th North Sea oil exploration licence round.

Industry sources said that oil exploration activity in the North Sea had all but dried up over the past 12 months, with the added uncertainty generated by the prospect of higher taxes compounding the effect of oil trading at the lowest levels for a generation.

Wood Mackenzie, the Edinburgh-based oil industry consultancy, estimated that if the government gone ahead with the introduction of a supplementary corporation tax of around 10 per cent and a reintroduction of the Petroleum Revenue Tax, the value of the assets held by oil companies in the North Sea would have been hit to the tune of pounds 3bn.

It was assumed in the industry that the Government was hoping to raise around pounds 1bn a year from the changes.

The Government was also becoming increasingly sensitive to the concerns in Scotland about the damage a tougher tax regime could do to employment in the industry. A total of 380,000 work in the UK oil industry, of which around a third are employed in Scotland.

Last week's 85 per cent slump in profits at Enterprise Oil, the UK independent, underscored the real pain being felt by the UK industry.

BP, Britain's largest integrated oil company and the one which stood to loose most from any changes in the North Sea tax regime, last night welcomed the move.

"We look forward to a period of stability in the UK's tax system which will help encourage investment in Britain's oil and gas industry in what is already a very difficult low price environment," said a spokesman.

BP recently shelved plans to develop the Clair field west of Shetland, while scores of other smaller projects were on hold.

James May, director general of the UK Offshore Oil Association, said: "There was no spare taxable capacity in the UK oil industry. It has to be the right decision," he said.

Mr Brown's decision to drop the scheme will remove one potential new source of revenue to fund government spending plans at a time when the outlook for tax revenue generally is looking less promising because of the forecast economic downturn.