The proposals, made in last month's Budget, amount to the most sweeping tax changes affecting the sector in 18 years and have triggered a huge controversy in the industry.
A key proposal aims to abolish tax rules that currently allow companies to offset the costs of new exploration and development against profits of existing fields.
Many industry experts believe that the change will severely damage the future of Britain's North Sea industry. Their fears appeared to be confirmed yesterday by Treasury estimates which imply that, in the worst case, exploration and appraisal drilling could halve, costing 10,000 jobs. Treasury sources said that Michael Heseltine, President of the Board of Trade and ultimately responsible for Britain's oil industry, was briefed about the potential impact of the changes before the Budget. The changes received his and the energy minister, Tim Eggar's backing.
However, the Treasury estimates have come to light at a time when the Government is already reeling from heavy criticism over its coal policy. They could spark a new political storm over the oil sector, which has contributed about pounds 120bn to the Exchequer over the past two decades.
Under the Budget proposals, petroleum revenue tax on profits made from existing fields will be cut from 75 to 50 per cent. It will be abolished for new fields.
The Treasury believes that the tax cut will encourage additional investment in existing fields and provide greater rewards for companies that find big new reserves.
As a result, it is felt that the overall impact of the changes are likely to be much less than its worst case implies.
However, many oil companies argue that the withdrawal of exploration relief will sharply lower drilling activity, discouraging the development of new North Sea fields. The Chancellor's plans were described last week by Amerada Hess, the big US oil group, as 'driller killer'.
Others, such as British Petroleum, have welcomed the PRT cut as a boost to the recovery of oil from existing fields, in which they have an interest.Reuse content