For BP, the proposals are like manna from heaven, a godsend for a company that is down on its uppers and in desperate need of a stroke of luck such as this one to help pull it out of the mire. If the company had drawn up the measures itself, it would have been hard pressed to come up with something more tailor-made to suit its needs. True, a number of other oil majors also benefit, but none on the same scale. To BP, the proposals are worth a minimum of pounds 150m a year.
For the North Sea oil exploration industry, however, the changes are damaging in the extreme (see pages 4 and 5). Even the Treasury admits the effect could be to halve the level of exploration activity at a cost of 10,000 jobs; the industry fears much worse.
Treasury ministers continue bravely to defend the measures; petroleum revenue tax (PRT) relief is a wasteful public subsidy that has long since outlived its proper purpose of helping with the discovery and development of new North Sea oil fields, they say. But in truth, none of them fully appreciated the impact of these measures when they put their names to them. To the smaller independents, it looks as if the Government deliberately set out to come up with a package to help BP, regardless of its effect elsewhere in the industry. That may seem a far-fetched view, but the detail of the proposals certainly seems to support it.
To understand the enormity of the anger felt, you have to go back in history a bit. The government first granted oil companies the ability to offset the cost of exploration and appraisal against PRT in 1983. Having been one of the strongest proponents of the concession, BP then proceeded to exploit it mercilessly to the point of virtual abuse. It sold off units in its big North Sea production fields to all and sundry, enabling others to obtain the revenue stream necessary to exploit the new tax shelter. The price charged for these units naturally reflected the tax breaks that went with them; BP made more out of this so- called 'PRT trading' than anyone else operating in the North Sea at that time. It also claimed the lion's share of the relief. Until a couple of years ago, around 30 per cent of relief went to BP - equal to a government subsidy for BP's North Sea exploration and appraisal programme of anything between pounds 50m and pounds 100m a year.
Of late, however, BP has drastically cut back on North Sea exploration, preferring instead to devote its resources to 'elephant hunting' in far- off foreign climes such as South America and the former Soviet Union. As a company, BP no longer needs exploration relief. Meanwhile, its portfolio of producing North Sea oil fields is a substantial beneficiary of the cut in PRT from 75 to 50 per cent. Furthermore, what few scraps the Government has been prepared to throw the exploration industry in the latest set of proposals seem specifically designed for the benefit of BP's activities and no one else. For instance, the Government says it is abolishing all PRT for new developments. About the only two current and likely developments that look big enough to have to pay PRT - Forth and the West of Shetlands find - are, surprise, surprise, BP fields. It gets worse. The proposals specify that exploration relief is dropped with immediate effect except where drilling contracts are already in place. Again, BP appears to have had uncanny powers of clairvoyance, for it has already contracted - in some cases, years in advance - for drilling on most of its remaining North Sea exploration programme.
To many in the industry, it looks as if BP must have gone into the Treasury and said something to the effect of: 'You are looking for revenue-earning wheezes. How about this one? You can make it look as if you are giving the industry a shot in the arm by reducing the rate of PRT for existing fields. That in turn will encourage investment in those fields to extend their lives. But all this exploration and appraisal that is costing you about pounds 700m a year is a complete waste of money. There's nothing major left to discover in the North Sea. All you are doing is keeping alive an industry whose purpose has long since vanished.' I exaggerate, of course, but it's easy to see why smaller independents might imagine that something along these lines actually took place. To them, it all looks too much like a BP stitch-up.Reuse content