Centrica blames tax for Morecambe Bay closure

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The Independent Online

The backlash against the Chancellor's decision to impose higher taxes on energy firms continued yesterday after Centrica decided not to recommence production at a major gas field, citing the heavy tax burden.

The owner of British Gas said it had completed the planned maintenance on its South Morecambe gas field, but that it now expected it to "operate on a more intermittent basis".

"Decisions on when to run the field are made on a commercial basis, taking into account market factors, operating costs and earnings," a Centrica spokesman said.

"We welcome the ongoing dialogue the Government is having with industry around the damaging impact the increased tax levels have on North Sea gas security and investment. However, the increase in supplementary corporation tax means the South field is now taxed at 81 per cent. At this level of tax, profitability of Morecambe South field can be marginal."

Underscoring the impact of the tax, Centrica said that it would continue to monitor the situation, but that "if it makes more economic sense to buy gas for our customers in the wholesale market, we would limit South field production."

The field is one of the country's largest, and can produce around nine million cubic metres of gas a day. That equates to around 6 per cent of the country's annual gas requirements, or up to 12 per cent of residential gas demand, according to the company. Centrica said higher taxes affected "the trigger levels at which point we shut production and purchase gas from other sources". In other words, production at the field would only make sense if gas prices rose by more than would have been necessary before the tax increase.

Crucially, while much of the debate over the higher supplementary charge has so far focused on the potential impact on future investment, the news on South Morecambe puts the focus on current production.

Last month, Centrica's share price touched a nine-month low after it warned investors that the higher taxes meant its earnings would grow at a "more modest rate" than previously anticipated. The company added that it "no longer" expected to "maintain the previously projected high levels of investment in the UK".

The wider industry has also warned about the impact of George Osborne's surprise decision to raise the supplementary charge against the backdrop of rising oil prices at the time of the Budget in March.

Giving evidence before Parliament's Energy and Climate Change Committee last month, Malcolm Webb, the chief executive of the industry body Oil & Gas UK, said the move was "very, very damaging for investor confidence". Speaking after the session, Mr Webb said: "Our primary message... was that this increasingly mature sector needs careful handling.

"It cannot take shocks such as the recent tax hit... these reduce the UK's relative attractiveness for investors, who will now look to rival opportunities overseas, where their capital will earn better returns."