Ministers urged to curtail North Sea tax breaks

The Treasury took £2bn less in tax from oil companies last year than it would have if the Conservatives had not cut North Sea taxes, research shows.

The Treasury took £2bn less in tax from oil companies last year than it would have if the Conservatives had not cut North Sea taxes, research shows.

Gordon Brown should reopen a review of the petroleum tax regime he shelved in 1998, say Ian Rutledge and Philip Wright of the University of Sheffield. They calculate that the big oil companies' production in the North Sea is on average twice as profitable as their non-UK output.

The research, published in this month's Energy Economist Briefing, follows official figures earlier this week which showed that the profitability of UK oil companies, as measured by net rate of return on capital employed, had soared to 33 per cent in the second quarter of this year, up from 10 per cent early in 1999 and the highest for 15 years.

"The high profitability of UK Continental Shelf operations is a result of an exceptionally weak fiscal regime," the academics conclude. They argued that the Chancellor should go ahead with plans for a new tax regime, saying successive governments have lost much of the benefits of an oil windfall that should have accrued to the nation.

North Sea tax revenues were £2.6bn in 1999, compared to £4.6bn in 1987 when the oil price was similar. The Treasury estimates it will get an extra £2.4bn annually if the oil price remains at $30 a barrel rather than the $22 average last year.

Mr Brown announced a review of North Sea oil and gas taxation in his first Budget in July 1997, but in September 1998 said there would be no changes "at this stage". The researchers blame the then-low oil price, oil company lobbying and pressure from Scottish Nationalists for this "failure of nerve".

Petroleum Revenue Tax on new fields was abolished, and the rate on existing fields reduced substantially, by Norman Lamont in 1993. Oil producers had argued that taxation was deterring exploration for new reserves.