Tax rise leads BP to cut North Sea investment

BP warned yesterday that it would cut its $1bn-a-year investment in the UK North Sea because of Gordon Brown's decision to increase taxes on oil company profits.

Lord Browne, the chief executive of BP, said the tax changes announced by the Chancellor in last month's Budget would increase the company's tax bill by $200m (£137m) this year and lift its effective rate of tax from 36 per cent to 38 per cent.

"What we will see is that over time the amount of investment in the North Sea will reduce," said Lord Browne. "We do not think the tax increase is a good thing and we would like it reversed."

The increase in corporation tax on North Sea profits from 30 per cent to 40 per cent announced by the Chancellor will raise an extra £600m a year from oil companies.

Under the umbrella of its trade body, the UK Offshore Operators Association, BP has written to the Chancellor and the Secretary of State for Trade and Industry Patricia Hewitt urging a re-think.

If the Government refuses to reverse the tax rise, then Lord Browne said it should go ahead immediately with the proposed scrapping of the levy on North Sea oil production, which the Chancellor said he was putting out to consultation.

"I don't see why there should be consultation on the issue of royalties when there was no consultation on tax," said Lord Browne.

He was speaking as BP reported a 57 per cent fall in first-quarter profits to $1.58bn. BP blamed the decline on lower oil prices, mild weather and the worst trading environment for oil refining and marketing in a decade. However, Lord Browne said the environment for its downstream operations was "definitely improving".

Lord Browne also said BP remained on course to increase production by 5.5 per cent this year despite undershooting its target in the first three months.

"Led by the US, the world economy is showing signs of demand recovery, crude prices have been rising since the end of February and the market now seems to be roughly in balance," he added.

The bullish outlook helped lift market sentiment and BP shares closed 16.5p, or 3 per cent, higher at 585.5p.

Exploration and production profits were down 53 per cent on the back of a $6 decline in the average price of a barrel while earnings in refining and marketing plummeted 71 per cent thanks mainly to a collapse in refining margins, notably in the US where they fell 60 per cent.

Lord Browne said the risk premium in current oil prices to reflect Middle East tensions was "overstated", adding that Opec members had more than enough spare capacity to withstand a shock such as a total halt to production by Iraq.