North Sea independents turn to the courts

FRESHFIELDS, a leading firm of City lawyers, has challenged the Government over controversial changes in North Sea oil taxes. The firm, which has been retained by a leading independent North Sea operator to advise on the changes, claims ministers are trying to wriggle out of contractual agreements with the industry in an effort to make the changes as tax-productive as possible.

North Sea exploration companies are vowing to fight the Government all the way to the courts. Many believe the changes amount to a retrospective tax on exploration activity. Ministers are dishonestly reinterpreting contractual North Sea drilling obligations to ensure the proposals produce as much net revenue as possible, the industry says.

The Government plans to abolish petroleum revenue tax relief on exploration and appraisal activity, except where companies have already entered into legally binding contracts to drill wells.

The industry believes the abolition of the relief, worth up to pounds 700m a year, will kill off nearly all remaining exploration activity in the North Sea at a cost of up to 30,000 jobs.

Oil independents believe the terms under which the Government originally granted them North Sea licences amount to a contractual obligation to carry out drilling activity and as a result should continue to attract tax relief.

According to Freshfields, there is clearly 'not only a contractual obligation to comply with the work programme but a risk that if it is not complied with the licence could be forfeited'.

The Treasury claims there is no legal requirement for oil companies to stick to exploration targets agreed with the DTI. Treasury ministers insist that these were only 'moral' commitments.

However, oil companies are firm in their belief that these were contractual agreements with the DTI. Most licences state that the licensee shall before the expiry of the initial term carry out a specified programme of prospecting and test drilling. If it does not, the Government can seek damages. The licence also provides for disputes to be settled by an arbitration process.

An industry source said: 'The Treasury obviously didn't realise we already had a contractual obligation to drill, agreed with one of its own departments. It is now just trying to wriggle off the hook. The effect is the same as a retrospective tax.'

C W Energy, an oil tax consultant, says: 'It is ironic that relief is not permitted automatically for the drilling of wells where the commitment to drill was a condition of a licence awarded by the DTI.'