View from City Road: 'Driller killer' Lamont makes odd oil change

The Chancellor has been cavalier with his changes to the North Sea oil tax regime. Not only did he fail to consult the industry, but his reforms will aggravate one of the key problems of the British economy, the weakened state of the balance of payments. They may also damage the long-term future of the British oil industry.

Under the Budget proposals, the petroleum revenue tax rate on existing fields drops from 75 per cent to 50 per cent. Since oil companies pay corporation tax too, this cuts the tax rate on extra earnings from existing fields from 83 per cent to 67 per cent. So far, so good. The change will encourage operators to wring every last drop out of existing fields, helping to boost output over the next few years.

The problems may arise in the late Nineties and beyond, as even the Treasury admits. The Chancellor made two other important changes. First, he abolished PRT on all future fields, reducing the marginal tax rate to the standard corporation tax rate of 33 per cent. Because oil fields have such long lead times, this concession is less significant than it looks. More crucially, Mr Lamont also stopped oil companies from putting the costs of exploration and appraisal work against their North Sea profits. By sharply increasing the cost of exploration, he has earned the nickname 'driller killer'.

This one change could have a far worse impact on the British economy than, say, the coal industry's decline. For more than decade, the industry has accounted for about a quarter of British total manufacturing investment with an average capital expenditure of about pounds 5bn a year. Its importance to the Exchequer has been even more critical. Well over pounds 60bn has poured into the State's coffers in the past 15 years by tapping the area. The build-up of production between now and 1996 could fill nearly pounds 5bn of last year's pounds 12bn hole in the balance of payments.

Coming on top of the uncertainty caused by the Government's energy review, the tax changes have raised a serious question mark about one of Britain's most attractive features as an oil province: the stable fiscal regime. The E&A relief offset the high costs and risks of the North Sea, and locked profits back into development. British oil profits will now be footloose, and may alight anywhere from Brunei to Bogota.

Total E&A work has already halved from its 1990 peak and could drop by a similar proportion in the short term. Thousands of jobs in the oil services industry are at risk.

The Government's case is that the PRT regime itself cost the taxpayer pounds 200m a year in 1991/2. The Treasury now expects to raise a further pounds 300m in 1994/5 and pounds 400m in 1995/6. But this is the sort of short-term arithmetic that previous Chancellors have rightly avoided, bequeathing Mr Lamont a far higher level of output (and ultimately tax revenue) than might otherwise have occurred.

As the Finance Bill wends its way through the House, Mr Lamont should spare a thought for his successors and reintroduce some relief for North Sea exploration.

(Graph omitted)