Fears for North Sea oil and gas after UK tax hit

Officials representing the UK's oil and gas industry will this week attempt to persuade the biggest multinationals against pulling investments from the North Sea in the wake of the Government's recent tax rise.

This comes as British Gas-owner Centrica said it might shut down Britain's biggest gas field after the rise in taxation. This week, 65,000 members of the oil and gas industry will meet at the OTC Conference in Houston with the £2bn UK tax rise likely to be high on the agenda.

Bob Ruddiman, head of energy at law firm McGrigors, said: "We have already seen a number of high-profile multinationals put off projects in the North Sea as a result of this unexpected tax hit, and there are several others who are doing so quietly."

The highest profile move so far has been from Norway's Statoil, which has shelved projects worth $10bn (£6bn) in the region. Royal Dutch Shell has also revealed that some of its smaller projects may be affected. Experts believe the UK could face a tough job persuading more companies not to pull out.

It emerged yesterday that Centrica was set to close production at Morecambe Bay for maintenance, but was considering not reopening the field because the profitability was now so marginal. Overall, Mr Ruddiman said, "The manner in which the tax regime here in the UK has been chopped and changed, without warning or consultation, is a major concern for investors – and a source of frustration and embarrassment for those of us who try to encourage investment in the UK."

George Osborne announced plans in the Budget in March to raise the supplementary charge on oil and gas production in the North Sea from 20 per cent to 30 per cent. The rise, which came into force the same month, was introduced to pay for a cut in fuel duty.

The Chevron chief executive, John Watson, has criticised the tax rise, saying the move made the UK "one of the more unstable investment climates for our business". He also complained that the increase, the third in 10 years, was done without consulting the energy sector.

But, Deputy Prime Minister Nick Clegg was unrepentant this week and said there had been no point consulting with the industry because it was hardly likely to agree a tax rise.

Mr Ruddiman added: "I'm still not sure the Government truly comprehends the damage this tax change has done to the reputation of UK oil and gas internationally."

Next week, representatives of the UK's North Sea oil and gas industry will also face Parliament to try to head off the tax rise.

The Energy Secretary, Chris Huhne, and delegates from the trade bodies Oil & Gas UK and the Oil and Gas Independents' Association will give evidence to the Energy and Climate Change Select Committee on how the "windfall tax" will hit energy production in the North Sea.

Mr Ruddiman said there was a growing rift between the Government and the oil and gas industry. "It's possible that we could see some fireworks this week as lobbyists seek to ratchet up pressure on DECC and the Treasury," he said. "There is no doubt that there will be many who see this as a last stand in attempts to curb this tax."