Oil tax changes 'will damage economy'

THE GOVERNMENT'S sweeping tax changes affecting the North Sea oil industry are likely to cause severe long-term damage to the economy, according to an authoritative report.

Wood Mackenzie, the stockbroker that specialises in North Sea oil, predicts that the Budget changes will have such a damaging effect on exploration that the short-term tax yield might even fall. It believes the changes will raise a mere pounds 115m extra revenue instead of the Treasury's estimated pounds 700m.

The most controversial element of the tax changes is the abolition of the relief that allows oil companies to offset exploration costs against profits made from producing fields. The Treasury has already admitted that the changes could lead to 10,000 job losses and halve drilling activity in the North Sea.

Although the Government plans to reduce petroleum revenue tax on profits of existing fields from 75 to 50 per cent - and abolish it altogether for new fields - WoodMac says the overall impact of the changes will be negative. 'The main beneficiaries are the large mature fields which (mostly) do not need any extra financial incentives,' it says. 'The majority of new fields being lined up for development are too small to pay PRT and thus gain nothing.

'In addition, for new fields the UK will have no fiscal means other than corporation tax to extract an appropriate economic rent for the nation from its oil and gas reserves. It would be better to have a system - even, paradoxically, for the oil companies - which extracted extra tax based on unusually high profitability.'

The broker's most damning conclusions concern the North Sea's attractions as an oil area. 'The future exploration and appraisal levels will be the major casualty of the tax changes along with the drilling contractors and service companies . . . Even the winners under the proposals may reduce UK drilling activity in order to focus on overseas opportunities.'