Energy Industry: Brown imposes £2bn levy on oil companies

The worst fears of North Sea oil companies were realised yesterday, as the Chancellor announced a doubling of the supplementary rate of tax on their revenues from 10 to 20 per cent.

The increase, which is double that predicted by many analysts, is expected to cost the industry an extra £2bn a year in taxation. News of the rise sent shares in a handful of energy companies plummeting. Venture Production, a FTSE 250 energy company that derives all its revenues from the North Sea, saw its stock fall more than 7 per cent after the announcement was made. Tullow Oil, which also derives a significant amount of its profits from the North Sea, saw its shares fall 2 per cent.

Mike Wagstaff, the chief executive of Venture, said the move could be critical for the UK oil and gas industry, causing investment in the North Sea region to drop. "I think it is very short-sighted of the Government to treat the industry this way," he said.

The energy industry and business groups reacted angrily to the news, saying it could not have come at a worse time. Malcolm Webb, the chief executive of the UK Offshore Operators Association (UKOOA), which represents UK oil and gas companies, said: "I am staggered the Chancellor, who speaks of the need for stability and long-term investment, should take this action against UK oil and gas producers.

"It is almost beyond comprehension that the Government has failed to grasp the vulnerability of the industry's future in the UK. North Sea activity has recovered remarkably since 2002 when it was last hit by a punitive tax change. Investment, exploration and new field development in the North Sea are now reaching levels last seen around a decade ago.

"This tax will deter investment in new fields and make older fields less attractive for increased recovery. Moreover, the impact will be felt significantly by smaller oil and gas producers. Loss of investment will lead directly to the permanent loss of reserves and a swifter onset of decommissioning."

UKOOA said it estimates the increase in tax will cost the industry an additional £6.5bn over the next three years. It added the Treasury had already taken £11bn in tax from the industry this year. BP alone, which represents about 20 per cent of the UK oil industry, is expected to see an increase of about £400m a year in its tax bill.

Digby Jones, the director general of the CBI, said: "The doubling of the supplementary oil revenue charge ... could put at risk much needed development of our North Sea oil and gas reserves. We need to get as much out of the North Sea as possible, not deter investment there.

"The Government's approach makes little sense as part of an integrated energy policy and at a time when there is so much business concern about security of energy supplies."

The Chancellor also announced a string of measures to support producers and users of alternative forms of energy. They included plans to collaborate with Norway on a range of so-called "carbon capture and storage" technologies, that could help to reduce the UK's emissions of greenhouse gases. The Chancellor said he would also hand an extra £35m to the Carbon Trust, to provide loans for businesses to introduce energy-saving measures and provide more financiual support for development of clean coal technologies

The Government also said it would push ahead with plans to force transport fuel providers to ensure a percentage of their sales are from renewable sources by April 2008. It said it will also increase the financial incentives for the use of biofuels.

However, there was also some good news for motorists, as the Chancellor promised to freeze taxes on fuels until next year's Budget, expected in March.

Motorists welcomed the move with the RAC Foundation declaring the decision was "a big freeze that the motorist will welcome". But environmentalists expressed amazement the Chancellor had done little to tackle pollution from traffic.

Watchdog warns BP

Ofgem, the UK energy regulator, has stepped up efforts to ensure Britain has enough natural gas this winter, warning the likes of BP that it would use its powers to ensure that import terminals at the Isle of Grain storage facility were properly utilised.

BP and Sonatrach have exclusive rights to store imported Liquified Natural Gas (LNG) at the Isle of Grain facility. However, the facility has lain idle since early October as shipments are diverted to Spain and the US. Under a so-called "use it or lose it" agreement, the two companies are obliged to make any spare storage available to other energy operators.

BP and Sonatrach has said that they would now use their full capacity at the facility for the rest of this winter, and would also improve transparency around the facility's use.