Choppy waters for oil and gas industry after Osborne's Budget

By Rob Davies for the Daily Mail
Updated: 18:10 EDT, 23 March 2011

The oil and gas industry fired a furious broadside at the Chancellor after he dropped a shock £2bn tax bomb on North Sea explorers in his second Budget.

In a measure aimed at funding tax breaks for motorists struggling with high fuel costs, George Osborne unveiled a 'fair fuel stabiliser', ratcheting up the levy on North Sea oil and gas production from 20pc to 32pc.

The higher rate will remain in place unless the price of Brent Crude  -  currently hovering around $115 per barrel  -  falls below $75, which economists do not expect to happen for a long time if at all.

'The North Sea oil tax regime was most recently changed in 2006, when the price of oil stood at $66. It is now almost double that amount,' the Chancellor said. 'That means the oil companies are making unexpected profits on oil prices that are far higher than those they based their investment decisions on,' he added.

But industry body Oil & Gas UK said the measure would drive jobs abroad and increase Britain's reliance on resource-rich countries for energy.

Chief executive Malcolm Webb said the industry was 'shocked' by the measure, which he said 'runs counter to the government's stated desire to promote growth, jobs and exports'.

'Importantly, it will also most likely increase this country's dependence on imported oil and gas and thus diminish its energy security,' he added.

He said the measures would mean an effective tax rate of at least 62pc for North Sea oil firms, with some older fields incurring a levy of up to 81pc.

Oil stocks were steady as the Chancellor stood up to present his Budget, but plunged immediately after he unveiled the surprise tax hike.

Centrica, which extracts gas from the North Sea, warned it would be forced to reconsider its investments there, due to the 'chilling impact' of Osborne's measures. Its shares fell 8.4p to 317.7p.

Fellow former British Gas division BG shed 30.5p to 1474.75p, while North Sea specialist EnQuest suffered the most, down 12.5pc as its stock lost 19.7p to close at 137.1p, the furthest faller on the FTSE 250.

It was followed down by fellow explorers including Premier Oil (79p to 1910.5p), Nautical Petroleum (44.5p to 399p), Xcite Energy (down 12p to 250p) and Valiant Petroleum (down 50p to 553p).

Those seven firms alone saw a combined £1.8bn wiped off their value in the space of an afternoon.

Analysts at Numis Securities pointed out that the measure would hit company valuations and could have a ' negative impact on the life of the North Sea and the associated service market'.

The fuel duty stabiliser all but wipes out oil-friendly measures introduced in 2009 by Labour's Chancellor Alistair Darling, which gave tax breaks for companies to extract hard-to-reach oil and gas reserves.

One analyst, who declined to be named, called the reversal a 'slap in the face' for small oil companies, many of which have based their plans on the environment created by Darling.

However, the news was welcomed by motoring organisations, because the extra revenues will be used to axe Labour's 1p rise in fuel duty and delay the 'fuel duty accelerator' that would have added 5p to the price of a litre of petrol.

And Angelos Damaskos, chief executive of investor Junior Oils Trust, said some firms would be able to delay the impact for years to come.

While small oil firms were hit hard in the markets, Britain's two majors, BP (up 6.65p to 470p) and Shell (up 20.5p to 2200.75p), shrugged off the impact, due to their relatively low exposure to the North Sea.

The extra levy on their North Sea assets will be a drop in the ocean compared to the extra revenues pouring in due to the higher oil price.

The price of Brent Crude has soared by some 35pc in the space of five months, driven upwards by ongoing political unrest in the Middle East.