29 Mar 2011

Crude awakening for Osborne’s “refuelling” of the economy

So another headache for the Chancellor. Several oil tankers full of oil and gas executives parked up outside the Treasury waiting to complain about the £2bn tax hit to fund the modest decrease in petrol duty.

Whilst we were told that the industry was washing around with so much superprofit from high oil prices that this tax raid would be basically unnoticed, it appears they have had what you might call a crude awakening.

Statoil, the Norwegian oil giant, has put two oil developments near Shetland on hold while they consider the impact of the Chancellor’s new tax. This is serious. £6.6bn of investment has been paused, and planned award of design and engineering contracts have stalled. Its language was pretty harsh. The reason was that although companies are making superprofits, individual projects are ranked on industry spreadsheets according to the marginality of their return. At the margin, this tax rise will push expensive/difficult to extract oil back under the line where they are sensible uses of a firm’s capital.

The Chancellor will take comfort from the fact that production was not due to start until 2016 anyway, so it was hardly likely to impact on oil or petrol prices. But it may be a different matter for jobs.

But it isn’t just oil. Gas compaies are livid (The Times had a good splash on this on Saturday) about being caught in this tax net. The rationale about high oil prices and petrol prices has got nothing to do with gas production at all. As one told me: “you can see the logic train from oil to petrol”. Yet it is worse than that. The strike price for enacting the fuel stabiliser is planned to be $75 per barrel of oil For about three years the oil and gas prices have been linked thanks to the influence of LNG shipments to Asia, which are priced against oil. But recently this link has broken down. The gas price is much lower than oil, and did not follow it up. Gas and oil prices have decoupled.

Yet the same marginality argument will be applied for gas fields. And the pass through to consumer bills may be more direct. So you might end up with lower than expected petrol prices, only to see a rise in your domestic gas bill.

All this will be discussed by the industry with Economic Secretary Justine Greening. My sense is that they will not give way on the gas raid. But there might be some leeway on tax breaks known as “field allowances” for those marinal fields. How that is funded, I have no idea.

2 reader comments

  1. sue_m says:

    Well with Osborne involved it’s not that surprising to see another FAIL.

  2. Saltaire Sam says:

    Once again, it looks as though this government has come up with a ‘good idea’ but not thought through the consequences.

    It’s happened so often – step into the spotlight Michael Gove – that there is definitely a trend developing here.

    But, to give him the beneift of the doubt, perhpas George did see this coming and decided it was the Green thing to do to slow down oil production. He was just too shy to tell us that was why he was doing it.

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