Populist tax on oil firms has backfired

 
Allister Heath
IF George Osborne is to be believed, Britain is open for business once again. Some senior executives clearly agree: Sir Martin Sorrell, WPP’s boss, wants to move his firm’s legal base back to Britain if all of the proposals in the Budget are voted through. But if you are an oil and gas company, or a bank, Britain is looking like an increasingly bleak place to be based. This should concern everybody: financial and energy firms are both very large payers of tax to the exchequer, and important employers. In these straightened times, any hollowing out of those two key sectors can only mean one thing: higher taxes on the rest of us and fewer jobs.

It was therefore bizarrely short-termist for Osborne to launch such a savage raid on North Sea energy firms in the Budget. The special additional tax on the sector was hiked from 20 to 32 per cent. All too predictably, several important firms are reconsidering whether it is worth the hassle developing new fields. First Norway’s Statoil halted investments in the Mariner and Bressay fields, which are worth up to $10bn. Yesterday, Valiant, a British firm, cancelled a project worth £93m, while Centrica is reviewing its options, as is Total, the French giant. Just like when Gordon Brown foolishly introduced a 10 per cent tax hike on oil firms in 2006, the North Sea will suffer and jobs will be lost. Already, many of the oil majors have been quietly selling their fields, reinvesting their capital in other, more promising parts of the world.

Of course, energy firms have made a fortune from the increase in the price of oil in recent years. It is equally true that conditions in many other countries are even more unstable – and not just in Libya. But some mature North Sea oil and gas fields, which pay petroleum revenue tax as well as corporation tax, will now face a marginal tax rate of 81 per cent. Others will pay 62 per cent tax. This is oppressive and reminiscent of the 1970s. Luring firms into making an investment in the belief that tax will be low, before tightening the screws once the spending has taken place, can only destroy a country’s credibility, and forces investors to impose a risk premium on all their dealings with that economy. Large oil firms need to invest in parts of the world with the highest return on capital and the least tax and regulatory uncertainty. It is not much of an advert for the UK when the only argument in our favour is that we are not as bad or unpredictable as various banana republics or dictatorships around the world.

Not only is the coalition artificially accelerating the North Sea’s natural decline, it is also cooling on nuclear energy in the aftermath of the Japanese tragedy. Combined with the UK’s woeful infrastructure, an energy crisis – perhaps in a decade or so – is looking ever more likely. Even more supplies will have to be imported from countries such as Russia, further endangering energy security. Energy companies are also key investors in skills: the coalition keeps saying it wants to help high tech manufacturing and science – and yet it is crippling an industry that does all these things.

It is not just oil firms. The US has its own problems, of course, but Mike Bloomberg, New York’s mayor, yesterday said that he would love Barclays to relocate to New York. As we cut off our nose to spite our face, others will happily be picking up the pieces.

allister.heath@cityam.com

Follow me on Twitter: @allisterheath