Tax burden on oil explorers will cost Treasury billions

OIL worth tens of billions of pounds to the Treasury will remain trapped beneath the North Sea unless George Osborne eases the tax burden on exploration firms, industry figures have warned.

North Sea production fell by 18pc last year, the steepest drop in the history of Britain’s oilfields, while half as many exploration wells were drilled as in 2010.

The unexpectedly sharp decline shaved £2.3bn off the Treasury’s expected oil income, outweighing the £2bna-year industry levy that the chancellor announced in last year’s Budget.

Industry body Oil & Gas UK said part of the decline was down to companies shutting off production as it became uneconomical to keep the pumps on. And it warned that the Treasury’s already sparse coffers would miss out on ‘tens of billions’ unless Osborne introduces measures in his Budget next month to ease the burden on oil explorers.

It said an extension of allowances on new oilfields and greater certainty on tax breaks for decommissioning ageing assets could unlock £20bn of investment. That would allow firms to extract an extra 3bn barrels, providing badly needed revenue for the Exchequer.

Peter Buchanan, chief executive of Valiant Petroleum and chairman of Brindex, which represents oil explorers, said: ‘The future of the North Sea, which supplies over half of UK’S consumption, depends in part on independent oil and gas companies which exploit smaller marginal fields.’

Faroe Petroleum boss Graham Stewart said the tax environment risked accelerating decline of the North Sea. ‘It appears the Treasury is quite happy to overrule what would be in the long-term interests of the industry just to find some cash quickly,’ he said.

Osborne launched a five-year £10bn tax grab in the 2011 Budget to pay for a freeze in fuel duty. Despite the effort to ease the burden on motorists, Britain remains the fuel tax capital of Europe, with 60pc of the cost of unleaded petrol going in duties and VAT.

Companies invested some £8.5bn in the North Sea last year, rising to £11.5bn in 2012. But Oil & Gas UK pointed out that most of the investment is from large projects commissioned before the tax grab.

Separately, BP (down 2.4p at 499.3p) has agreed to sell its interest in gas production assets in Kansas for £760m as it continues with asset sales to help fund its costs from the Gulf of Mexico oil spill.