‘North Sea Tax Hike Will Hit Pension Funds’

By Frank Urquhart. North Correspondent

LORD Browne of Madingley, the chief executive of oil giant BP, yesterday warned that already beleaguered company pension funds, as well as future offshore investment, will be hit by the government’s controversial tax hike on North Sea profits.

The stark warning came in a keynote address to an oil industry conference in Aberdeen, organised by Royal Bank of Scotland.

He told the audience, including Malcolm Wicks, the UK energy minister, that Chancellor Gordon Brown’s decision to double the supplementary tax on oil company profits to 20 per cent represented double jeopardy for Britain. And he called on the Treasury to issue a pledge that the tax rate will fall in line with future oil prices.

Browne told delegates it was worth remembering that profits, including windfall profits, funded just two things. He explained: “First, payments of dividends and returns to shareholders, in our case predominantly UK pensioners and those saving for their retirement. We estimate that GBP 1 in every GBP 6 of UK pension funds income, from companies in the FTSE index, comes from BP’s profits.

“Other companies in the oil and gas sector also make a material contribution to pension funds through their dividends. That means that if profits in this sector are subject to exceptional taxation, it is that flow of revenue – into the pension funds – which is reduced.

“The other use of profits is for investment, and there again an increased tax take will mean that the resources available for reinvestment in areas such as the North Sea are reduced.

“Fiscal stability has been an important element of the regime which has sustained the North Sea in recent years, and I hope that a sense of stability – of alignment between the legitimate interests of government and the interests of the industry – will be restored by clarification of the fact that windfall profits taxes will be removed immediately, if and when prices fall.”

Earlier, Browne had told delegates it was clear the North Sea was set to continue to provide a secure source of oil and gas supplies for years to come in a “complex and volatile world”. The latest forecasts predicted there were still up to 26 billion barrels of oil- equivalent to be found and developed in the UK continental shelf (UKCS).

But he continued: “To deliver the remaining potential does mean that we have to deal with some real issues. The North Sea needs continued investment. Production is declining in the UKCS as we all know, but it would be declining much more, perhaps by 20 per cent a year, without the investment that has been made.”

Wicks later defended the Chancellor’s tax hike. He said: “The changes ensure the government strikes the right balance between oil producers and consumers, by promoting investment and ensuring fairness for taxpayers.”

And he added: “I am not a Treasury minister, but I don’t think it would be very feasible or sensible to say that a tax like that can go up and down and somehow correlate with the price of a barrel of oil, because you have got expenditure commitments.”