Rise in Oil Tax Could Reduce Scots Economic Output By GBP800m

By GRAEME SMITH

THE oil tax rise announced by the chancellor of the exchequer in his pre-budget statement could reduce Scottish economic output by up to GBP800m, according to results of a report published yesterday.

However, if the oil price remains at dollars60 a barrel the reduction over the next four years could be as little as GBP150m.

The report was commissioned by Scottish Enterprise Grampian and the findings will be taken into account in its planned strategy review looking at all sectors of the northeast economy.

The aim was to get the most accurate information possible as to what the impact would be to the industry and wider economy in general to allow the organisation to be in the best position to advise and act.

In his report, economist Tony Mackay makes clear that the impact is dependent on the oil price. The lower the price, the greater the impact would be on growth and jobs.

At dollars60 a barrel, there would be a reduction in Scotland’s economic output (gross value added) between 2006 and 2010 of GBP150m – with half of that in Grampian.

United Kingdom Continental Shelf capital expenditure – which represents investment in the North Sea – would be GBP30m lower in 2006, widening to GBP110m in 2010. The 20062010 total is GBP360m, or 2.1per cent, lower than it would be without the additional tax.

At dollars30 a barrel, Scotland’s economic output (GVA) over the same period would be reduced by GBP800m, with half of that reduction in Grampian.

UKCS capital expenditure would be GBP175m lower in 2006, widening to GBP560m lower in 2010.

The 2006-2010 total would be GBP1.995bn – 17.5per cent lower than it would have been. In 2006, Grampian’s GVA would be reduced by 0.4per cent and Scotland overall by 0.1per cent, while in 2009, Grampian’s GVA would decrease by 1.2per cent and Scotland’s by 0.3per cent.

There was also a warning from a leading oilman that rising costs, world-wide pressure on resources and skills and concerns about the long-term impact of increased taxation could cast a shadow over the ultimate recovery of the UK’s oil and gas reserves.

Total spend in the UK offshore oil and gas sector is expected to climb to around GBP11bn this year, boosted by increased exploration and development in fields around the British Isles.

Mike Tholen, economics and commercial director of the UK Offshore Operators Association, said activity this year was a ref lection of the industry’s continued commitment to invest in the North Sea and to the modernising schemes introduced over the past five years.

“However, there are several underlying factors that give rise to concern for the longer term future, ” he said. “Today’s buoyant activity is founded in investment decisions taken before the announcement of the tax increase on UK oil and gas companies.

“While the oil price has increased significantly since the first negative tax change in 2002, the post all-tax rate of return on industry investment has declined from 19per cent to 14per cent, highlighting the challenge the sector will face at lower oil prices.

“The industry will contribute around GBP10bn in taxation to the UK exchequer in 2005/06, even before the increase in the supplementary tax rate announced last December, rising to GBP12bn in 2006/07.

“Experience shows that across industry, and not just in the oil and gas sector, higher taxation today will ultimately lead to a decline in investment.

“This is something we simply cannot afford to let happen at this crucial stage of the North Sea’s life.”