WATCHING THE WORLD

David Knott
London
[email protected]

Britain's new Labour government is planning a "windfall tax" on profits made by utilities privatized under the previous Conservative regime.

While the gas, electricity, and water suppliers prepare for an unwelcome squeeze, two analysts have produced evidence they say show U.K. offshore oil and gas producers have been enjoying a tax windfall for about 10 years.

Ian Rutledge and Philip Wright, researchers at the University of Sheffield, U.K., have called for an overhaul of the U.K. North Sea tax regime. They claim that, while tax revenues have recovered from their 1991 low, in 1996 they were still £1 billion ($1.6 billion) less than in 1987, despite the fact that gross trading profits were £4.8 billion ($7.7 billion) greater.

"The explanation for this," said Rutledge and Wright, "resides in the fact that U.K. has the weakest oil and gas taxation regime in the world, and there is no evidence that this has been or is justifiable in terms of the low profitability of company operations on the U.K. continental shelf."

The analysts said that, for a representative group of 12 companies, the average prospective profitability of their U.K. continental shelf operations in 1993 and 1994 was twice that of their operations elsewhere in the world.

Taxpayers' loss

"In 1995," said Rutledge and Wright, "prospective U.K. continental shelf profitability was still one and a half times that offered by the rest of the world.

"The fall in the government's tax take has meant that, in effect, the taxpayer has financed a large part of the redevelopment of the North Sea and exploration of the frontier of the U.K. continental shelf."

Many majors with U.K. operations do not split out their results in a way that allowed analysis, but Rutledge and Wright reckon the 12 companies analyzed represent a suitably wide range of regional composition to make analysis fruitful.

British Petroleum Co. plc, the largest U.K. operator, responsible for about one-fifth of U.K. oil production, published the most detailed picture of its different regional operations in annual reports from 1984 on.

BP breakdown

"BP's U.K. profitability exceeded that of its operations in other petroleum provinces in 8 out of 12 years for which data are available," said the analysts.

"There is no evidence to suggest that BP's U.K. profitability was below normal for international oil operations over the period in question. During the last 7 years, discounted cash flow per barrel of the company's U.K. continental shelf reserves has been forecast to be, on average, roughly twice that from its reserves in other oil and gas provinces."

Rutledge and Wright published their findings "to make a contribution to policy debate." Timing of their publication will not be welcomed by oil companies, which are waiting to see which way policy is going to head under a new government planning costly changes after 18 years of Conservative party legislation.

Low oil prices mean government will not benefit from booming U.K. production as during the Thatcher years, said the analysts: "Unless the new government addresses the issue of taxation and introduces changes to the current U.K. continental shelf tax regime, the country will not receive its fair entitlement from this second U.K. hydrocarbon boom."