Why are the oil companies complaining?

Posted by Richardg — 18 April 2011 at 4:41pm - Comments
Cairn's tugs drag icebergs out the way of its Arctic oil drilling rig
All rights reserved. Credit: Will Rose / Greenpeace
Cairn's tugs drag icebergs out the way of its Arctic oil drilling rig

Ever since last month’s Budget, oil companies have been complaining about George Osborne’s tax on North Sea oil and gas. Yet many have just announced record profits - boosted considerably by current sky-high oil prices. What do they take us for?

Taxing North Sea oil producers and cutting fuel duty wasn’t the smartest of ideas. Personally, I’d have preferred the Chancellor to explain what he'd do to help us use less oil – demanding more efficient cars, for instance, or giving everyone gold-plated bicycles to ride about town on (or not).

But, the oil companies were furious. Instead of accepting that they were making a fortune from keeping us hooked on oil, they immediately demanded to have the tax withdrawn. Norway's Statoil has even put its North Sea exploration plans on hold - the oil company equivalent of picking up your ball before a local kickabout, and going home with it.

Are the oil companies really hard done by? Not according to the Office of Budgetary Responsibility. Robert Chote, who chairs the OBR, told the Treasury Select Committee that the tax would have “no significant effect on the investment and production profile”.

Another way of calculating the impact of Osborne’s announcement is to examine the  London Stock Exchange. We looked at a bunch of oil companies – each of whom had complained to the Financial Times about how badly they’d been treated by the tax rise – and discovered that their share prices had held up remarkably well given the Chancellor’s tax grab.

Those of you with an aversion to numbers, look away now.

What this graph shows us is that several smaller companies – Valiant Petroleum, EnQuest, Encore, Xcite Energy and Nautical Petrolem – took a hit on Budget day. But in many cases the hit was just temporary. Either way, most of the companies are now either better off than they were before the Budget, or at the very least doing better than they were at the beginning of the year.

There’s a very, very good reason for this. The price of Brent Crude – the oil they get out of the North Sea – is 31% higher now than it was at the start of the year. That means that every barrel they can get out of the ground is worth a third more than three months ago, even though the cost of extracting it is no higher.

So it’s no surprise that many companies have reported record profits. Valiant’s CEO, Peter Buchanan, told shareholders that their profits had been “further boosted by the recent higher oil prices.” EnQuest, another exploration company, did very well indeed, because, on average, they were selling oil for 25% more than they’d expected.

Cairn Energy have also handed out £1.7 million of bonuses after the Edinburgh based oil and gas explorer clocked up record profits last year.

But what about Statoil and their $10bn hissy fit? Not what they’d have you believe. A couple of days after telling the world’s media that they were thinking about cancelling their North Sea operation, they announced that they’d discovered oil off the coast of Norway.

No wonder they were pausing on their exploration of British waters – they were working out what to do about the oil they’d found somewhere else. (Incidentally, tax on Norway’s North Sea oil profits is 78% - 16% higher than the UK.)

I’ll let the eco-warriors at the Financial Times have the last word. One week after the Budget, they wrote:

“Statoil and others will face a 62 per cent marginal tax rate on new projects, a good deal less than the 78 per cent they pay on the Norwegian side of the border.

On old fields, the rate will be 81 per cent, just above Norway’s. Such rates are sustainable because oil and gas profits largely consist of economic rent – returns due to the scarcity of the resource, not the cost of extracting it.

A tighter UK regime will make up for years of undertaxing this rent, which, with Brent at $115 a barrel, is now much greater than any responsible company would rely on for its planning.”

Since then the price of Brent rose to $123 a barrel. So no matter what they tell you, the oil companies are making a killing.

The windfall tax isn’t going to reverse that. But sadly neither will a long-term solution to high oil prices, dwindling supply and climate change.

We desperately need to go beyond oil, and start investing in cleaner, more efficient technologies. But that means facing up to the might of an oil industry which had become accustomed to getting its way, and throws its toys out of the pram at every opportunity.

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