Scotland business

Aberdeen University oil study warns of tax hike impact

oil rig
Image caption The study warned there would be cuts in investment and production of North Sea oil

The UK government's Budget tax hike on North Sea oil will lead to substantial cuts in investment and production in the industry, a new report has said.

Economists at Aberdeen University made the claim after studying figures based on a range of projected oil prices over the next 30 years.

Chancellor George Osborne raised the supplementary tax on North Sea oil production from 20% to 32%.

The move, in his budget last month, was designed to fund a cut in fuel duty.

The Aberdeen study, carried out by Professor Alex Kemp and Linda Stephen, considered a range of oil prices over the next 30 year, from $50 (£30) a barrel to $90 (£54).

They said the rise would inhibit maximum returns from production and reduce incentives to pursue exploration prospects in the North Sea.

Professor Kemp said the root of the problem lay within the tax structure.

He said its flat rate meant marginal projects could readily become uneconomic.

'Minimise effects'

Prof Kemp suggested a more flexible structure.

Mike Tholen, economics director of industry body Oil and Gas UK, said: "Professor Alex Kemp's research shows that the tax increase announced in the Budget could reduce UK oil and gas investment by up to £30bn and production by up to a quarter over the next three decades.

"This kind of impact is wholly expected following the sudden change.

"The tax change has damaged the industry's confidence and trust in the tax regime and that trust will take a long time to rebuild.

"Oil and Gas UK can only work with the government to find ways to minimise the effects on investment, production, energy security and jobs."

'Responsible way'

A Treasury spokesperson said: "This is an interesting study which supports the government's view that the increase in tax on oil will not have a significant impact on investment because of the current high price of oil.

"The government announced a reduction in fuel duty at the Budget and that has to be fully funded so we will progress with our plans.

"We are now looking at how we put in place the fair fuel stabiliser and we are working with the industry to make sure we can do that in a responsible way."

Industry leaders met Chancellor George Osborne to discuss the tax rise on Tuesday.

Oil and Gas UK chief executive Malcolm Webb said, "disappointingly", Mr Osborne had taken a different view of the impact the tax rise would have on the industry.

However, he said the Treasury had requested further discussion of the issue.

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