As the FT has reported this morning:
Tom Mitro, who managed Chevron's taxation and financial planning in the North Sea in the 1990s, said [a new tax] scheme could deprive the Treasury of more than £3bn in tax over the next decade.
“Overall impact on the Exchequer of [the transferable tax history scheme] could range from virtually zero to roughly [a] £3bn [plus] reduction in tax receipts over the next 10 years depending on oil prices and [the] number of asset sales and decommissioning [of North Sea platforms and pipelines],” he said in a research paper prepared for Global Witness, the non-governmental organisation.
But why does the Treasury care? If it assists the spin that Scotland cannot survive on its own, I suspect that's considered a price worth paying. And I would not be at all surprised if that is part of the political motivation for this.
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I know many people in the oil industry and they often talk about the viability of north sea oil compared to other regions where extraction can be much cheaper. Ultimately this is what dictates where the oil companies invest not a political agenda.
Is there money to be made?
TRhat is the only question they’ll ask
I think you’ll find that after-tax return on invested capital is what dictates where companies do and do not invest.
Warren Buffet has suggested otherwise
If it was as simple as return on invested capital then why do people not put their savings into high risk deals in unstable countries rather than the FSA protected saving accounts?
RISK!!!
Start an Oil company and rush Ito Iran and let me know how it goes.
I am an FCA
I have managed many companies
I might know just a little bit about this
And I also know how tax works in such things too
Julia: the greater the risk, the greater the cost of capital, and the one thing a company should never do is invest money where the return on capital is below the cost of capital (which, if risk is very high, might well be the case even if the potential return is also very high).
Richard: Buffett has certainly criticised companies that pay insufficient attention to after-tax return on capital, but are you suggesting the UK government should incentivise those bad companies? Do your companies ignore after-tax return on capital?
Buffet said no one turned down making profit because they had to pay tax on it
And given no one has a clue what profit will be nor do they much care about tax
The reality is the theories are bullshit: no one is clairvoyant and they demand that business people are
I’d suggest you drop the pretence
If the businesses you managed had an insatiable appetite for ploughing capital into projects with meagre after-tax returns on capital, it’s probably for the best that you are devoting yourself to blogging these days.
I assure you, I knew how to make money
People who don’t understand the difference between an accounting profit and an economic profit are very dangerous in business. I’d stick with the blogging from now on.
As far as I know I am the only chartered accountant who is a professor with economics in their job title
You are certainly unique. I’ll give you that.
Thank you
Not political?
Perhaps you should ask Norway what it’s forecasts are?
I notice the government funding of the non-governmental organisation you mention includes a substantial amount from the UK foreign aid budget. And some portion of it is being used to analyse receipts from North Sea platforms. Is this a tacit acceptance by London that Scotland is a foreign country, or is it that cronyism in our government gone completely bonkers.
Global Witness has a long history in looking at oil issues around the world
I am pleased to have worked with them
Richard why is the British taxpayer paying the decommissioning costs for the North Sea oil rigs? Once again the 99% subsidizing the 1%. Wealthy corporations should not get subsidies of any sort. They have plenty money of their own.
Indeed…
The Oil & Gas industry is adverse to high risk. The North Sea is more expensive to develop BUT it is in a very politically stable region. Future financial planning is far more predictable
The article also ignores two key factors in the debate.
a) With similar reserves Norway managed to take double the tax revenue.
b) The zero transfer of revenue into an “Oil Fund”. Once again the Norway model highlights the UK folly.
The main problem has been the political manipulation of reserves data due to the growing demands for Scottish Independence. In simple terms Westminster/ Whitehall is asset stripping while they can. If this was not the case then the burning off of Gas in the late 70s and early 80s would not have taken place. A managed development for long term production would have ensured pipeline infrastructure rather than burning a third of gas reserves and poor field depletion management which damaged wells or soured reservoirs..
To many opinions from accountants and too few from the front line.
We all know what did not happen
We all know Thatcher used oil to find her folly
The question is now though
We cannot undo the past
“The Oil & Gas industry is adverse to high risk. The North Sea is more expensive to develop BUT it is in a very politically stable region.”
If you change ‘it is in’ to ‘it was in’ you would be closer to the truth. UK hydrocarbon taxation policy in the past ten years or so has moved from written by folk with no understanding of the industry to being written by the industry. Neither position is useful for the nation.
Julia Gibb says:
“The Oil & Gas industry is adverse to high risk.”
They don’t seem too averse to dumping their workers in the north sea and drowning them.
https://www.holyrood.com/articles/news/john-swinney-calls-george-osborne-reduce-tax-oil-and-gas-industry
This is the tax incentives that the SNP deputy first minister John Swinney demanded the treasury make to increase investment in the sector,
The treasury agreed and brought them in at the next budget, Tax incentives
that welcomed by the SNP, I’m fact they wanted the treasury to go further
Strange course of action for the SNP if it’s all about playing down Scotland’s wealth
I’d suggest it a mistake
As I understand it, the transferable tax history policy, was an SNP initiative and was implemented in last years budget after lobbying and submissions from Paul Wheelhouse. The SNP responded to this by saying it was long overdue and didn’t go far enough. If, as you claim, this ‘assists the spin that Scotland cannot survive on its own’ why do you think the SNP are the main proponents of this sort of support?
If the SNP thought it a good idea it looks like they got it wrong
As you know, I don’t do party politics
My understanding is that this was a correction to poorly devised policies that had caused a dramatic slump in investment across the board from exploration through production and into maintenance. A fix was needed that was aimed at employment and local industry rather than tax recovery. That was put forward. Stability is almost there. Now is the time to move progressively to increase the tax return to achieve a sustainable balance of attraction for investment and return through taxation. To the extent that the changes were aimed at a different target to the taxation target, I’m not sure the SNP got it wrong.
The UK government recently commissioned the IFS to look at tax incentives in low and middle income countries (specifcally based on reviews of tax incentive sin Ghana and Ethiopia)
https://www.ifs.org.uk/uploads/R142.pdf
Amongst the usual ‘more evidence needed’ conclusions was the clear recommendation that
‘reduced rates for extractive industries should be removed’
hmmm.
Indeed
Jang Sung Taek says:
“And some portion of it is being used to analyse receipts from North Sea platforms. Is this a tacit acceptance by London that Scotland is a foreign country, or is it that cronyism in our government gone completely bonkers.”
A third reason for analysing receipts from North Sea platforms is to separate revenues from sectors deemed to be from waters under Scottish and English jurisdictions. One of the main reasons for this separation results from the “oil grab” carried out by Blair and Brown on the eve of the creation of the Holyrood assembly.
Instead of using the obvious solution of the boundary following the line of latitude from the point where the land boundary meets the North Sea, Blair & Brown came up with a somewhat imaginative solution that sees the maritime border curving north-eastwards until it straightens out to follow a line of latitude offshore from Carnoustie i.e to the north of Dundee. All fishing and petrochemical platforms to the south of this line are deemed to be in English waters for statistical and revenue-separation purposes, even though these industries are being serviced through Scottish ports. In turn, this impacts GERS figures by artificially deflating Scottish revenues.
Indeed
That wasn’t even creative accounting
It was a con trick
How is it “imaginative” to use the equidistance principle for the maritime boundary – it’s the international standard! https://en.wikipedia.org/wiki/Equidistance_principle
Or do you have a sensible argument for why waters which are closer to England should come under Scottish law?
It’d simply been an trivial/lazy solution to use the line of latitude before.
Oh come on – that is convenient nonsense
There is not an iota of logic to the distribution of this boundary
Euan asks (without a question mark) “How is it “imaginative” to use the equidistance principle for the maritime boundary — it’s the international standard.” Well the equidistance principle makes sense where a boundary needs to be defined between states on opposite sides of a body of water (e.g. Wales and Republic of Ireland, England and France), but not contiguous states on the same land mass, where matters are much less clear.
In the latter case, a variety of solutions is employed, from historical outcomes to latitudinal parallels, with the latter, where historical ownership claims don’t apply, being the simplest and most obvious solution. Historically, in the case of Scotland/England, it was indeed the modus operandi right up until the night before the Scottish Parliament was reconvened in 1999, when it suddenly veered sharply northwards.
The change was clearly politically motivated: it wasn’t discussed publicly in advance, it wasn’t voted on by Westminster, nor was its inception publicised at the time, so it was clearly recognised by Brown and Blair as a political hot potato and delivered as a fait-accompli.
Thanks Ken
It makes you wonder why the tax laws permitted such a thing and secondly, who else,other than the oil companies are benefiting from this. Is this criminal?
“giving away” They “UK Govt” are experts in this field.
During the Thatcher period Brent production increased in 1984/85 to 2.8m/bbl per day flooding the spot market and driving the price below the $25bbl contract price to force a spot price of $15bbl — the revenue of this any cost approach to production were desperately needed to replace energy lost due to the miner’s strike and support the subsequent 2 year destruction of the UK mining industry.
This really sums the aftermath up of this initial period of over production –
http://www.resourcegovernance.org/blog/did-uk-miss-out-%C2%A3400-billion-worth-oil-revenue
The UK has lost “well” over $400B in oil revenue and this is down 100% to political mismanagement by Conservative Government’s and the outright blind arrogance of a PM who destroyed the coal industry as a whole and gave no quarter for any coal mines and areas that did not join “mad” Scargill. The EEC founded on a Coal and Steel agreement has closed mining all over the EU at a snails pace allowing regions to replace jobs before ending each regions mines. I have no doubt in my mind that Scargill had to be defeated – yet what followed was a costly short sharp shock that was applied at great cost to communities and the UK Economy.
UK Oil has been over taxed and mismanaged since the 80’s, the simple reason that Norway can make good profit on oil at $50 a barrel is competence and that their model does not involve giving big oil companies any way to cheat Tax, it is state owned and spot production is placed on the market for price not and blindly sold.
I see many comments above on decommissioning costs, risks and production costs. A good source of information is the OPEC World Oil Outlook a yearly publication it shows the reality of production and the long term future investment for all Energy and Countries. This source is far more accurate and based on “on the ground intelligence” than any UK government agency ( ONS ) or press source.
I would view £3B as very much a small tip of a very large iceberg.
Scotian
Thank you for this.
Another nail (at least to me) in Maggie’s coffin.
I knew that north sea oil propped up her ‘regime’ but did not know the detail. This fills a my gap in my knowledge and as a UK citizen I am extremely angry.
The Tories are indeed enablers of the rich and corpulent private sector at a loss to the country. I’m disgusted.
“”yet what followed was a costly short sharp shock that was applied at great cost to communities and the UK Economy.”
Sharp it may have been, but short it certainly isn’t. Unless you are calculating in geological timescales in which case the damage may be overcome before the Poles melt.
With a hard Brexit and just when Indy yes polls go to 52% for Indy. The oil status goes to worthless again, much like your £pound soon. ? It won’t be that hard if it’s such a burden to hand it back speedily to Scotland when we are Independent then will it.
The price of oil is heading towards $100 a barrel again
Scottish independence is likely
Brexit is certain
The House of Lords and Westminster is full of large shareholders in oil companies that drill in the North Sea
North Sea oil is how many in the House of Lords expanded their fortunes
I thought we once had a state owned company, something like a British national oil corporation – can’t remember what it was called – and a major share in another big oil company. I suspect our stakes in these companies were probably sold off to City vultures and we parted company with the Norwegian model, which I have heard was quite successful.
Good heavens – state ownership is a terrible thing, don’t you know?
It’s very telling just how many British nationalist conservatives have jumped on this particular blog about Scottish oil just to say that it no longer exists or is running out or is too expensive to extract and not worth bothering about.
If it’s not worth bothering about why are they so bothered about it ?
I already know the answer …
It’s worth a lot
There’s still a lot of oil left
The price will only increase so taxation is not an issue
Cars that run on fossil fuels will not disappear overnight
All types of oil will become more expensive because they are all fossil fuels and we have become very dependent on them
Perhaps it is worth a lot – for sure it will depend on international oil prices. However, Scoltand has something which will never run out – wind – on & off-shore. Rather than focusing on oil – whose time is coming to an end – it might be more profitable for the Scottish nation to look to the future – specifically wind – which could drive an industrial rejuvenation. not just the turbines – but – for example – using low cost electricity form on-shore & off-shore wind to produce hydrogen – which will be needed in vast quantities in the petro-chem and stell industries. ThyssenKrupp workinh with others has a project to use hydrogen for the primary production of steel. My own companies calculations suggest that given the rise in EU ETS prices, costs on carbon when steam reforming of natural gas (to produce hydrogen) mean that hydrogen from electrolysis is getting much much closer to being competitive. I suggest Scotland looks to the future – not the past.
Agreed
It is literally a power house
“All types of oil will become more expensive because they are all fossil fuels and we have become very dependent on them”
And we should stop squandering it by burning the stuff. It’s far too valuable a commodity to set fire to.
It’s insane.
West of Shetland, and Cameron’s unpublicised visit; Clyde basin, once safe from nukes; and all the way out to Rockall. Nah, there’s none left, all gone, worthless stuff. Every country in the world that’s ever found an oil reserve has always been cursed by it, haven’t they? Oh, wait…