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North Sea Oil Taxation

October 9, 2015

By Paul Homewood  

  

 

 

We’ve had some discussion about fossil fuel subsidies, so I though it worth just summarising the position with regards to North Sea oil.

 

Producers of North Sea oil are taxed in three ways:-

1) Petroleum Revenue Tax (PRT) – this only applies to fields operating, or with consent, prior to 1993.

PRT is charged at 50% of profits, specifically for that field. In other words, losses from one field cannot be offset against the profits from another.

2) Corporation Tax – this is normally at 30% of profits (after PRT has been accounted for). Note that this is higher than normal corporation tax, which is now 20%.

3) Supplementary Charge – this is an addition to Corporation Tax, and is set at 20%, calculated against the profit before Corporation Tax.

 

 

So we can summarise:

 

  Pre 1993 Post 1993
Profit £100 £100
PRT £50 NIL
Profit after PRT £50 £100
Corporation Tax £15 £30
Supplementary Charge £10 £20
Total Tax £75 £50
Net Profit after Tax £25 £50

https://www.gov.uk/guidance/oil-gas-and-mining-supplementary-charge

 

As a non oil business would only pay Corporation Tax of £20, North Sea oil outfits are clearly paying much more than their share.

Wikipedia have a bit of the history:

 

Petroleum Revenue Tax (PRT) is a direct tax collected in the United Kingdom. It was introduced under the Oil Taxation Act 1975, soon after Harold Wilson‘s Labour government returned to power and in the immediate aftermath of the 1973 energy crisis, and was intended to ensure "fairer share of profits for the nation" from the exploitation of the UK’s continental shelf, while ensuring a "suitable return" on the capital investment by oil companies.

PRT is charged on "super-profits" arising from the exploitation of oil and gas in the UK and the UK’s continental shelf. After certain allowances, PRT is charged at a rate of 50% (falling to 35% from 1 Jan 2016) on profits from oil extraction. PRT is charged by reference to individual oil and gas fields, so the costs related to developing and running one field cannot be set off against the profits generated by another field. PRT was abolished on 16 March 1993 for all fields given development consent on or after that date, but continues in existence for fields established before that date. At the same time, the rate of PRT was reduced from 75% to 50%, but various reliefs from PRT for expenditure on exploration and appraisal were withdrawn.

 

For many years, oil companies were seen as cash cows, making “undeserved” super profits. Even recently that has been the case. In 2002, the supplementary charge of 10% was introduced, increased to 20% in 2006, and 32% in 2011. It has only been reduced to 20% again this year in the face of the threat to North Sea oil output from lower oil prices.

 

On top of all of this, of course, and the fuel duties paid by motorists, which totted up to £27.2bn last year. The idea that oil, or oil companies, are being subsidised is frankly nonsense.

The same applies to natural gas. The only fossil fuel which can be said to have been subsidised is coal, back in the nationalised days of the 1970’s and 80’s, and that was not so much a subsidy of fossil fuel as one for yet another inefficient nationalised industry.

Ironically, the BBC thought that was a good thing then!

13 Comments
  1. Joe Public permalink
    October 9, 2015 5:08 pm

    Then of course there is the ‘other’ taxation – on petrol products.

    A litre of petrol retailing at 132.9p* – the product is 47.8p; Retailer & delivery is 5p; Duty is 57.95p; and to add insult to injury, “Value”(ha ha ‘cos it’s on the Duty as well) Added Tax is 22.15p

    80.1/132.9 = 60% is revenue to the Exchequer.

    [*OK Petrol is now ~110p/litre, but the proportions are probably similar]

    http://www.petrolprices.com/the-price-of-fuel.html

    • Ben Vorlich permalink
      October 9, 2015 9:20 pm

      I would suggest that the only things changing would be the product cost and the VAT. To get 110p per litre the product cost would be 28p, delivery 5p, Duty 57.95p, VAT 19p; meaning the Exchequer now takes 70%

  2. October 9, 2015 5:09 pm

    I wonder how much these tax rates were shaped by Thatcher’s fiscal policy of using NSO profits to lower income tax etc, instead of building a wealth fund similar to Norway’s. We’ll obviously never know but it is fascinating how different a place the UK could be now.

    http://www.theguardian.com/business/economics-blog/2012/mar/29/north-sea-oil-revenue-squandered

    • October 9, 2015 6:28 pm

      It must have started with Wilson in 1975.

      I guess there is nothing different here with govts around the world who want to tax to the hilt.

      We could have had our own wealth fund, but govts down the years have spent it instead!

      • October 9, 2015 6:48 pm

        It did – though Tony Benn wanted to form a sovereign wealth fund for industrial investment though was voted down in Cabinet.
        There was difference in that Norway taxed oil companies at 90%!

        “This was no garden party. With literally trillions of dollars at stake, Norway was playing to win. At one iconic meeting in 1974 the Norwegian government announced to a delegation of oil companies that they were raising the level of taxation on petroleum profits to 90 per cent from 50. After the shouting had died down, the minister expressed disappointment that some of them did not walk away from their offshore leases. “We should have taken more,” he admonished his bureaucrats in full view of the enraged oil executives.

        Thatcher on the other hand seemed more enamoured with ideology than money. She told a Conservative conference in 1977, “Our aim is to make tax collecting a declining industry.” She and successive governments succeeded in that dubious goal. Even though the U.K. extracted nine per cent more oil and gas by 2011, they collected $156 billion less in petroleum taxes and royalties than the Norwegians.”

        http://www.tribunemagazine.org/2014/03/thatcherism-a-complete-failure/

        There was also a lot of politcking going on in terms of who owned what in the North Sea.

        http://www.bbc.co.uk/news/uk-scotland-north-east-orkney-shetland-14895693

      • October 9, 2015 9:45 pm

        Wilson Labour 1975 – spent it

        Brown labour 2002 – spent it

        Brown labour 2006 – spent it

        I think we can see a pattern here.

        However, we are both missing a much bigger point here. The Norwegians decided to live within their means and save the windfall for the future. We decided to spend it (and remember Thatcher did not reduce Wilson’s tax)

        Now who was right? By what right do we demand now that people in the 1980’s should have put away money so that we can benefit, when we nowadays are so much better off?

      • October 9, 2015 9:58 pm

        Tory administrations spent it too.

        Some people are much better off but there’s many who aren’t. The oil cash in the eighties propped up the welfare state – you could say that it also helped institutionalise many who got used to the benefits system that the government gave away too easily – instead of investing the cash in future industry to replace the closed mines.

        Of course the Norwegians had a much smaller population to support.

  3. BLACK PEARL permalink
    October 9, 2015 5:39 pm

    Yep all that revenue and we still couldn’t find the cash to build our own hospitals and had to resort to a crippling PFI disaster by the usual incompetent Govt at the time which has having a lasting major detrimental effect on the NHS right now
    Isn’t Hinkley power station being built on the same lines ?
    A Sovereign Wealth Fund creation has been in UKIPs manifesto for some time
    ‘Common sense’ but that goes AWOL when parties are thinking about being in a job & POWER every 5 years so the petroleum revenue quickly evaporates in handouts & live for free lifestyles that has typified certain political parties policies in most peoples living memory’s.
    A Chinese politician labelled Europe as an ‘indolent society’ two or three years back when the EU was looking for more loans … and I can see where he was coming from

  4. October 9, 2015 5:52 pm

    So the North Sea is an all-UK ocean?

  5. October 9, 2015 7:07 pm

    Reblogged this on Green Living 4 Live.

  6. dearieme permalink
    October 9, 2015 9:24 pm

    The coal industry used to get two subsidies. (i) A direct subsidy to the NCB. (ii) An indirect subsidy by government instruction to the electricity generators (CEGB, SSEB) to buy their coal from the NCB at above-market rates.

    As for a sovereign wealth fund, it’s not obvious that it’s any better than letting the population have the wealth and letting them invest it. In fact, given the record of British governments it’s probably far better to leave the wealth in the hands of the people.

    Note that much of the Norwegian oil wealth was in waters that by international treaty were British but were released to Norwegian ownership by Wilson decades ago.

    The hospital/PFI disaster was a triumph for Brown as Chancellor.

  7. May 26, 2016 11:15 am

    The UK’s strategy of full privatization in the North Sea has put the country at risk of an uncontrolled collapse of one of their most strategically important assets. The talk of a lucrative decommissioning market emerging is a horrific prospect as decommissioning should be a side business to a thriving sector as platforms are replaced, not the new focus as infrastructure is abandoned permanently.

    Partial state ownership would’ve maintained a level of drilling through the downturn, giving options upon recovery. This scenario of state buy-back may be forced to play out anyway as key infrastructure is billed for abandonment by private companies.

    https://offshoreinsider.wordpress.com/

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