Chancellor must stop using North Sea as a milch cow- Bruce

9.00.00am BST (GMT +0100) Thu 3rd Aug 2006

Malcolm Bruce has today challenged Gordon Brown on the instability of the tax regime for the oil and gas industry and the impact this is having on investment in the North Sea.

In a letter to the Chancellor, the MP for Gordon outlined his concerns. He added:

"Successive Governments have treated the North Sea as a milch cow and while oil and gas have been very successful for the UK's economy, we cannot assume that this will continue unless there is sufficient investment.

"Governments have failed to acknowledge the need for a long-term environment of stabilisation which maximises production rather than simply meeting the short-term needs of Chancellors in a tight fiscal situation.

"The Chancellor's changes have introduced uncertainty and undermined confidence in the industry. The tax regime must continue to attract adequate off-shore investment which will ensure that the UK remains competitive with other off-shore theatres; in particular it must ensure there is sufficient incentive to encourage exploration, appraisal and development of the North Sea Continental Shelf."

ENDS

Note to Editors:

The full text of the letter from Mr Bruce to the Chancellor follows:

The Chancellor of the Exchequer

HM Treasury

1 August 2006

Dear Mr Chancellor,

Taxation on oil & gas industry in the UK Continental Shelf

Following the publication of the Government's energy review and discussions with representatives in the oil and gas sector, I am becoming increasingly concerned about the long-term future of the North Sea oil and gas industry and the Government's role in attracting future investment to the sector.

The energy review acknowledges that fossil fuels will constitute the majority of our energy mix for the foreseeable future and yet the level of investment in exploration of the North Sea Continental Shelf faces a decline unless the current tax regime is addressed and stabilised.

Oil and gas has been lucrative for the UK for over 40 years and has been a veritable milch cow, contributed over £10bn in direct taxation last year alone. If the benefits are to be extended further then the current infrastructure and skills in the workforce must be safeguarded.

Although the current high prices of oil led to an increase in the number of offshore licence applications last year, UKOOA's economic report 2006 notes that investors now add a risk premium to UK investments because of fiscal instability. As the price drops there is a fear continued fiscal instability will damage UK competitiveness.

Estimates by UKOOA suggest that substantial opportunities for further exploration of the UKCS remain and existing wells, together with new exploration, has the potential to deliver up to 27 billion barrels of oil equivalent and the latest survey forecasts production of around 2.7 million boe per day in 2010. However, 20% of production in 2010 is still to receive a final investment decision and this will be critical to sustain this rate of production.

While it has become easy to attack the profits made world-wide by the industry, this fails to address the bigger picture and the benefits that offshore oil and gas provides compared to nuclear energy. For example, once the balance of payments has been off-set, it is clear that the nuclear industry is little more than a bottomless pit, draining Government resources through endless subsidies and increasing the financial burdens on consumers. Furthermore, nuclear also incurs further expense as power plants begin to require greater security in the current international climate of terrorism.

The oil industry is concerned that the Government will continue to believe that the UKCS will be an automatic preferred location for investment. But as one of many locations competing for investment and development, the Government must act now to make the UK more attractive to investors.

The Treasury's changes have introduced uncertainty and undermined confidence in the industry. The tax regime must continue to attract adequate off-shore investment which will ensure that the UK remains competitive with other off-shore theatres; in particular it must also ensure there is sufficient incentive to encourage exploration, appraisal and development of the North Sea Continental Shelf.

Yours sincerely,

Rt Hon Malcolm Bruce MP

(Dictated by Malcolm Bruce and signed in his absence)