£24m-a-day Shell profit fuels petrol price row

As the North Sea giants cash in on surging oil prices, is it time to tap more tax from upstream profits?

Shell, the Anglo-Dutch oil giant, yesterday inflamed the row over rising petrol prices by announcing profits of $35m (£24.3m) a day. In the three months to the end of September, Shell's profits increased by 80 per cent to $3.25bn, thanks to the surge in world oil prices.

Shell, the Anglo-Dutch oil giant, yesterday inflamed the row over rising petrol prices by announcing profits of $35m (£24.3m) a day. In the three months to the end of September, Shell's profits increased by 80 per cent to $3.25bn, thanks to the surge in world oil prices.

The City gave a lukewarm reaction, marking Shell's shares 4 per cent lower on the grounds that it had been expected to make even higher earnings. Elsewhere, however, the figures were like a red rag to a bull. Shell's figures, and the $3.5bn third-quarter profit BP is expected to announce on Tuesday on the back of $34-a-barrel oil, raise a simple question: Are the North Sea oil companies being taxed enough? Gordon Brown, the Chancellor, may answer that when he presents his pre-Budget Report to Parliament on Wednesday.

Mark Moody-Stuart, the chairman of Royal Dutch/Shell, sought to put its latest profits in perspective by noting: "These are exceptional results driven by exceptional oil prices. I have no doubt there will be leaner periods in future, just as there were in the past. After all it is less than two years ago since Brent crude fetched $10 per barrel."

But in today's fevered atmosphere, stoked by the self-appointed leaders of the self-styled People's Petrol Lobby, his pleas for a little more perspective are falling on deaf ears. Shell now makes 70 per cent of its profits from exploration and production. What could be fairer than taxing these upstream profits more heavily and using the revenues to finance a reduction in UK fuel duty?

Shortly after Labour came to power in 1997, it launched a review of North Sea taxes. Mr Brown received the results of the review in January, 1998. He would almost certainly have tightened the screw had it not been for two factors. One was the sudden and precipitous fall in oil prices. The other was the need to spike the guns of the Scottish Nationalists who, ahead of the elections to the Edinburgh Parliament, were campaigning on a ticket of "no more English tax on Scotland's oil".

The review was, therefore, reluctantly shelved some six months later. But September's nationwide protests over rising fuel prices - blamed by the Government on soaring oil prices - put the idea of a new tax on oil company "super profits" firmly back on the agenda even though the Energy Minister, Helen Liddell, has recently said we should not expect any changes.

On the face of it, the arguments for levying more tax on North Sea operators are very powerful. The UK produces more oil than it consumes but the Treasury now takes some £2bn a year less in tax from UK Continental Shelf oil production than it did in the mid-1980s when oil prices were broadly similar in real terms. Since 1990, downstream oil taxes have risen by £16.7bn so that they now account for 77 per cent of all revenues raised from petrol sales. At the same time, taxation as a proportion of upstream revenues has fallen by a third from 19.5 per cent to 13.5 per cent.

This is largely because of the chipping away of the tax base itself. A former Tory chancellor, Norman Lamont, abolished Petroluem Revenue Tax on all new fields in 1993 and cut PRT on existing fields from 75 per cent to 50 per cent. A decade earlier his Tory predecessor, Geoffrey Howe, had abolished the 12.5 per cent levy on all new fields. The principal form of taxation on oil companies now is mainstream Corporation Tax.

The argument against increasing North Sea taxation is that the oil majors would simply vote with their feet and take their drilling rigs elsewhere. Digby Jones, director-general of the Confederation of British Industry, sums it up when he says: "These companies are very internationally mobile and if you make it unattractive for oil companies to be in Scotland, they will go to the Gulf of Mexico or Alaska.

"Now is the time to encourage these companies to come to Britain, not to discourage them. I wouldn't risk it and I hope Mr Brown doesn't risk it."

The likes of BP and Shell also argue that higher taxes would make it uneconomic to stay in the North Sea because the province is mature and therefore most fields awaiting exploitation are small by international standards and more costly to develop.

Philip Wright and Ian Rutledge of the University of Sheffield, who have studied the subject extensively, dispute this, arguing that the infrastructure which is already in the North Sea, allied to the new production techniques being developed, actually make it a relatively cheap production area. They have also argued that, of those companies operating in the North Sea, the profitability of their UKCS fields is 1.6 times that of their non-UK operations.

"We believe the Government was wrong to shelve its plans for a new tax regime in 1998," say the two academics.

"The arguments for holding off at that time were largely spurious - there never was any question of the tax burden being increased at a time of low prices. Rather, a new regime could have been introduced to capture a fair share of super-profits as prices rose.

"The largely production-related windfall which should have accrued to the UK government since the late Eighties has already been lost. If the Government does not act swiftly, another windfall, this time largely price-related, will get away as well."

We do not have to wait long to see whether Mr Brown heeds these words.