Osborne pressed to reform taxes or see UK oil and gas decline Oil companies want George Osborne to make good his promise of tax reforms to encourage more investment in the North Sea or risk a collapse of the sector. The head of industry body Oil & Gas UK has warned the chancellor and his number two at the Treasury, Liberal Democrat minister Danny Alexander, that without tax cuts and the reform of allowances to encourage development and exploration, "swaths of the UK continental shelf will be pushed into terminal decline." The warning from Malcolm Webb, chief executive of the industry's leading lobby group, comes in spite of two years of record investment in UK waters. This year the UK's continental shelf is expected to attract £13bn in capital investment, after £14.4bn was committed in 2013. Another £39bn has been approved, much of it sanctioned during a sustained period of high global oil prices. However, Mr Webb and other observers point out that increases in operating costs, a collapse in exploration drilling and sharp falls in production of oil and gas in British waters threaten to extend a collapse in cash flows from the once-prolific basin. He says the recent fall in the benchmark Brent Crude price index to $80 a barrel has strengthened arguments for a more benign fiscal environment for operators at the expense of short-term tax yields. In particular, they want the chancellor to reverse a 12 percentage point increase in the supplementary charge in his 2011 Budget, which raised their top marginal tax rate to 81 per cent. At the time of that £2bn tax raid on the North Sea, Mr Osborne said the government would consider scrapping the increase if the price of oil fell back to $75 a barrel. Since then the chancellor has also sought to placate operators by extending allowances to enhance the rewards of developing smaller and more difficult fields with tighter margins. The rapprochement has gone further. In his March Budget, Mr Osborne formally threw his weight behind the recommendations of the Wood report, authored by Sir Ian Wood. The Aberdeen-based oil industry leader called for a "tripartite approach" of closer co-operation between the Treasury, Department of Energy and Climate Change and the oil companies, designed to maximise recovery from the North Sea. "We will take forward all recommendations of the Wood report," the chancellor told MPs. And we will review the whole tax regime to make sure it is fit for the purpose of extracting every drop of oil we can. Oil companies are now awaiting the recommendations of a consultation launched by the Treasury in July, with publication expected alongside next month's Autumn Statement. This move appeared to recognise that the North Sea's tax regime needed reform as the Treasury committed itself to encouraging further investment "whilst ensuring a fair return for the nation." Since then, though, Mr Osborne's room for manoeuvre has narrowed. On Friday, the Office for Budget Responsibility cited falling oil revenues, along with low wage growth and sagging stamp duty income, as causes for continued weakness in tax receipts this year. The recent fall in oil prices, combined with North Sea output levels which have fallen by more than a third since 2010, threaten to dampen Treasury income still further. According to Mr Webb, Mr Osborne's 2011 tax rise did not have its desired effect of raising Treasury receipts, while investment in the North Sea is set to halve by 2017. A letter Oil & Gas UK sent to the chancellor said: "Far from gaining additional receipts from the UK continental shelf, tax revenues have fallen by two-thirds and the OBR predicted a further decline, even before the recent price adjustment." Derek Leith, a tax partner at EY specialising in the oil and gas industry, backs the view that the chancellor could need to cut the highest marginal tax rates on North Sea operators to encourage new investors. "Given virtually all new fields given development consent since March 2011 have obtained the benefit of some kind of field allowance then the supplementary charge rate would appear to be too high for the maturity of the basin," Mr Leith says.