Britain Trims Oil Tax to Help Firms Cope With Low Prices

Britain will trim a supplementary tax on oil companies by 2 percentage points next year, the finance minister announced, less than the cut sought by the industry as it grapples with high costs and a steep decline in oil prices.

The government will reduce the supplementary charge, an added tax on oil producers' profits, to 30 percent from 32 percent from Jan. 1, George Osborne announced on Wednesday, while the oil and gas industry had hoped for more.

"There is record investment this year in the North Sea, but the lower oil price clearly presents a challenge to this vital industry," Osborne said as he announced a half-yearly budget update.

Britain's oil and gas output has been dwindling rapidly since it peaked at the turn of the century, but Osborne vowed in his last update to extract "every drop of oil we can".

Now on top of high project costs and taxes, oil producers face Brent prices below $70 per barrel after a 55 percent decline in six months.

"There was very little support in today's Autumn statement for a North Sea oil industry that could see profits half in the coming year on the back of falling oil prices," said Ian McLelland, an analyst at Edison investment research.

Industry body Oil and Gas UK said it welcomed the cut as a first step but asked for further reductions to ensure companies can continue investing in field development.

The oil and gas industry is a big contributor to the economy, including employing about 450,000 people and paying around 5 billion pounds ($7.85 billion) in upstream taxes.

To support the extraction of oil in difficult areas, the government also introduced on Wednesday a cluster area allowance for high-pressure, high-temperature projects that are typically more challenging to develop than others.

Chief Secretary to the Treasury Danny Alexander is set to outline further details of the oil and gas fiscal review in a speech on Thursday.

The government also confirmed that it intended to create an investment fund from tax revenues collected from shale gas production.

The money will be targeted at areas such as northern England where shale gas developments will take place.

Britain is betting on shale gas to help boost energy production as operations in the North Sea age. But it has met local opposition based on concerns over the environmental impact of the drilling and extraction process.

By Karolin Schaps