Energy companies plead for tax breaks to help raise production

Britain's oil and gas companies including BP, Shell and British Gas have been making record profits but say they need better tax breaks if they are going to meet higher production targets in the North Sea.

The energy sector is warning that unless the government stimulates activity the UK will miss its expected production targets and have to import more fuel from abroad, which may lead to higher energy costs for homeowners and lower tax revenues for the Treasury.

Ministers had set their sights on companies being able to raise production from the current 2.8m barrels a day to 3m barrels by 2010. But Oil & Gas UK, the industry body, said last night that the latest projections suggested there would be a 20% shortfall. The new level is likely to be closer to 2.4m barrels.

Companies are investing at the £3bn a year level that the government and industry had expected but the mounting cost of steel, platforms and manpower is undermining the effectiveness of the money, with inflation running at between 15 and 20% across the North Sea.

Malcolm Webb, chief executive of Oil & Gas UK, said much of the profits were being generated abroad. "It must be recognised that, even in the current price environment, the [North Sea] tax regime continues to have an impact on long-term investment confidence," he said.

The plea for better tax treatment came as a survey showed that oil and gas groups have overtaken banks as the biggest contributor to the Treasury. Energy and banking firms were responsible for nearly three-quarters of the £12.8bn of corporation tax paid by 74 of the UK's biggest companies in 2007, according to the report by accountant PwC.