Although the exact method and timing is unclear and would follow consultation with the industry, a spokesman for the Department of Trade and Industry confirmed that the decision to abolish royalties had now been made

"It is now about when, rather than whether, to abolish them," said the spokesman. Chancellor of the Exchequer Gordon Brown angered the North Sea oil industry when he announced in his budget that he intended hitting oil companies with a new 10 percent tax on profits.

However, Mr Brown tried to sweeten the bitter pill by offering higher allowances on new investment and by saying he was considering - subject to consultation - the abolition of the 12.5% royalty applying to fields approved for development before March 1982. But now the decision has been taken to scrap the regime.

"We will soon announce a consultation process to establish exactly how to scrap it, looking at whether to phase it out or go for a 'big bang' approach," said the spokesman.

Mr Brown said in April that scrapping royalties and raising investment allowances would offset the new oil revenue tax for companies, which the Treasury estimates will raise £450 million in fiscal 2003/04 and £600 million the year after.