Banks reduce support for North Sea oil firms as windfall tax becomes embedded

Banks are slashing their support for North Sea oil and gas firms as the windfall tax begins to impact firms ability to secure more favourable financing deals for future projects. 

After the Energy Profits Levy (EPL) was first introduced last May, banks didn’t factor in the EPL when deciding to loan oil and gas firms money – via a process known as ‘reserve-based lending’ (RBL) – because it was considered to have a limited time span, concluding by 2025 at the latest. 

But Hunt expanded its lifespan to six years, saying the government “will no longer consider phasing out the levy ahead of its end date of March 2028.”

Most UK banks no longer fund projects in the North Sea leaving European banks to pick up the slack. 

The big three banks seen as the main supporters of North Sea firms are ING, BNP Paribas and DNB Group, while the likes of Deutsche Bank, Credit Agricole and Societe General are also frequent lenders. All declined to comment on their North Sea lending policies. 

But one source at a major European bank told Morning Wire they now regard the temporary tax as permanent and is now factored into loan agreements for North Sea companies – making the terms of the loan less generous, meaning oil and gas firms inevitably borrow less from banks.  

The change is more likely to impact smaller North Sea oil and gas firms, rather than global energy giants such as BP or Shell, who make the majority of their income outside of the UK. 

Iain Lewis, chief financial officer at UK oil and gas firm Ithaca Energy told Morning Wire that “there’s no doubt that the current structure of the EPL being linked to RBLs will impact our capital expenditure profile.”

“The EPL has been constructed in such a way that it’s very difficult for the banks to be supportive,” he added. 

One North Sea industry source told Morning Wire that some lending facilities are being reduced by as much as 40-50 per cent. 

Another industry source told Morning Wire that multiple energy firms have faced RBL issues over the past few months following changes to the windfall tax. 

“The timing of the tax increase has been pretty significant and companies have seen their lending and the borrowing base of their lending facilities erode significantly. It’s a pretty tough environment, and the way that banks will look at these things typically is when they see the increase in EPL, that they assume this is an increase in taxation or permanent change in taxation,” the source said. 

A Treasury spokesperson said: “The Energy Profits Levy strikes a balance between funding cost of living support from excess profits while encouraging investment in order to bolster the UK’s energy security. 

“We have been clear that we want to encourage reinvestment of the sector’s profits to support the economy, jobs, and our energy security, which is why the more investment a firm makes into the UK, the less tax they will pay,” they said.