Government needs to do more to win over North Sea oil and gas firms wounded by windfall tax
The government has made the North Sea’s investment climate inhospitable for smaller oil and gas firms after failing to sufficiently ease the windfall tax, warned a leading energy trade association.
Robin Allan, chair of the Association of British Independent Exploration Companies (Brindex), urged the government to do more to incentivise developments in British waters.
He told Morning Wire: “The fiscal terms in the UK today suit only a handful of multinational players, such as the Norwegian state oil company [Equinor]. From my perspective, I am constantly amazed that our own government isn’t doing everything within its considerable power to encourage smaller British independents to invest in the UK. I don’t understand why the government exhibits so little interest in British companies.”
This difference between the aspirations of larger and smaller energy producers is reflected in the impasse over Rosebank – the UK’s largest undeveloped oil and gas field.
Majority stakeholder Equinor is eager to push ahead with the project, but minority partner Ithaca Energy remains wary over funding the project after the windfall tax was expanded to six years last year.
Allan’s comments also follows Apache’s decision last week to suspend drilling in the North Sea, with the US firm blaming the “challenging UK macro environment with its increasingly costly and burdensome tax and regulatory regime”.
It has announced plans to slash 30 jobs in Aberdeen, and is instead pivoting operations to Egypt, Suriname and onshore opportunities Stateside.
Apache has overseen the Forties oilfield for the last 20 years, with the company producing arond 50,000 barrels of oil equivalent per day – making it the North Sea’s ninth largest operator.
It plans to sell Forties, which is one of the largest and oldest oilfields in the North Sea – its supplies helping to underpin the Brent crude oil benchmark contract.
However, its ageing asset requires onerous maintenance to maintain production levels, a trickier task to financially justify amid the windfall tax.
Apache’s decision follows warnings from Harbour Energy, the North Sea’s largest producer, it will shift investment to the US and South America.
It even snubbed the latest oil and gas licensing round for new projects.
The government has confirmed plans to ease the windfall tax – after imposing a 75 per cent levy on the profits of domestic fossil fuel traders to harness record profits from global energy giants to fund support for household energy bills.
Last week, the Treasury unveiled the Energy Security Investment Mechanism (ESIM) earlier, which establishes a price floor at $71.40 per barrel and 54p per therm.
At this point, the Energy Profits Levy – known as the windfall tax – would fall away entirely, with taxes on earnings dropping from 75 to 40 per cent.
However, oil prices would need to fall below the price floor for a period of six months for the windfall tax to be removed.
Based on forecasts from the Office for Budget Responsibly, ESIM will not be triggered before the tax’s planned end date in March 2028.
The plans were met with short shrift across the industry.
An industry source told Morning Wire that the ESIM “doesn’t do anything” to change investment conditions and will not encourage banks – which have toughened lending rules – to provide more capital to oil and gas companies.
They dismissed the floor threshold as below conventional conditions – with six month periods of oil prices that low typically representing only severe economic conditions.
Another industry source told City A.M. they were “extremely disappointed.”
Investment analysts Stifel do not expect the latest changes to improve the terms of lending for North Sea oil and gas players.
Stifel said: “We think overall Iending capacity will still shrink, as banks still consider the UK as riskier now than before the windfall tax implementation, just hopefully by not as much as it would otherwise have done prior to this proposed price floor.”
It expects lending capacity was likely to fall by 50 per cent post the windfall tax – referencing Neptune Energy, which saw its reserves-based borrowing capacity shrink 45 per cent at its redetermination earlier this year from £1.97bn to £1.20bn.
When approached for comment, a government spokesperson said: “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.
“This is also why we introduced a new Energy Security Investment Mechanism to give investors the confidence they need to continue investing and secure the long-term future of our domestic energy production, which is vital as we transition to net zero”.