North Sea operators warn of reduced investment and output

Oil and gas operators reacted with dismay on Thursday after the UK government surprised them with a multiyear raid on their profits with some warning that they would review their commitment to the North Sea.

Executives had expected Rishi Sunak to hit them with a one-off windfall tax, to help finance measures to ease the cost of living crisis, but instead the chancellor announced it could remain in place until the end of 2025. In a further blow to the sector, the levy is designed to bypass various specific North Sea tax reliefs used by many operators.

BP, which had previously said a windfall tax would not impact its plans to invest £18bn in the UK over the next eight years, led the complaints about what it dubbed Sunak’s “multiyear proposal”.

The oil major, the third-largest UK oil and gas producer, said: “Naturally we will now need to look at the impact of both the new levy and the tax relief on our North Sea investment plans.”

Deirdre Michie, chief executive of the North Sea trade body Offshore Energies UK, warned the new levy would “drive away investors and so reduce UK energy production” at a time when UK ministers want to bolster domestic supplies.

“Right now, the key task is to prevent a flood of investment formerly earmarked for UK energy projects now being diverted to Norway, Saudi Arabia, and Qatar,” she added.

Sunak’s 25 per cent “energy profits levy” will immediately increase the combined tax rate paid by North Sea producers to 65 per cent from 40 per cent, raising £5bn in its first year.

The chancellor conceded the tax could be phased out earlier than the end of 2025 if oil and gas prices “return to historically more normal levels”. But companies warned the lack of clarity would affect an industry which has to plan years in advance because of the complexity of oil and gas projects.

North Sea specialist EnQuest said long-term, stable taxation arrangements were “fundamental to guaranteeing the investment required by the oil and gas industry to ensure the UK’s energy security and support the energy transition”.

Sector specialists added that the way the levy circumvented established tax breaks could also hit investment plans. Operators have used losses racked up after the oil price crash of 2014 to offset their UK tax bills, while other reliefs are designed to help with the decommissioning costs of depleted oil and gasfields.

“People who thought that in the next year or so they would be using these historic losses before they had to pay any tax are suddenly going to be facing a tax bill of 25 per cent on their profits. That will come as a real shock,” said Derek Leith, global oil and gas tax leader at EY.

In recent years fewer than 35 oil and gas groups have consistently made tax payments, the Treasury said although it did not detail how many other companies it expected would be captured by the new levy.

Shell, Europe’s biggest oil company, has not paid any tax on its oil and gas production in the UK North Sea for four years, although it has previously said it expects to start contributing in 2022.

Investment bank Jefferies estimated that BP’s tax bill would increase by $100mn in 2022 and $800mn in 2023. At TotalEnergies, the second-largest oil and gas producer in the North Sea, the incremental tax impact was expected to be $500mn in 2022 and $900mn the following year, while for Shell it said it expected the impact would be negligible.

In a bid to offset industry concerns, Sunak announced that North Sea operators planning big investments in new hydrocarbons projects would benefit from a new investment allowance built into the levy, which would mean companies receiving an overall 91p tax saving for every pound they invest, the chancellor said.

Giving these firms even bigger tax breaks to extract more oil and gas will lock in greater dependence on fossil fuels — this is bad for future energy bills, our energy security, and our environment.

Officials hope the allowance will ensure companies continue to plough ahead with new projects to bolster the country’s domestic energy supplies.

Shell acknowledged that the investment allowances were “a critical principle in the new levy” but stressed that “a stable environment for long term investment” was fundamental to its aim to invest as much as £25bn over the next 10 years, mostly in low and zero-carbon projects.

Climate groups hit out at the chancellor for not including low carbon projects within the investment allowance. “Giving these firms even bigger tax breaks to extract more oil and gas will lock in greater dependence on fossil fuels — this is bad for future energy bills, our energy security, and our environment,” said Luke Murphy, associate director for energy and climate at the IPPR think-tank.

Shares in smaller North Sea oil and gas companies, including Serica Energy and EnQuest plunged following the chancellor’s announcement. Companies with large investment programmes or with global operations, such as Harbour Energy were less affected. Shares in Serica fell 14 per cent, EnQuest closed down 7 per cent.

Electricity generators fear they could be slapped with their own profits levy in the autumn after Sunak said he was considering “appropriate steps” to target their “extraordinary profits” when households start to bear the brunt of recent sharp rises in energy bills as they switch on their boilers.

“We will have to be clear all the time that we are investing [in the UK] and we are green,” said one senior director at an electricity generation company.

Shares in some electricity generators fell on Thursday with Centrica down 7 per cent, Drax 4.5 per cent and SSE nearly 5 per cent.