UK oil and gas producer Harbour Energy warns on windfall tax risk

Harbour Energy, the biggest oil and gas producer in the UK North Sea, has warned the government that it may be forced to reconsider investments in the country if the windfall tax on profits is increased.

Linda Cook, chief executive at the private equity-backed producer that has bought a substantial number of fields in the North Sea over the past five years, cautioned that investors were pushing the company to diversify into other geographies because of the so-called energy profits levy.

“While we fully recognise the significant challenge in the UK to put public finances on a sustainable footing, we urge the government to carefully consider the consequences of any increase in, or extension of, the EPL,” Cook said in a trading update on Thursday.

“At a time when oil and gas producers are being asked to invest more to help ensure the UK’s energy security and are considering longer-term, material investments in CCS (carbon capture and storage), additional taxes would run the risk of undermining our ability to do either.”

New prime minister Rishi Sunak and chancellor Jeremy Hunt are looking at raising the rate of the windfall tax, introduced in May, from 25 per cent to 30 per cent, taking the total tax on profits to 70 per cent. They are also considering extending the levy’s duration from the end of 2025 to 2028, as the UK races to plug a roughly £50bn fiscal black hole that was created in part by the energy crisis.

The windfall tax includes, however, a “super deduction” for investments in new oil and gas production, that rewards companies with an overall 91p tax saving for every £1 they invest. It has not yet been extended to investments in cleaner energy technologies such as CCS.

Cook said the potential for “further fiscal changes” was creating significant “uncertainty” for smaller independent oil and gas companies such as Harbour. The company, which joined the FTSE in London after taking over Premier Oil last year and buying a substantial portion of Shell’s North Sea assets in 2017, has a market capitalisation of £3.8bn, compared with £172bn for Shell.

“Evaluating expected returns from long-term investments has become more difficult and investors are advocating for geographic diversification,” Cook said.

In the first nine months of the year Harbour had revenues of $4.1bn but highlighted that the amount it received for its oil and gas was significantly below market rates, due to an extensive hedging programme.

People close to the company have argued that smaller independents have little choice but to hedge as part of financing agreements with lenders.

Harbour received an average of $80 a barrel for its oil in the first nine months compared with a market price of $105, while its gas sales delivered an average 86p a therm vs an average market price of 209p a therm.

The company has nevertheless raised its expected UK tax liability to $900mn, $400mn of which is from the EPL. Harbour had forecast a tax liability of about $500mn for the year.

Harbour is also returning substantial amounts of cash to shareholders, with $500mn paid out so far this year, along with a new $100mn share buyback programme. It expects to be debt-free in 2023. Its net debt was $1.1bn at the end of September.

The company’s share price has declined to 393p from just below 500p in August when gas prices reached a record high, reflecting a drop in gas prices and concerns about increased windfall taxes.