Windfall tax: tinkering will not pour oil on troubled North Sea waters

Tightrope walking over the churning North Sea is difficult — as the UK government is discovering. It seeks to tread the narrow space between maximising its take of oil and gas profits and securing investment into the sector. In the process, it is wobbling perilously. The latest iteration of its oil and gas windfall tax, which will now not apply below a threshold price, does little to help.

It is not hard to see why the UK is moving to fix the Energy Price Levy. As has previously Lex noted, it is not, in fact, a windfall tax at all. It raised the tax rate to 75 per cent until 2028, irrespective of oil and gas prices. This made short-cycle investments less attractive. It also hit the ability of independent exploration and production companies to access bank debt secured on oil and gas reserves.

In theory, setting a price under which the windfall tax no longer applies should reduce downside risk for the E&P and for lenders. But its impact may well end up being marginal. 

For one thing, the UK government — seeking to protect its fiscal take — has made it hard to trigger the threshold. Both oil and gas prices have to fall below their respective long-term prices — of $71.40 a barrel for oil, and 54p/therm (equivalent to $40.70/barrel) for gas — for two consecutive quarters. With UK gas prices expected to remain far above their floor, oil-producing companies could get stuck paying the higher levy even if the oil price drops. 

Meanwhile, access to capital for oil companies is in secular decline. Net zero conscious banks, including BNP Paribas and Lloyds, have recently announced their exit from reserve-based lending.

Lastly, while imposing a floor may reduce uncertainty, there is still plenty of it around. As Stifel, a broker, notes, this is the 10th change in energy policy since 2002. To be fair, this one tinkers in the right direction. But investors, burnt time and time again, will be fearful of what the 11th might look like.