A North Sea firm has asked Jeremy Hunt to provide a “small fields allowance” in the windfall tax, reinstating legislation from George Osborne’s era in the Treasury.
In a letter seen by Energy Voice, IOG (LON:IOG) has made the request of the Chancellor for all smaller North Sea producers, ahead of a widely-expected increase to the windfall tax during the Autumn Budget next week.
CEO Rupert Newall said a “small fields allowance” for these “economically challenging” fields could mitigate decline in the southern gas basin in the UK, and “potentially pay for itself over time” as these projects would be liable for production taxes.
IOG argued that the UK’s stock of producing fields is declining, with a greater reliance on smaller projects – though these are subject to the same fiscal regime as larger producers despite being more technically and economically challenging.
Mr Newall cited legislation introduced in 2010 – replaced in 2015 – which allowed smaller fields (below seven million tonnes of oil equivalent) lower rates of taxation.
Doing so would “mitigate basin decline, underpin UK energy resilience” and reduce reliance on imports, as well as support the supply chain, he argued.
He said it is “concerning” to hear of the planned increase to the windfall tax -known as the Energy Profits Levy (EPL) next week – an expected increase of 5% and a timeline extension of another three years to 2028.
Government sources are reported as saying the UK faces a £50bn fiscal black hole which needs to be plugged in the upcoming budget on November 17.
Difficult reality
IOG – a specialist in smaller developments in the southern gas basin – is the UK’s newest gas producer, bringing its flagship Saturn Banks development online in March, before the current windfall tax was introduced.
That means none of the investment incentives linked to the EPL – a 91% allowance on investments – were available to IOG.
Mr Newall said this is a “difficult reality” to accept, given that IOG’s spending trumped its entire market capitalisation of £61.4m, but this was “accepted in recognition of this government’s efforts to tackle significant cost of living pressures”.
IOG reinforced the importance of smaller UK upstream companies in the energy ecosystem, and the difference between them and larger energy majors whose revenues come from all around the world.
Mr Newall said smaller firms like his “play an important role in our national energy ecosystem, yet we are very different in size and scope to the energy majors”.
With many of the larger southern north sea gas fields now depleted, the role of companies like his is to exploit “smaller, more technically challenging remaining resources”.
Marginal economic undertaking
Mr Newall added: “By definition, this is a more marginal economic undertaking, but it is currently subject to the same fiscal regime as larger projects operated by bigger companies.
“However, that has not always been the case. The Qualifying Oil Fields Order (2010 No. 3153) previously reduced the amount of adjusted ring fence profits on which the Supplementary Corporation Tax charge (SCT, which was in effect the windfall tax of its time) was levied.
“This included a small oil or gas fields allowance for which the initial threshold was up to 3.5 million tonnes of oil equivalent, which was subsequently lifted to 7 mmtoe. Investment allowance legislation introduced later in the Finance Act 2015 replaced the field allowances legislation, including that for small fields.”
IOG said there is “compelling rationale” to reintroduce the small fields allowance as the UK sector matures and fewer big fields are developed.
“By enabling operators to justify investment in the more economically challenging sub-7mmtoe projects, a successful UK small field strategy would mitigate basin decline, underpin UK energy resilience with more domestic energy, and limit further dependence on expensive, non-tax generating imports to fuel our homes and power our industries.”
IOG said in the letter that it follows similar pleas to Mr Hunt’s predecessor – the now prime minister Rishi Sunak – for a small fields allowance, along with a small companies and lower emissions allowances.
The move also follows a letter by the organisation Brindex, which IOG is part of, earlier this week.
The Treasury was not immediately available for comment.
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