Already reeling from the impact of the windfall tax levy, some North Sea firms are reportedly adjusting plans in expectation of losing investment incentives under a Labour government.
Having been a leading proponent of a windfall tax earlier this year, Labour says if elected it would amend the current Energy Profits Levy (EPL) to capture more than £16bn of additional tax revenue, chiefly by removing tax rebates for North Sea investment.
The recent turmoil in Conservative leadership has many pundits already eyeing the prospect of a Labour government within the next few years. Yet the suggestion appears to have spooked some energy investors, with one analyst suggesting plans are already being adjusted accordingly.
Oil and gas research analyst Ashley Kelty of Panmure Gordon said some companies are “looking at the longer term view” and are “concerned” that a change in government – and policy – would be detrimental for the North Sea.
Tax hike
In the Autumn Budget, chancellor Jeremy Hunt hiked the oil and gas windfall tax by 10% – to a total of 35% – expected to pay out £40bn to the Treasury by 2028. It means oil and gas firms will now pay 75% total on profits through to 2028 – the new “sunset clause” for the Energy Profits Levy (EPL) – even if oil prices fall.
Yet under the revised terms, oil and gas firms can claim a £91.40 rebate for every £100 invested, rather than the previous £91.25 – and even more for investments in decarbonisation projects.
Labour has said scrapping these rebates on investments in new oil and gas projects would allow it to raise a further £10.6bn over the term of the policy.
It has also argued that backdating the EPL to January 2022 year could raise an additional £2.6 billion, while raising the headline tax rate to 38% – in line with the headline rate for Norwegian oil and gas firms – would raise a further £3.6 billion.
“Labour would be making fairer choices – fairly taxing the windfall profits of war, instead of diving into working people’s pockets first,” Shadow Chancellor Rachel Reeves said in a statement.
Use it and lose it
Yet as Mr Kelty sees it, the prospect of further changes is not encouraging to many firms’ investment plans.
“They do fear that Labour would adopt a populist approach and seek to punish energy companies, despite the inherent risk to energy security that would create,” he told Energy Voice.
“Some companies that I have spoken to are admitting privately that they are looking to invest only in short-term projects that are quick to deliver, and thus able to maximise the usage of the investment allowance before it is taken away.”
The Labour Party has been approached for comment.
The impact of the current levy is already manifesting in corporate investment decisions – albeit not uniformly.
The head of TotalEnergies UK business, Jean-Luc Guiziou, told Energy Voice earlier this month that the EPL would see the company slash around £100m from its 2023 investment plans, affecting plans for infill drilling at its Elgin field in particular.
Meanwhile, last week Harbour Energy signaled it will not participate in the upcoming 33rd Licensing Round as it reviews investments across the company. The independent producer – which has invested heavily in production and M&A over the past few years but has few new projects against which to offset current gains – has been one of the firms most exposed to the policy.
Harbour boss Linda Cook had already said the move would prompt Harbour to diversify its areas of operation, and look outside of the UK – making good on a repeated warning delivered by sector representatives such as Offshore Energies UK (OEUK) and even Conservative MPs.
Mr Kelty said changing expectations as to the fiscal regime were also affecting transactions.
“In addition, they said that they are also looking at M&A activity on the same basis and this is causing negotiations to be pushed back as both sides look to work out a compromise on valuation.”
Moreover, the prospect of losing future tax incentives is likely to cast a shadow over longer-term, pre-FID projects such as the controversial Cambo and Rosebank fields.
Increasingly, it may prompt operators to look elsewhere altogether, as energy consultant Kathryn Porter suggests.
“The key issue is that the UKCS is technically challenging.
“If you have a global portfolio, you’re going to prefer easier areas with a more favourable tax regime. So [the UK] would produce less and import more, and UKCS Treasury receipts will continue to decline.”
In the meantime, OEUK and its members have continued to advocate for some form of price floor, so that the EPL could be phased out if prices fall below a certain threshold – similar to a scheme currently in place for power producers.
The trade body said it also asked for a Treasury to help rebuild confidence in UK investment and deliver a “sustainable and competitive” fiscal regime.
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