Ithaca Energy and EnQuest are among the North Sea oil and gas producers most at risk from Labour’s policy changes, ratings agency Moody’s has said.
The Labour Party came under fire by the trade body representing the independent oil and gas producers most affected by North Sea policies as politicians vie for voter support in the general election on 4 July.
In its recently published election manifesto, Labour proposed changes to tax allowances, ending new exploration and increasing and extending the existing Energy Profits Levy (EPL), which BRINDEX said shows Labour has failed to grasp the importance of the sector and the impact their policies will have as companies face downgrades by ratings agencies.
In a market comment, Moody’s warned that a Labour victory in the upcoming election would negatively affect North Sea oil and gas producers’ credit ratings.
It singled out Ithaca (which Moody’s rates as B1 review for upgrade) and EnQuest (B3 stable) as likely to be most affected by the revisions, particularly through the removal of investment allowances.
According to Moody’s, Labour’s plans to remove EPL-related investment allowances would drive up tax bills and reduce available liquidity and capital for reinvestment for companies across the UK continental shelf.
Ithaca and EnQuest
The ratings agency warned that both Ithaca and EnQuest carry substantial UK tax losses on their balance sheets.
This would “delay the cash flow impact of rising tax-related outflows in the short term, assuming producers continue to be able to offset a portion of their taxes with tax losses carried forward from previous periods,” Moody’s said.
Unlike most E&P companies, which have been moving away from the maturing UK North Sea, Ithaca extended its operations in the region when it snapped up Eni’s UK oil and gas assets in a £754m stock deal in April.
According to Moody’s, the company also faces rising investment requirements to bring on stream the Rosebank project, an undeveloped field approved by regulators in 2023 and developed by Equinor.
Ithaca was previously hit by a $500m impairment against its Greater Stella Area, which it blamed on the windfall tax.
EnQuest would also face significant challenges to its core exploration and production business, Moody’s said.
However, the ratings agency added, the negative impacts might be mitigated by the company’s work decommissioning mature oil fields and its potential to diversify into green energy projects, such as carbon capture and storage, green hydrogen and electrification at its Sullom Voe Terminal.
Independent producers
Moody’s noted that Ithaca and EnQuest won’t be the only companies hit by Labour’s proposals, and warned that the impact would be greater for local independent producers than the large oil majors.
Due to their smaller size and limited ability to diversify beyond their core exploration and production work, independents will be less able to withstand the potential changes in fiscal regimes or fiscal uncertainty.
Smaller producers also face significant maintenance costs as they sustain older oil fields with steep rates of annual production decline. Moody’s added that this would likely lead to reduced borrowing capacity and access to capital markets, an effect that was previously seen following the introduction of the EPL in 2022.
Commenting on the Moody’s report that Labour’s policies on oil and gas would push the sector into “credit negative”, chairman of trade body BRINDEX Robin Allan said: “The downgrading of North Sea oil and gas producers to credit negative under Labour’s plans shows clearly that the Labour party don’t listen to business and have failed to understand the strong macroeconomic arguments in favour of further UK oil and gas development.
“Labour understands that there will be a need for oil and gas in the UK for decades, but have taken a position that importing our oil and gas is preferable to domestic production. Labour’s position fails when subject to any economic, environmental, social or geopolitical scrutiny.
“Labour have said that the ‘North sea will be managed in a way that does not jeopardise jobs’, but the reality is that Labour’s oil and gas policy could see job losses in the sector of up to 100,000 by 2030 according to investment bank Stifel.
“The UK oil and gas industry has put forward a positive case for its continuation in the national interest. Following the outcome of the general election in July, BRINDEX and its members calls on the Labour party to engage positively with the industry, its union representatives and its workers.”
Ithaca and EnQuest were approached for comment.
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