Windfall tax hikes risk no new North Sea investment, analyst warns

Monday, November 14, 2022 3:31 p.m.

The UK is not at risk of any new investment in the North Sea oil and gas sector if the government toughens the windfall tax at this week’s tax event, investment analyst group Stifel has warned. .

In his latest report on the oil and gas sector, chief executive Chris Wheaton predicts that future investment will only consist of pledges already made by energy companies in UK waters.

He said AM City“The combination of higher taxation and uncertainty about the tax environment, rather than the tax alone, is what is likely to reduce investment, as companies that have alternative regions in which investing will not want to risk locking up capital in a high tax environment.”

In the long term, Wheaton predicted this would lead to a faster decline in North Sea production and make the UK more dependent on imported gas.

AM City understands that Chancellor Jeremy Hunt is in favor of increasing the Energy Profits Tax from 25% to 35% and extending the duration of the tax from 2025 to 2028.

The government has been scrambling to shore up the country’s finances following the severe fallout in the mini-budget market two months ago under former Prime Minister Liz Truss.

He is preparing to further exploit record profits in the oil and gas sector, fueled by soaring oil and gas profits after the Russian invasion of Ukraine, to plug a £50billion fiscal black hole.

This is accompanied by record energy bills for households, with the government protecting households from the full extent of the wholesale price spike via the energy price guarantee – which is due to be phased out in April.

Cornwall Insight expects the price cap to rise to £3,702 per year in April, well above the current record averages of £2,500 per year set in the support package.

Wheaton doubted the windfall tax would be eased, even if the government turns out to be overpricing raw materials, with oil and gas slipping amid warmer weather and reduced demand these days. last weeks.

He said: ‘It is clear to us that even if prices fall further the windfall tax will not be removed – this is politics, not politics.

Along with the rates of the tax and its duration, Wheaton further believed that the investment allowance would be reduced, not expanded in accordance with a longer tax.

Currently, it offers 80% investment relief to oil and gas operators in the North Sea, saving £91 pence, allowing enough new domestic projects to be developed – with the exploration of fossil fuels featuring the UK’s energy security strategy.

AM City revealed last weekend that the big energy companies pushed the government to keep the investment allowance in line with any exceptional tax expansion, while Labor is pushing for it to be scrapped altogether.

Wheaton argued that the government should instead focus on reforming the balance of investment relief – rather than reducing or removing it.

He said: “The investment tax allowance makes no distinction between gas and oil, and the government treats all production equally, although the UK is more dependent on gas imports than imports. oil.”

The UK produces around 45% of its gas domestically – and relies on Norway as its main foreign partner, which supplies 38% of the country’s gas needs.

On the other hand, it produces around 70% of its oil needs, which makes investments in such projects less critical for the UK’s security of supply.

Independent businesses will suffer from the tax

A windfall tax could also hit independent businesses disproportionately more than energy giants, according to Stifel.

This is due to the fact that these producers lack diversification in their ventures compared to companies with a large international footprint.

For example, Serica and Harbor would suffer a much greater impact on their market capitalization due to an increase in windfall tax than BP, Shell and Total Energies.

Serica could potentially suffer a drop of more than 20% in its market capitalization, compared to less than 1% for Shell.

Without further investment in new projects, industry body Offshore Energies UK warns the UK could depend on overseas suppliers for 70% of its oil and 80% of its gas by the end of the decade – putting the UK at risk the country’s energy independence while increasing emissions. .

The Climate Change Committee, Westminster’s independent advisory group, predicts that half of the UK’s energy needs by 2050 will still be met by oil and gas, and up to 64% of the UK’s energy needs between 2022 and 2037.

North Sea specialists face a bigger blow than their multinational rivals (Source: Stifel)

OEUK recently released its economic report on the sectorwhich revealed that only five exploration wells were drilled last year.

This is the lowest total since the North Sea sector was opened up for development almost 60 years ago.

The UK is currently pursuing a mega liquefied natural gas deal with the US as part of a future Energy Security Partnership, which could deliver 10 billion cubic meters of gas.

For context, the whole of the European Union has been promised 15 billion cubic meters by the United States this spring.

National Grid has warned of blackouts as a potential worst-case scenario this year, and pressure has been building in Downing Street since talks with Norwegian energy giant Equinor over a possible 20-year gas deal hit the rocks last week – with The Treasury balking at the asking price.

Wheaton argued that domestic energy generation should be a priority as the UK strives to meet its net zero targets with an oil and gas base to meet its energy needs over the next few months. decades.

He said: “The transition to renewable energy must take place to save the planet. The way to minimize the cost of this transition is to ensure that there is a steady decline in hydrocarbon use and therefore production, but this scenario requires investments in hydrocarbons to be sustained to ensure a smooth transition and just between the energy system that we have now and the one that we must have in 25-30 years.