North Sea operators warn of lower investment and output

Oil and gas operators were frustrated on Thursday after the British government surprised them with a multi-year raid on their profits and warnings they would revisit their commitments to the North Sea.

Executives had expected Rishi Sunak to impose a one-off windfall profits tax on them to help fund measures to ease the cost of living crisis, but the chancellor has instead Announce It may continue until the end of 2025. In a further blow to the industry, the tax is designed to bypass various specific North Sea tax breaks used by many operators.

BP has previously said The windfall will not affect its plans to invest £18bn in the UK over the next eight years, prompting complaints about what it called Sunak’s “multi-year proposal”.

The oil major, Britain’s third-largest oil and gas producer, said: “Of course we now need to consider the impact of new levies and tax breaks on our North Sea investment plans.”

Deirdre Michie, chief executive of North Sea trade body Offshore Energies UK, warned that the new levy would “drive away investors and thus reduce UK energy production” at a time when ministers hope to boost domestic supply.

“Right now, the key task is to prevent significant investment previously earmarked for UK energy projects from now being diverted to Norway, Saudi Arabia and Qatar,” she added.

Rishi Sunak’s 25% “energy profits tax” will increase the combined tax rate paid by North Sea producers from 40% to 65% © Jessica Taylor/UK Parliament

Sunak’s 25% “energy profits tax” will immediately raise the combined tax rate paid by North Sea producers from 40% to 65%, raising £5bn in the first year.

The chancellor admitted the tax could be phased out by the end of 2025 if oil and gas prices “return to more normal levels in history”. But companies warn that the lack of clarity will affect an industry that must plan years in advance due to the complexity of oil and gas projects.

North Sea specialist EnQuest said a long-term, stable tax arrangement was “the basis for securing the investment the oil and gas industry needs to ensure the UK’s energy security and support the energy transition”.

Industry experts add that taxation methods that circumvent established tax breaks could also affect investment plans. Operators have used losses accumulated after the 2014 oil price crash to offset their UK tax bills, while other reliefs are designed to help reduce the cost of decommissioning depleted oil and gas fields.

“Those who think they’re going to take advantage of these historic losses for the next year or so before they have to pay any tax will suddenly be facing a 25% tax bill on their profits. That’s going to be a real shock,” Ernst & Young Global Oil & Gas Tax chief Derek Leith said.

The Treasury Department said fewer than 35 oil and gas groups have consistently paid taxes in recent years, although it did not detail how many other companies it expected to be taxed under the new tax.

Shell, Europe’s largest oil company, did not pay any tax Its oil and gas production in the UK North Sea is for four years, although it has previously said it expects to start contributing in 2022.

Investment bank Jefferies estimates BP’s tax bill will increase by $100 million in 2022 and $800 million in 2023. At TotalEnergies, the North Sea’s second-largest oil and gas producer, it expects $900 million in 2022 and the following year, while for Shell it said it expects the impact to be negligible.

To offset industry concerns, Sunak announced that North Sea operators planning large-scale investments in new hydrocarbon projects will benefit from a new investment allowance built into the tax, meaning companies will receive 91p for every pound invested. Total tax deduction. said the Prime Minister.

Officials hope the stipend will ensure the company continues to move forward with new projects to bolster the country’s domestic energy supply.

Shell acknowledges investment allowances as “a key principle of the new levy” but emphasises a “stable long-term investment climate” underpinning its target to invest up to £25bn over the next 10 years, much of which is low and zero carbon project.

Climate groups have slammed the Prime Minister for not including low-carbon projects in investment grants. “Giving these companies bigger tax breaks to extract more oil and gas would lock in a greater reliance on fossil fuels — which is bad for future energy bills, our energy security and our environment,” he said. Luke Murphy, deputy director of energy and climate, speaks at the IPPR think tank.

Shares in small North Sea oil and gas companies including Serica Energy and EnQuest tumbled after the prime minister’s announcement. Companies with large investment plans or global operations, such as Harbour Energy, were less affected. Serica shares fell 14% and EnQuest closed down 7%.

After Sunak said households were considering “appropriate measures” to target their “extraordinary profits” as households began to bear the brunt of the recent sharp rise in energy bills, generators feared they could be taxed on profits in the autumn. their boilers.

“We must always know that we are investing [in the UK] We are green,” said a senior executive at a power generation company.

Shares in some power generators fell on Thursday, with Centrica down 7 per cent, Drax down 4.5 per cent and SSE down nearly 5 per cent.

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