UK one-off tax hits North Sea oil investment

Berthed in the Cromarty Firth near Inverness in north-east Scotland, Ping Petroleum’s up to 270,000 barrel oil extraction and storage vessel is an imposing presence in a port full of components destined to fuel the UK economy.

About 60 meters in diameter and about 45 meters high, the Excalibur is a floating vessel deployed near platforms to receive, store and process oil before transferring it to tanks.

Ping bought the ship in mid-2022 as energy prices rose after Russia’s full-scale invasion of Ukraine and anticipated using it for up to 15 years. But the imposition of a one-time tax on UK oil and gas groups and potential regulatory changes have prompted the company to delay plans for an around £100m refurbishment which would make the vessel one of the first to operate with electricity.

The higher fees mean Ping is one of several smaller companies whose bets on cashing in on Britain’s aging oil pool by snapping up assets abandoned by international majors risk taking a turn for the worse.

“(Policy uncertainty) reduces our willingness to spend money to get things done quickly, because if we spend and the policy changes, then we have to start over,” Ping President Robert Fisher said aboard the ship. “People are leaving the fields with significant reserves.”

The Labor government last month fulfilled its pre-election pledge to raise headline tax on oil and gas companies by 3 percentage points to 78% and extend the one-year tax exemption until 2030.

The move to increase the levy, first introduced by the then Tory chancellor Rishi Sunak in May 2022, sparked protests from industry bosses who warned it would hit the tax in the long term, prompting more companies to abandon projects and lay off workers.

Estimates published before Labor’s announcement by the Office for Budget Responsibility, the tax watchdog, showed that tax revenue from the UK’s oil and gas industry would collapse to £2.2bn by 2029, from £9.8 billion pounds in 2023.

Executives raised the alarm over Labour’s plan to scrap allowances that allow companies to offset investment spending against tax, saying the move would exacerbate a decline in industry’s share of private sector investment.

The government said last month it would provide the final details of its tax plans in its first budget on October 30, leaving the sector holding its breath.

Chris Wheaton, an analyst at investment bank Stifel, said Labour’s changes to exceptional taxes would raise around £4bn more for the Treasury – less than the £6bn the party is targeting to help finance GB Energy, the new state-owned company that will invest in renewable energy. The government would then lose around £11 billion in tax revenue over five years, he estimated.

“If the government implements the kind of windfall taxes that I’m talking about, then you’re going to end up with a cliff edge in UK energy production because the industry will be taxed into uncompetitiveness,” Wheaton said. “This will cause a very dramatic drop in investment and therefore output and jobs, and a big hit to energy security.”

The industry is already facing a big drop in production, which fell to 1.27 million barrels of oil equivalent per day last year from 4.33 million barrels in 1998, according to the North Sea Transition Authority. The regulator expects output to fall to just 730,000 barrels of oil equivalent in 2030.

David Whitehouse, chief executive of industry group Offshore Energies UK, said general uncertainty and the one-time tax had “meant that so far this year we are at historic lows for wells drilled in the North Sea and that fundamentally means we are not seeing the investment that the sector needs “.

Labour’s opposition to new drilling licenses has put the party at odds with union allies such as Unite. It said the measures risked turning oil and gas workers into the “coal miners of our generation” before a “just transition” to cleaner forms of energy can replace the often well-paid and skilled jobs.

More than 55,000 jobs supported by the North Sea industry have been lost in the past five years, according to OEUK, leaving just over 200,000, although climate change campaigners argue that new drilling will not protect jobs and ensure energy security.

HM Treasury said it was “extending and increasing the energy profits tax and closing its basic investment allowance to ensure oil and gas companies contribute more to our clean energy transition”.

“We will work with the sector to ensure that the transition over the coming decades does not put workers at risk,” he added.

The government’s position has its supporters. James Alexander, chief executive of the UK Sustainable Investment and Finance Association, which promotes sustainable investment, said the 3 percentage point increase in the one-off tax “brings us in line with Norway and is intended to be a catalyst for boosting private investment in renewable sources. . . That’s exactly what we want to see.”

Trader Viaro Energy also bet on the North Sea in 2020, paying £248m to buy RockRose Energy to expand into production.

Chief executive Francesco Mazzagatti said Viaro remained employed in the UK but that the last government’s “erroneous decisions” had forced companies to “learn to plan for the unplannable”.

Back at the Excalibur, whose delayed renovation has put at least 200 jobs on hold, Fisher said that despite changing attitudes to his industry, it would have a vital role to play in the energy transition.

“When we were selling oil in the late 1970s (and) early 80s, everybody wanted it,” he said. “Now there’s a sense that we’re not needed as much.”