Banks cut loans to UK North Sea oil groups as windfall tax hits industry

Banks have cut lending to UK oil and gas producers since the introduction of the one-off tax on fossil fuel companies in 2022, according to lenders.

The drop in borrowing is fueling concerns that Britain’s oil and gas industry could become “impractical” to invest in, threatening to shut down before renewable energy sources are available to fill the gap.

The industry has been at a standstill this year, with none drilled in the UK section of the North Sea.

An investment bank said available loans had shrunk by up to half since the introduction of the Energy Profits Tax – an extra tax imposed on oil and gas groups by the previous Conservative government after commodity prices rose as a result of large-scale growth . Russian invasion of Ukraine.

“The North Sea oil and gas industry, particularly in Scotland, is starved of funding,” said Davis Larssen, chief executive of Proserv, an Aberdeen-based provider of subsea control systems.

“This financial strain extends beyond traditional banks, as even insurance companies are beginning to withdraw their support, which threatens the viability of many businesses,” he added.

Debt available to UK companies under so-called reserve-based loans, a form of asset-backed lending secured against future cash flows, has fallen by 40-50% since the tax was introduced, Norwegian investment bank SpareBank said 1 Markets.

Fossil fuel companies often obtain financing through reserve-based loans, where the loans are repaid with revenues from the oil produced by the borrowers.

Businesses will face a total tax burden of 78% in November after Labor announced plans to increase the EPL, a temporary measure that was extended until 2030 to 38%.

They also risk losing capital spending and investment allowances after ministers said they wanted to close “unduly generous” tax loopholes.

Independent oil and gas producer Ping Petroleum has warned that investing in the UK could become “impractical” as a result of rising taxes and the loss of allowances, while energy consultants Wood Mackenzie said this month it could lead to a halving oil and gas production by 2030.

“It’s been very difficult for us recently because people who are providing capital are very uncertain about getting their money back because of policy changes,” said Robert Fisher, president of Ping.

In addition to fiscal uncertainty, pressure from environmental activists and the government to meet net-zero emissions targets in the transition to renewable energy has led major banks to pull back from financing.

Only five banks are currently lending to UK North Sea oil and gas companies, according to an industry executive.

Alternative sources of funding from bond investors, oil companies and energy traders have “ceased” in funding UK projects, another person said.

In addition, worries about the industry weighed on shares in UK groups, which underperformed Norwegians operating in the North Sea.

Share prices, including reinvested dividends, in UK-based Ithaca Energy, Serica Energy and EnQuest have fallen sharply since the end of 2022. Only Harbor Energy, which reduced its UK exposure, broke the trend with a stable share price .

In contrast, shares of Norwegian companies Vår Energi and DNO ASA fared much better over the same period, although stocks of Equinor, the country’s largest natural gas supplier in Europe, fell.

Some investors say Norwegian manufacturers have benefited from a stable policy that has barely changed in decades, despite similarly high tax levels of 78 percent.

The Norwegian government has also introduced incentives that allow oil and gas groups to deduct capital costs and claim partial repayments when they fall into a loss. This, investors say, explains the outperformance of their shares.

Oslo-based SpareBank 1 Markets adds that UK producers are typically charged up to 1 percentage point more for guaranteed loans than Norwegian groups due to tax uncertainty, while equity research analysts gave projects in UK a similar risk profile to those in Kurdistan and West Africa.

“It certainly wasn’t the case if you go back 10 years. This is a fairly recent change,” said Jarand Lønne, head of natural resources at the bank. “It’s more about stability and the ability to plan for the long term than the absolute level (of taxation).”

Analysts say the UK tax situation has also weighed on companies, making acquisitions more difficult.

Another sign of the problems in the North Sea is the decision by Neo Energy, Serica and Jersey Oil & Gas to postpone exploration of the Buchan Horst field.

“We would love to invest in the UK (and) we have options and things to do, but we can only do that if the tax regime allows us,” said Martin Copeland, chief financial officer at Serica. “Those (things) we can only do if we get the right result on capital allocations.”

Other UK groups were “actively looking” for opportunities in South America, West Africa and Asia, said Nick Dalgarno of investment bank Piper Sandler. One of his clients said he prefers projects in more stable regimes, such as Egypt.

“It’s quite interesting (because) historically if you said in the UK, people would always claim we were a stable environment,” he said.

However, the UK Treasury insisted the government “recognizes the need to provide long-term certainty over taxation” and will “work with the oil and gas industry” to develop a successor regime to the EPL levy when it expires to deal with energy shocks.