Trouble deepens for North Sea oil and gas

When the Labor Party came to power, it promised to tax the oil and gas industry more. Warnings that this could backfire fell on deaf ears. Banks are now refusing to lend to North Sea operators. It could end up with power outages.

“To deliver our clean energy mission, Labor will work with the private sector to double onshore wind, triple solar and quadruple offshore wind by 2030,” Labor said in a pre-election manifesto. Instead, their plan for oil and gas was increased tightening through taxation and regulation.

Indeed, with the formation of the Keir Starmer government, pressure on oil and gas has increased. The one-off tax that the previous Conservative government had put in place was left in place, with an investment incentive that the Conservatives implemented to prevent the industry from growing and going out of business. Labor clearly wanted to have a transition, have it quickly and fund it with oil and gas tax money.

However, this tax has caused a backlash in the industry and is now appearing in the banking sector as well. For starters, North Sea operators have warned they may be forced to relocate to survive. “Britain is now more fiscally unstable than almost anywhere else on the planet,” the CEO of Serica Energy, one of the region’s biggest oil and gas producers, said last month. “This means we are looking for new places to invest our money. And Norway is a place where we could recreate our business model.”

Related: Shell abandons hydrogen projects in Norway due to lack of demand

Now it looks like the banks will encourage even more energy companies to leave the UK as they have reduced the amount of money they are willing to lend to the industry – because of the windfall tax. This is the same windfall tax that the Labor government wants to use as a cash cow for the energy transition, one of the ultimate goals of which is to literally kill the oil and gas industry.

“The North Sea oil and gas industry, particularly in Scotland, is starved of funding,” an energy industry insider told the Financial Times last week. “This financial strain extends beyond traditional banks as even insurance companies begin to withdraw their support, which threatens the viability of many businesses,” said David Larssen, CEO of Proserv, which provides offshore operators with subsea control systems.

The windfall tax was imposed on the energy industry in 2022 amid record profits resulting from uncertain oil and gas supplies following the incursion of Russian troops into Ukraine. Initially, the size of this additional tax was 25%, to be increased next year to 35%. This raised the total tax burden on oil and gas companies to a rather hefty 75%.

However, the Conservative government allowed a windfall tax break if the company reinvested its profits into more supply. Labor has removed this exemption option. It also increased the tax on exceptional profits to 38%. Now the national budget will lose tens of billions of pounds – and the country will lose its security of energy supply.

According to data from Norwegian investment bank SpareBank 1 Markets, reserve-based lending to UK North Sea oil and gas operators has fallen by around 40-50% since the introduction of the windfall tax. This is a type of asset-backed loan where oil companies get money based on future cash flows, the FT explains. But with future cash flows highly uncertain, such funding was expected to dry up.

“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,” Robert Fisher, president of Ping Petroleum, told the FT.

The ultimate problem with this situation is that when there is no money, energy companies will not work to expand or even maintain production. This means, on the one hand, lower revenues for the state coffers and, on the other hand, less supply of oil and gas – while they are still very much needed.

“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,” Stifel analyst Chris Wheaton told the Financial Times in August . “This will cause a very dramatic drop in investment and therefore output and jobs, and will greatly affect energy security.”

It will also cause a dramatic drop in tax revenues from the energy industry, which last year reached nearly 10 billion pounds, or $13.3 billion. It is on course to fall sharply to around £2bn in four years if current tax policies remain in place. That £2 billion won’t help much in funding a transition, while at the same time it would make the UK more dependent on energy imports, which is never a good idea when you have your own oil and gases. In this sense, Britain may be a unique case worth studying by future generations.

By Irina Slav for Oilprice.com

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