Oil and gas companies are scaling back North Sea operations and prioritising investment outside the UK because of the government’s windfall taxes, the industry’s trade body has warned.
David Whitehouse, the new chief executive of Offshore Energies UK, said 95 per cent of members surveyed had been “negatively impacted” by the levy and were “looking to invest elsewhere”, adding that “this leaves the UK reliant on overseas imports and puts the UK’s energy security at risk”.
The energy profits levy was introduced last year to capture more of the bumper profits made by oil and gas producers following a surge in prices after Russia’s invasion of Ukraine. The government has since raised the levy, bringing the total tax rate on the sector to 75 per cent, although there is also a generous investment incentive that allows a 91p tax saving for every pound invested in the UK.
Harbour Energy, the biggest oil and gas producer in the North Sea, is planning to cut back and review its North Sea operations while TotalEnergies of France, another big player in British waters, is cutting investment in the UK by 25 per cent as a result of the windfall tax.
EnQuest has deferred drilling at its Kraken oilfield as a result of the levy and US-owned Apache has cancelled a drilling contract in the North Sea, arguing the tax had made the region “less competitive”.
Whitehouse warned that the “super tax is hitting all offshore companies hard, large and small, not just those who make headlines”.
Although 76 companies submitted 115 bids for oil and gas drilling permits in a licensing round this year, up from 104 bids in 2019, Whitehouse said there was no guarantee these would result in production.
Any increase in oil production will not alter the long-term decline of activity in the UK’s North Sea or directly lower fuel prices for domestic consumers as the oil price is set on international markets.
But Whitehouse said domestic output reduced reliance on imports and increased energy security.
“We know people are suffering a cost of living crisis, but undermining our own energy security and ramping up imports is not the answer,” he said.
Energy analyst Wood Mackenzie has also warned that the energy profits levy has wiped an average of 40 per cent off the value of North Sea producers.
Despite progress in the transition to renewable energy, the UK still relies on gas and oil for 75 per cent of its energy because of the intermittency of wind and solar power and limited battery storage.
A reliance on imported hydrocarbons and low levels of gas storage leave the UK particularly vulnerable to price spikes, although this is mitigated in part by its capacity to import liquefied natural gas and convert it back to its gaseous form.
Wholesale gas prices have fallen sharply over the past few months, in part because of mild weather and a rise in storage levels across Europe. But they remain volatile and there are fears of shortages next winter.
Ashley Kelty, analyst at Panmure Gordon, said the windfall tax was inequitable as “pharma and tech stocks, which also benefited massively from the pandemic, are only subject to UK corporate tax of 19 per cent despite the supernormal profits they realised”.
But Tessa Khan, director of environmental campaign group Uplift, said: “It’s galling that the oil and gas lobby is complaining about a tax rate that is roughly the global average when they’re making bumper profits and companies like Shell are paying out more to shareholders than they’re choosing to invest in oil and gas.”