UK windfall tax hits North Sea oil investment

Docked in the Cromarty Firth near Inverness in north-east Scotland, Ping Petroleum’s vessel for extracting and storing up to 270,000 barrels of oil is an imposing presence in a port full of components set to power the UK economy.

Some 60 metres in diameter and about 45 metres tall, the Excalibur is a floating ship deployed near platforms to receive, store and process oil before transferring it into tankers.

Ping bought the vessel in mid-2022 as energy prices surged after Russia’s full-scale invasion of Ukraine, and anticipated using it for up to 15 years. But the imposition of a windfall tax on oil and gas groups in the UK and potential changes in regulation have caused the company to delay plans for a roughly £100mn refurbishment, which would make the ship one of the first to run on electricity.

Higher levies mean Ping is one of several smaller companies whose bets on eking out profits from the UK’s ageing oil basin by taking over assets being abandoned by international majors risk turning sour.

“[Policy uncertainty] reduces our willingness to spend money to do things quickly because if we spend and the policy changes, then we have to start all over again,” said Ping chair Robert Fisher aboard the vessel. “People are walking away from fields with significant reserves.”

The Labour government last month delivered on its pre-election pledge to lift the headline taxes on oil and gas companies by 3 percentage points to 78 per cent and extend the windfall tax by one year to 2030.

The move to increase the tax, first introduced by then Conservative chancellor Rishi Sunak in May 2022, sparked an outcry from industry bosses, who warned it would hurt long-term tax take by leading more companies to abandon projects and fire workers.

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

Executives have sounded the alarm over Labour’s plan to axe allowances that enable companies to offset investment spending against their tax bill, saying the move would exacerbate a decline in the 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, analyst at investment bank Stifel, said Labour’s changes to windfall taxes would raise about £4bn more for the Treasury — less than the £6bn the party is targeting to help fund GB Energy, the new state-owned company that will invest in renewable energy. The government would then lose about £11bn in tax revenue over five years, he estimated.

“If the government implements the kind of windfall taxes they are talking about, then you end up with a cliff edge in UK energy production because the industry will be taxed into uncompetitiveness,” Wheaton said. “That is going to cause a very dramatic decline in investment and therefore production and jobs, and a big hit to energy security.”

The industry is already grappling with a big drop in production, which fell to 1.27mn barrels of oil equivalent per day last year from 4.33mn barrels in 1998, according to the North Sea Transition Authority. The regulator estimates production will slump 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 windfall tax had “meant that so far this year we are at historical 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 licences have also put the party at odds with trade 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 could replace the often highly 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 campaigners argue that new drilling will not protect jobs or ensure energy security.

HM Treasury said it was “extending and increasing the Energy Profits Levy, and closing its core investment allowance, to ensure oil and gas companies contribute more towards our clean energy transition”.

“We will work with the sector to ensure the transition over the next decades does not jeopardise workers,” it added.

The government’s position does have its supporters. James Alexander, chief executive of UK Sustainable Investment and Finance Association, which promotes sustainable investment, said the 3 percentage point increase in the windfall tax “puts us in line with Norway and is earmarked to be catalytic for driving private investment into renewables . . . It is exactly what we want to see.”

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

Chief executive Francesco Mazzagatti said Viaro remained committed to the UK but that “erratic decisions” by the last government had forced companies to “learn to plan for the unplannable”.

Back at the Excalibur, whose delayed refurbishment 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 is a sense that we are not needed quite so much.”