The City View: Offshore Energies UK CEO on deleterious effects of a windfall tax
Today Andy Silvester chats to Deirdre Michie, CEO at Offshore Energies UK.
They unpick the windfall tax, the risk it poses for smaller energy firms and the sector in general, the state of the energy industry, and the seemingly lackadaisical speed of the energy transition.
In other news: M&S is leaving its Russian franchise business, average petrol prices have exceeded £1.70 per litre, and members of the RMT union have voted in favour of a nationwide strike.
Episode transcript (auto-generated)
Andy Silvester 0:08 Good afternoon and welcome to The City View podcast. I’m Andy Silvester, the editor here at City AM. In a few minutes I’ll be joined by Deirdre Michie, the boss of Offshore Energies UK who will talk to us about the possibility of a windfall tax and more. Firstly, some of the corporate headlines and Marks and Spencers said it is leaving its Russian franchise business, as it also warned that sales growth will slow due to the cost of living crisis. The retail giants Russian arm, which is run in turn by a Turkish franchisee operates about 48 shops and 1200 employees in the country in March. The company stopped shipments to the stores, but has now said it will fully exit the franchise. Taking a 31 million pound cost it as a result is that profits for new financial year will start at a lower level due to the impact of that withdrawal, but also the end of the business rates holiday and it added that it expects this will stay lower throughout the year. Given the increasing cost pressures and consumer uncertainty that is out and about in the world. m&s highlighted that the increase in costs is weighing on consumers ability to spend and expects this pressure to increase further in the year. Showing over the past six weeks been slightly ahead of levels from last year. Don’t forget when we were still just about in pandemic restrictions, and that’s been driven by strong sales and its clothing and home operation. And elsewhere. Average petrol prices have now exceeded one pound 70 per litre for the first time the figures show. The average price of a litre of petrol at UK for course on Tuesday was 170.4 B. According to the data firm experienced catalyst. Diesel also reached a record high of 181.4 p per litre. Petrol has become around 41 p per litre more expensive over the past year, adding around 23 pounds the cost of filling your typical family car Ric called it an unfortunate landmark and of course, with our new online shopping pawnshop, that cost of petrol cost of diesel going up well of course hit all of our purchases that require vans to drop off at the front door. Meanwhile, insurance giant Prudential has poached its new boss from Canadia rival it announced on Wednesday. The business said the former Citibank annual Watani would pick up the reins in February next year. Prudential expected to tap into his experience of Asian markets where the Mumbai educated well one he has spent most of his career in Zurich courses listed and has headquarters in both Hong Kong and London. But there have been concerns in recent years that he might walk away from its London base after a pivot to Asia and Africa. And commuters wanting to brace themselves I’m sorry for a new wave of strikes after members of the r&d Union. Working in the railway industry decided in favour of nationwide industrial action. RMC announced the ballot results last night, with a majority voting in favour of walking out over pay and conditions. RMC general SEC Mike Lynch call that an overwhelming endorsement government and also railway operators all absolutely livid. And I have to say, I’m minded towards the latter rather than the former. But enough of that I’m now joined amid talk of a windfall tax, much discussion of the role of the offshore energy industry in the UK by Deirdre Michi, who is the boss of offshore entities UK representing the UK offshore energy providers and extractors and all sorts. Deirdre thanks for taking time out of what I imagine is a pretty busy schedule at the moment.Deirdre Michie 3:02 So thank you for asking me a pleasure to be here. Andy Silvester 3:06 Many of your members are used to navigating storms in the North Sea in particular, but it’s a political Maelstrom in Westminster that’s dominating many of the headlines at the moment and no doubt an awful lot of your work, much chatter of a windfall tax amid rising energy prices. Fair to say that there are some trade associations which shy away from from getting too involved in public political battles. But I think it’s fair to say a letter you sent early this week, laid out where the industry is, and why a windfall tax or one off levy on energy companies will be a bad idea. Why don’t you just talk us through the logic behind that? Deirdre Michie 3:42 Yeah, sure. No, thank you. Yeah. So I think, you know, we absolutely as a sector recognise there is a consumer crisis going on. I mean, that is obviously patently there. And it’s unprecedented, and people are really struggling recognise all that. But I think, you know, from our perspective, we do continue to push for fiscal predictability and stability. And for a number of reasons. One, we think it’s working in terms of the fiscal reasons that we have at the moment. You know, we’ve said that, you know, we’ll be paying another 7.8 billion pounds to Treasury this year, which could be used to alleviate the consumer crisis, we’re also then predicted to, and that’s a conservative protection in terms of another 43 billion over the coming five years so that the tax regime is working. And of course, we’re already our tax regime, you know, is twice what other sectors pay. So the point, though, is we don’t like as other businesses don’t like we don’t like unpredictability, we asked for stability, because we think it works. And our concern is that if there is a windfall tax, it will undermine the investment that we know is critical security of energy supply. So in the oil and gas, but also crucially is a to the energy transition. So we have have identified up to 250 billion pounds worth of potential spend and investment by the sector, across all the energies between now and 2030. We think that’s a that’s a risk, if there is a windfall tax that seeks to undermine that stability and that predictability. So the select the letter that you reference is one from our supply chain members. Because of course, you know, bashing the oil and gas operators, that’s just, you know, that’s a bit of a sport, really, but actually, the supply chain had come in behind to say, this is not just about the oil and gas operators, folks, this is about our business, our activity, and what hurts them will absolutely undermine our business. That’s where the jobs will go. And that, and they’re the people again, that we need to support the energy transition. So that’s kind of why we’re saying what we’re saying. Andy Silvester 5:53 That makes perfect sense. I think the one thing that people will push back about is around the investment piece, because, of course, BP boss Bernard Looney few weeks back, saying that if a windfall tax turned up, it wouldn’t stop BP in particular doing the investments that they had already got planned in. My instinct is that that is a slightly different story. For firms that are smaller, everybody thinks that this energy tax a one for one off Levy, whatever you want to call it as basically being around BP and Shell, we’re as guilty of that as anybody else. But talk to us about the wider collapse of North Sea energy environment, I guess, because there are more than two players, famously, Deirdre Michie 6:31 no thanks for that. There absolutely are. And I think, I think when Bernard Looney said when he said he did then come back later at the AGM to reinforce that actually, they do need, you know, fiscal predictability and stability in investment is key. But as you say, our basin is made up of quite a diverse portfolio of different operators, you know, some are your big shells, your big PE A big PPS, but others are smaller their niche players, and they are really worried about a windfall tax, because of the way they you know, their investments is profiling. There’s a lot of concern about the fact that, you know, we are coming in, we are in this perfect storm of inflation, very, very high skills being challenged, and to have the fiscal stability undermined as another part of what is becoming a very complex, challenging economic situation is really worrying other members. Andy Silvester 7:34 And talk to me about the state of the industry in when it comes to offshore energy in the UK. Because at the moment, when you look at energy prices, and you hear the narrative in the discussion, it sounds like things are going pretty well. But give us a sense of the last few years because it isn’t that long, of course, since global demand for oil in particular just fell off a cliff. Deirdre Michie 7:53 Yeah, absolutely. So So yes. So we’re now in a situation where yes, we’re seeing the returns. But as you say, this is on the back of a downturn that ever we went through where we saw firms with eye watering losses, and also our supply chain. So we actually, you know, started remember, starting at the beginning of 2020, thinking actually things were looking we’re starting to pick up because we were starting to recover from the previous downturn. Basically, the sector has seen two downturns one after the other, which does make us slightly different. So of course, then COVID hits, we then see companies absolutely pulling back. And that absolutely hitting the supply chain. And we estimated at the time that about 30,000 jobs were lost from the sector. So you start to see a gradual pullback, as we come through COVID people starting to build back, but still, you know, capex levels dropped by 30%. During that time, OpEx was sustained operation, operating expenditure was sustained because we kept producing. But all you know, albeit with restricted manpower. And so the whole thing has been about right, we need to bring that investment back. And that investments stopped for a number of reasons. Obviously, it stopped for the economic situation that we were all in. But it also pulled back because of the investor sentiment that the sector was facing, particularly in the UK, with cop 26. And the real push back around people saying actually, we don’t want oil and gas. And so that did you did find people hesitating to make financial investment decisions. And there was actually only one or two that went ahead last year. So that we know we’re seeing a real gap in capex commitments that have been sanctioned last year and moving into this year. Yeah, that Andy Silvester 9:45 makes sense. And I think I think people do forget, sort of stepping away from journalists towards commentator but people do forget quite how tough it was there in 2020. And of course back to 2014 the last oil crash it’s not exactly been a bed of roses and now for government to then turn up When things are starting to look better, and I think most people in the world do agree this is probably a temporary spike in energy prices, at least temporary in the in the grander historical scheme during year, two years, it does seem odd that they can then come back at the other end potentially, with with the demand for for more cash for an industry, which as you say is already overtaxed talk to us just about criticism that comes from another area, not just to criticism that you’re making money, but the criticism that you’re not moving fast enough in the transition that North Sea oil and gas is, is an industry that the UK might be better off without, for the sake of its climate targets. There will be people that say, you know, blimey, windfall tax on these companies, and moving beyond that time, stop taking, you know, natural resources out the North Sea, or whatever it might be. How do you, as a, you know, in your role, how do you push back at that? What’s the argument back to those people who have very strongly held views? Deirdre Michie 10:58 So I think I think it’s, then let’s look at the data. So you know, we look at the committee on climate change data, which points to the fact that the UK will continue to use oil and gas as we go through this transition. And our argument is that for as long as you as you can use this oil and gas, we should be using what we produce on ongoing basis. So optimising the jobs, using the companies that we have, and then not importing even more than we have, at the moment, we are a net importer, because that does come with a bigger emissions footprint than if we produce it locally. That’s the irony of some of the you know, our detractors who say, Well, you shouldn’t be producing it. But we’re saying that we’re still going to be using it. Well, you could just import it, yes. But then you don’t have the jobs, you don’t have the revenue. And like I said, ironically, you’re actually adding to the emissions footprint. So in terms of us going fast enough, we were one of the first sectors to come out in support of the UK government’s 2050 netzero, a target. And then we signed the nursery transition deal with the UK Government last year, which is all about how does the oil and gas sector, you know decarbonize its activities produce cleaner oil and gas, while helping to unlock the new energies like hydrogen, carbon capture and storage and offshore wind. And so you know, that is our role. And as part of that, we committed to reducing our emissions by 50% by 2030 90%, by 2040, next year by 2050. And so we are committed to getting to that point. And we’ve set interim targets on our emissions, which we are on track to deliver, which I’m very pleased about it. But it’s difficult. This stuff is difficult, doesn’t happen overnight. And I think part of the challenge we have is that people say, Well, yeah, you’re not moving fast enough. But there is a practical challenge. There’s a technological challenge. There’s a financial challenge of, you know, putting all those things together. And they’re also practical things about one of the ways we’ll deliver on our emissions reductions is if we can electrify our offshore assets. To do that, we need to have access to the grid, to get access to the grid, there are a number of regulatory barriers that need to be dealt with. So it’s a complex picture, that that means that this does take time. And then also, when you think about the infrastructure that we have, as a country, you know, we’ve got 32 million petrol and diesel cars, we’ve got 85% of our homes are heated by gas boilers. This stuff does take time, whether people like it or not. And we have to do it in a way that recognises that. But I think the fact that we’re all committed to the end, getting there as quickly as we can. And I hope that some of our detractors once were able to demonstrate, you know, the actions that we’re taking, they will start to see, okay, these people are for real, they are really trying to drive this agenda forward. But a lot of the stuff we’re doing is planning and getting, we’re getting getting our ducks in a row. But you’ve got you’ve got five carbon capture cluster projects across the UK, you’ve got people, companies committing to Scotland project, which is a massive opportunity for offshore wind. But you know where we are today to where we need to get to, there are some big challenges that we all have to work to kind of unlock Andy Silvester 14:36 Yeah, still a journey for sure. Did you have a feeling we’ll be talking to you again, either on this podcast or through city I am, at least as the news agenda shifts, but thanks for joining us today. Deirdre Michie 14:46 Thank you very much for asking me. Thanks very much. Andy Silvester 14:48 That was Deirdre Michie the boss of offshore energies UK, I daresay we’ll be discussing the windfall tax for some time. Rumours flying about in Westminster this evening that we may even hear something on that tomorrow from the chancellor in the comments we shall wait and see for today that’s all from us at City A.M.