The Government’s decision to toughen the windfall tax has made companies and investors “reassess their plans for the future” warned one of the UK’s leading energy bodies.
Offshore Energies UK (OEUK) told City A.M. the latest changes to the windfall tax have made rates “so high that it threatens to drive investment out of the UK altogether.”
Mike Tholen, sustainability director at Offshore Energies UK, said: “Any change in regulatory or fiscal regimes will make the companies and investors affected reassess their plans for the future.”
The latest gloomy warnings come as Harbour Energy is booted off the FTSE 100 this week, after its share price plummeted over 20 per cent in the past six months.
Analysts have pointed to both the windfall tax turmoil and a lack of fresh projects in its mature portfolio for its declining market value.
Harbour is the UK’s largest oil and gas trader, previously warned it would have to reconsider investments in the UK if the windfall tax was expanded.
Chief executive Linda Z Cook explained that evaluating “expected returns from long term investments” has become more difficult and revealed that “investors are advocating for geographic diversification.”
Nathan Piper, head of oil and gas research at Investec argued Harbour’s declining fortunes reflected the potency of the windfall tax.
He said: “The windfall tax, effectively moving the tax rate from 40 per cent in 2021 to 75 per cent until 2028 has had a material impact on the value of Harbour’s largely UK North Sea portfolio reflected in recent share price weakness and drop from the FTSE100.”
|Before May 2022||Special Tax Rate||40 per cent corporation tax|
|May 2022||Energy Profits Levy||25 per cent rate|
+ 40 per cent corporation tax
|Nov 2022||Energy Profits Levy expanded||35 per cent rate|
+ 40 per cent corporation tax
North Sea volatility worsened by windfall tax
Harbour was one of a number of private-equity backed companies that swept up North Sea assets after the oil price crash in 2014, with energy giants diversifying to international portfolios and lower-carbon projects.
This includes rival operator Neptune Energy, which could be the target of a takeover bid from Italian energy firm Eni.
Multiple media outlets have reported Eni is in preliminary discussions to acquire Neptune Energy in a deal worth potentially $6bn.
Both companies have declined to comment on the reports.
In contrast, the reported potential acquisition of Neptune by ENI with a gas weighted asset base largely outside the UK North Sea demonstrates that PE investors may look to industry rather than public markets to exit from portfolio companies.
Last month, Chancellor Jeremy Hunt hiked the Energy Profits Levy, known as the windfall tax, from 25 to 35 per cent and extended its duration from 2025 to 2028.
This toughened rate is on top of the special 40 per cent corporation tax rate North Sea producers already pay.
The Government is looking to harness record profits across the industry, powered by soaring oil and gas prices following Russia’s invasion of Ukraine and a subsequent Kremlin-backed supply squeeze on Europe.
Hunt is hoping to raise £20bn over the next six years to fund support for households and businesses facing record energy bills, which have climbed to all-time highs even with historic interventions in the market.
He has also maintained investment relief, at a rate of 91p in the pound for North Sea oil and gas companies that commit to further oil and gas exploration
Managing director Chris Wheaton predicted that future investment will only consist of pledges already made by energy companies in British waters.
He told City A.M.: “The combination of higher tax and uncertainty about the tax environment, rather than solely the tax itself, is what is likely to curtail investment, as companies which have alternative regions to invest in will not want to risk stranding capital in a high tax environment.“
The UK produces around 45 per cent of its gas domestically – and relies on Norway as its chief overseas partner, which meets 38 per cent the country’s gas needs.
The Climate Change Committee, Westminster’s independent advisory group, predicts half of the UK’s energy requirements between now and 2050 will still be met by oil and gas, and as much as 64 per cent of UK energy needs between 2022 and 2037.
The UK is a mature basin, the and the NSTA has warned in its resources report that without further exploration the UK faces a cliff edge in production decline and increased reliance on imports.
OEUK recently published its economic report on the sector, which revealed that just five exploration wells were drilled last year.
This was the lowest total since the North Sea sector was opened up to development nearly 60 years ago.