UK regulator eyes compromise on looming windfall oil and gas levy

The UK oil and gas sector may be able to find a solution with the government on calls for a 'windfall' tax on profits without damaging the predictability and attractiveness of investing in the sector, the head of regulator the North Sea Transition Authority, Andy Samuel, said May 24 amid expectations of impending fiscal change.

The North Sea industry, home to the Dated Brent benchmark and a major source of energy security, faces growing calls for extra taxation on recent high profits, with one industry insider predicting the government would move ahead with tax announcements in a matter of days.

Publicly, the industry continues to argue a windfall tax, or proposals for a 'fund' to which it would contribute, would undermine confidence and damage investment prospects both for marginal oil and gas projects and energy transition projects such as carbon capture and storage (CCS). UK oil output fell 17% in 2021 to under 900,000 b/d, accelerating output decline.

However, asked by S&P Global Commodity Insights whether a compromise on tax could be achieved without destabilizing the sector, the chief executive of the NSTA, Samuel, said it was a possibility.

Samuel reiterated government calls for the industry to demonstrate it is reinvesting profits in the UK, saying it was "vital" for the sector to be seen to be contributing, especially to 'net-zero' projects such as CCS, offshore wind and hydrogen fuel projects.

He also stressed the importance of "from an investor point of view, understanding the rules of the game and predictability."

However, Samuel went on, "There may be something in between that is still very predictable and very investable for operators. I could certainly envisage something like that."

"In the world we're in today with some of the profits I can understand why this is being looked at very closely," he said on the sidelines of the Offshore Energies UK conference.

Dated Brent crude was assessed at $115.53/b on May 23, up 50% since the start of 2022, with the Ukraine war accelerating price rises since February.

Detrimental effect

At the same event, Linda Cook, CEO of Harbour Energy, one of the largest UK producers, warned a windfall tax would mean fewer projects being approved.

She said Harbour, which has bought numerous assets from Shell and US company ConocoPhillips, had spent over $5 billion in capital and operating expenditure in 2017-18 in addition to $8 billion of acquisitions, and recent activity such as drilling had resulted in a 25% increase in the company's first quarter production compared with a year earlier.

"There can be no doubt the imposition of additional taxes would be detrimental to energy sector investment, to our domestic energy security and to our sector's ability to further the country's energy transition ambitions," Cook said.

"Higher taxes mean we have less funds available to invest [and would] weaken our balance sheets, limiting our ability to raise debt and equity," she said.

"A higher tax burden makes it more difficult for new projects to meet investment hurdle rates, especially at a time when these projects are faced with material inflation and long lead times for equipment. This inevitably means fewer projects will be sanctioned."

"Fiscal instability [also] creates uncertainty and that makes the UK less attractive," she added.

While the industry continues to resist a windfall tax, insiders see some move in the area as inevitable. One senior industry figure told S&P Global "we are potentially talking days not weeks."

"It's not a question of if, but when," the industry figure said on condition of anonymity, adding the government might present the move not as a windfall tax but a package including incentives for energy transition investment and targeting other sectors such as electricity and fuels as well.

"It will probably end up being a package. It will be too blunt to be just a change in the supplementary charge" on upstream profits, the source said. "They still want that investment to come forward."

The UK Treasury noted Chancellor Rishi Sunak's statement that "no option is off the table" if the sector fails to demonstrate investment "at significant scale."

"While we can't shield everyone from the global challenges we face, we're supporting British families to navigate the months ahead with a GBP22 billion ($27 billion) package of support" including tax cuts, an energy rebate and social security changes, a Treasury spokesperson said.