North Sea industry warns on tax hikes amid uncertainty over aging basin

Tax hikes on the UK's North Sea oil and gas production would be a further brake on a sector already struggling to meet heightened energy security needs and adapt to long-term transition goals, even as currently elevated prices are providing some relief to producers, industry sources say.

In what is being trailed as an "austerity budget", UK Chancellor Jeremy Hunt is expected to announce more energy sector taxes on Nov. 17, despite a number of companies warning against a likely further rise in the "energy profits levy" imposed in May 2022. The levy, which currently runs until the end of 2025, already lifted headline tax rates to 65%.

The UK industry is striving to reset itself for a low-carbon era, including potential investments in technology such as carbon capture and hydrogen fuel, while the government also says it aims to support domestic energy production to offset European reliance on Russia oil and gas.

The threatened tax increases have prompted criticism especially from companies with limited scope in their portfolios to make new investments that could be used to offset the levy; for example companies focused on "near-field" drilling around legacy oil and gas hubs, or those with less deep pockets.

"We urge the government to carefully consider the consequences of any increase in or extension of the energy profits levy," Linda Cook, CEO of Harbour Energy, which operates the Britannia and J-Area oil and gas hubs, said on Nov. 3. "At a time when oil and gas producers are being asked to invest more to help ensure the UK's energy security and are considering longer-term, material investments in carbon capture and storage, additional taxes would run the risk of undermining our ability to do either."

It comes as UK oil and gas production volumes have fallen hard in the wake of the pandemic. Oil output fell 17% in 2021 to under 900,000 b/d, amid an effort to catch up on maintenance, going on to hit an eight-year monthly low of 650,000 b/d in August 2022. Gas production has also declined.

Price reprieve

For the most part the global energy majors have tolerated the tax increases under discussion around Europe, partly reflecting their view of the North Sea as a testbed for low-carbon technologies. Shell gave the go-ahead for the Jackdaw gas project in July and is expected to drill a gas prospect called Pensacola imminently.

Some independents that were struggling before this year's oil and gas price surge have also enjoyed a reprieve; regional gas prices approached $200/barrel of oil equivalent in the third quarter, while the Dated Brent benchmark moved above $100/b in early-November amid supply tightness, likely exacerbated by curbs on Russian oil.

Shell CEO Ben van Beurden on Oct. 27 said of the expected UK tax rise it was a "societal reality that governments intervene and alleviate pressure on those who need that alleviation most," though he pleaded for the industry to have a say in the design of tax policy. TotalEnergies CEO Patrick Pouyanne has also voiced acceptance of a "dynamic" UK tax policy, noting the UK has historically cut taxes when prices fell.

Nonetheless, higher taxes are a challenge for an oil and gas basin showing its age.

Loadings of the Brent crude blend at the Sullom Voe terminal in the Shetland Islands, a mainstay of the Dated Brent benchmark, fell below 50,000 b/d for much of the autumn. China's CNOOC and Canada's Suncor, the largest stakeholders at the UK's highest-producing oil field, Buzzard, have both signaled they are looking to exit the UK. Houston-based APA Corp, operator of the Forties field, which contributes to the flagship Forties crude stream, says its future UK output is likely to be "lower and more variable" due to aging facilities.

The potential Buzzard sale has prompted speculation Norway's Equinor, under pressure from investors to invest more of its cash, could swoop and buy the assets. Teodor Sveen-Nilsen, research analyst at Norway's SpareBank 1, said Equinor had shown interest in adjacent jurisdictions, and "it could make sense to buy cheap assets on the UK continental shelf."

Project shortage

But while the government has billed tax relief for investment as supporting the sector, the reality is the UK lacks attractive big-ticket projects awaiting the go-ahead, David Moseley, North Sea vice president at consultancy Welligence, said.

Among the few potentially sizeable projects, Moseley predicted Rosebank, a 350 million barrel West of Shetland project led by Equinor, would go ahead. Israeli-owned Ithaca Energy has voiced hopes of reviving Cambo, a West of Shetland project dropped by Shell in 2021 in the face of opposition from Scottish authorities.

Moseley said there was little sign of operators either cancelling projects or speeding up capex in response to UK tax moves, but added anyone looking at buying into the Buzzard field would meet only limited investment opportunities; a few new wells are to be drilled there under a so-called "Northern Terrace" program in the coming months.

Adrian del Maestro, head of research and global thought leadership on energy at PwC Strategy&, said the European oil and gas majors' recent "robust" earnings would enable the sector to invest in addressing energy security, and in low-carbon solutions.

"However, regulatory stability across various jurisdictions will be critical to enabling these investments to flow," he added.