North Sea Oil Investment Stalled by UK Windfall Tax

The UK's windfall tax is causing a chill in investment in the North Sea oil industry, as smaller companies reconsider their plans and larger firms abandon ageing assets.

Docked in the Cromarty Firth near Inverness, Scotland, Ping Petroleum's vessel, the Excalibur, is a formidable sight. This floating storage and offloading (FSO) unit, measuring 60 metres in diameter and 45 metres tall, is capable of handling up to 270,000 barrels of oil. Ping acquired the Excalibur in mid-2022, hoping to use it for 15 years as energy prices soared following Russia's invasion of Ukraine. However, the UK's windfall tax and regulatory uncertainty have forced Ping to postpone a £100 million refurbishment, which would have made the vessel one of the first to operate on electricity.

This delay highlights the impact of the windfall tax on smaller companies seeking to profit from the UK's ageing oilfields. Ping is one of several companies that have taken over assets from international majors, only to find themselves facing a new set of challenges.

“Policy uncertainty reduces our willingness to spend money quickly," said Ping chair Robert Fisher, speaking aboard the Excalibur. "If we spend and the policy changes, then we have to start all over again. People are walking away from fields with significant reserves.”

The Labour government, fulfilling its election pledge, increased the windfall tax on oil and gas companies to 78 per cent last month, extending it to 2030. This move has drawn criticism from industry leaders, who warn that it will deter investment, leading to job losses and ultimately diminishing the UK's long-term tax revenue.

The Office for Budget Responsibility (OBR) estimates that tax receipts from the UK oil and gas industry will plummet to £2.2 billion by 2029 from £9.8 billion in 2023. Industry executives are particularly concerned about the Labour government's plan to abolish investment allowances, a move they believe will exacerbate the decline in private sector investment in the North Sea.

The government has indicated it will provide details of its tax plans in its first Budget on October 30. In the meantime, uncertainty lingers. Chris Wheaton, an analyst at Stifel, believes Labour's windfall tax changes will raise an additional £4 billion for the Treasury – less than the £6 billion the party aims to allocate to GB Energy, its new state-owned renewable energy company. However, he estimates that the UK will lose £11 billion in tax revenue over five years as a consequence.

“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," Wheaton warned. "The industry will be taxed into uncompetitiveness, leading to a dramatic decline in investment, production, jobs, and a significant blow to energy security.”

The North Sea oil and gas industry is already experiencing a dramatic decline in production, falling from 4.33 million barrels of oil equivalent per day in 1998 to 1.27 million barrels in 2022. The North Sea Transition Authority predicts that production will further drop to 730,000 barrels of oil equivalent per day by 2030.

David Whitehouse, chief executive of Offshore Energies UK (OEUK), highlighted the impact of the windfall tax and general uncertainty on investment. “So far this year, we are at historical lows for wells drilled in the North Sea,” he said. “This fundamentally means we are not seeing the investment the sector needs.”

Labour's opposition to new drilling licences has also caused tension with trade union allies, such as Unite, who fear that the government's policies could turn oil and gas workers into the “coal miners of our generation,” before a “just transition” to clean energy can replace their skilled and often high-paying jobs.

In the past five years, the North Sea industry has lost over 55,000 jobs, leaving just over 200,000 employed in the sector. While climate campaigners argue that new drilling won't protect jobs or secure energy, OEUK emphasizes the threat posed by the current situation.

HM Treasury has defended its position, stating that extending and increasing the Energy Profits Levy and closing its core investment allowance are necessary to ensure that oil and gas companies contribute to the UK's clean energy transition. The Treasury assures that it will work with the sector to ensure a smooth transition over the coming decades, minimizing disruption to workers.

However, not everyone agrees. James Alexander, chief executive of the UK Sustainable Investment and Finance Association, believes the 3 percentage point increase in the windfall tax is a step in the right direction, aligning the UK with Norway and encouraging private investment in renewables.

Viaro Energy, another company that invested heavily in the North Sea, acquired RockRose Energy in 2020 for £248 million. Francesco Mazzagatti, Viaro's chief executive, maintains the company's commitment to the UK but notes that "erratic decisions" from the previous government have forced businesses to "learn to plan for the unplannable."

Back on the Excalibur, where the delayed refurbishment has put 200 jobs on hold, Robert Fisher believes that despite changing perceptions of the industry, oil and gas will play a role 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.”

The future of the North Sea oil industry is uncertain, as the UK government balances its commitment to a clean energy transition with the need to secure energy independence. The impact of the windfall tax and ongoing regulatory changes will continue to be a defining factor in the industry's future.