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Oil and gas executives have warned that Labour’s pledge to scrap tax breaks in the North Sea is threatening their investment in the basin, with several projects already on hold.
Mining companies have not drilled a new well in the area this year, industry leaders said, as the sector waits to see what tax regime it will face after the July 4 election.
Labor said this week that if elected it would increase the windfall tax on North Sea oil and gas profits to 78 per cent and remove “unduly generous investment allowances” that companies can use to reduce their taxes.
The party expects the measures to generate billions over five years if fully implemented.
While Labour’s plan to halt the issuing of new oil and gas exploration licenses was anticipated by the industry, several companies told the Financial Times that they were now unsure about the profitability of projects they already have licences.
Major companies such as BP and Shell have all but abandoned the basin, but dozens of smaller operators are still working in the subsea fields to extract the remaining reserves.
“Frankly, you need to make a return of 15 to 20 per cent to even get out of bed,” said David Latin, chairman of Aim-listed extractor Serica. “In the new regime, they will not pay at all. You’re not likely to cover your capital costs, you’re not going to get anywhere close to that.”
Production among the top 20 companies in the North Sea fell by 11 per cent last year, despite £4.4bn of investment, he added.
Serica, along with its partners Jersey Oil and Neo, postponed a decision on the Buchan field until after the election.
One veteran North Sea oil and gas banker said that under Labour’s proposals, all new projects would struggle to cover their costs, including the largest undeveloped project in the North Sea, the Rosebank field. “The real danger is that companies will choose to invest their money elsewhere,” he said.
Equinor and Ithaca have invested £3.8bn in the first phase of Rosebank, but neither company has commented on its future in a different tax regime. Equinor said: “The project is progressing on schedule, with start-up planned for 2026-27. There is nothing new to communicate from our side.”
The removal of the investment allowance, which would allow companies to claim back 29 percent of their taxes if they reinvest profits in oil and gas production, will increase the taxes paid by three of the largest companies – Harbour, Serica and EnQuest – by $200 million. per year, Jefferies analysts estimated.
Labour’s lead in the poll over the Conservatives means its pledges could become UK government policy within weeks, and its manifesto announcement sent the big pollster’s share prices tumbling.
Since the announcement, Deltic Energy is down 24 percent, EnQuest is down nearly 13 percent, Serica is down 11 percent and Harbor Energy is down 5.4 percent.
David Whitehouse, chief executive of industry lobby group Offshore Energies UK, said: “Stability and confidence are important. We are seeing a significant decrease in confidence in this sector. This will mean fewer projects moving forward and the removal of the investment allowance and how that plays out will be the next step in that direction.
“We are already halfway through the year and not a single exploratory well has been drilled on the UK continental shelf under the current fiscal regime.”
Last year, Apache, which bought the historic Forties oil field from BP in 2003, halted production at the field due to a “challenging” environment. Meanwhile, Harbor Energy plans to expand to other parts of the world.
Chairman Serica Latin said that even making a small decision last year in another area “was incredibly challenging.”
“This is the first time I’ve had to get them to do five fiscal scenarios to make a decision to make sure it’s going to be OK. We have convinced ourselves based on the fact that if we don’t, we will send a message,” he said.
But Labor is unapologetic about the policy, which is part of the party’s net zero 2050 strategy.
“Nobody in the Norwegian oil and gas industry had a problem with the 78 percent tax rate,” said one Labor insider. “The industry says if you tax us more, we’ll back off and go home.” . . that’s what industries always say when you’re going to raise their taxes.”