Are major UK oil projects at risk after windfall tax?

Offshore Energy has recently reported that operators of two major oil projects located off the UK – Cambo and Rosebank – are laying the groundwork to sanction these previously delayed projects next year. This comes amid an energy security crisis but also at a time when the UK government has imposed an additional tax on oil and gas profits so the question arises as to the effects of this new tax on upcoming investment decisions for these projects.

The new Energy Profits Levy, or windfall tax, is meant to raise £5 billion to alleviate the cost-of-living crisis in the country. It was announced by the UK government in late May 2022. Justifying the government’s decision, UK Chancellor of the Exchequer, Rishi Sunak, said the oil and gas sector is making extraordinary profits not as the result of recent changes to risk-taking, innovation or efficiency but as the result of surging global commodity prices driven in part by Russia’s war.

While the government said it would also build into the new levy a new investment allowance, explaining this doubles the relief for the energy companies that invest their profits in the UK, some representatives from the oil and gas industry are not convinced. Offshore Energies UK – a trade body representing the oil and gas industry and, as of recently, also the low-carbon sector – believes that the new windfall tax may already be undermining the major investments needed to keep Britain’s lights on.

OEUK has been warning about the perceived negative effects of this tax on new investments since the talks about its introduction started, saying it will sow uncertainty and confusion among the industry and its investors.

Now, the latest warning from OEUK follows reports in The Sunday Telegraph that Norway’s Equinor is considering abandoning its £4.5 billion investment in the Rosebank field, near the Shetland Islands.

However, when contacted by Offshore Energy seeking comment on these reports, a spokesperson for Equinor dismissed the story about Rosebank as “speculation.” Nonetheless, the spokesperson added that Equinor is “aligned with OEUK with regards to the Energy Profits Levy.”

As a reminder, OEUK has warned that the tax will deter investors and destabilise the industry in the short-term and, in the long-term, make it far harder for the UK to reach its target of net-zero greenhouse gas emissions by 2050.

The Telegraph also reported that Shell has told analysts it is also less likely to develop the £2bn Cambo project in the North Sea following the announcement about the windfall tax, which imposed an additional 25 per cent tax on the profits made by offshore energy firms operating on the UK continental shelf.

When asked about these reports, a spokesperson for Shell told Offshore Energy that the company had not made any new statements on Cambo since March 2022 when the project received a two-year licence extension. Shell said at the time that, while it had not changed its December 2021 plan to exit the project, this extension would allow time to evaluate all potential future options. It is also worth reminding that Ithaca Energy is in the process of taking over Siccar Point and, with it, the operatorship of Cambo.

When it comes to the matter of windfall tax, Shell believes that, in its current form, the levy creates uncertainty about the investment climate for the North Sea oil and gas for the coming years. “And, longer-term, the proposed tax reliefs for investment don’t extend to the renewable energy system we want to drive forward in the UK and invest in very substantially. When making plans for the next decade and beyond, we need certainty.”

OEUK said it was for such companies to comment on their individual plans, but it was becoming clear that the new tax would put investment at risk.

The UK’s oil and gas operators – which include many smaller independent companies as well as the better-known global giant, were already paying 40 per cent tax on profits – the highest rate of any sector. The new levy means they are paying 65 per cent – a rate which makes investing in new gas and oil fields in UK waters far less attractive, OEUK noted.

OEUK believes that, without such investment, production is predicted to decline rapidly – leaving the UK increasingly dependent on imports from other countries. This is particularly relevant in the context of the current geopolitical situation and the global turmoil which ensued following the beginning of Russia’s war in Ukraine.

The trade body’s research suggests that, without new investment, by 2030 around 80 per cent of UK gas supplies and more than 70 per cent of oil supplies will have to be sourced abroad.

Deirdre Michie, chief executive of OEUK, said it was for Equinor and Shell to comment on their own particular plans, but added: “This is an industry that thinks and plans long-term, so sudden new taxes will always disrupt investment plans. The windfall tax may not affect projects already underway – but is likely to deter investments under consideration, for which funds have yet to be committed. The UK’s offshore sector includes many independent companies who spend years planning investments that can be very risky.”

OEUK emphasised that is why the industry always considers a stable and predictable fiscal regime to be key to its investment criteria.

Michie added: “The problem is that if new taxes are imposed there is always a negative impact on investor confidence. In particular, such moves increase the cost of borrowing for new projects, making it more difficult to raise the money needed to maintain existing energy supplies and build the low-carbon energy systems of the future.

“The result will be a decline in oil and gas production in years ahead – just when the UK most needs reliable sources of energy,” Michie concluded.

So far, it seems that Equinor, as the operator of Rosebank, and Siccar Point/Ithaca Energy, plan to move forward with their plans for these projects as they have already tentatively scheduled their FIDs for 2023, but it remains to be seen whether this will indeed happen not only in light of the windfall tax but also in the context of energy transition.

When it comes to securing energy for the UK, just last week, UK’s Centrica and Equinor made a new gas supply deal under which the Norwegian company will add around 1 billion cubic meters (bcm) per year to the existing bilateral contract with Centrica, bringing the total volume under the contract above 10 bcm per year.