Europe upstream: the pressure is on

Fiscal changes, energy security pressures and cost inflation risks collide for Europe’s upstream oil and gas sector

3 minute read

The pressure on Europe’s upstream sector is mounting. As winter approaches, a security of supply crisis is looming – what levers can the sector pull as it diversifies away from Russian gas?

Norway, Europe’s biggest oil and gas producer, has responded to calls to raise short-term output but as the Netherlands’ Groningen powers down, can Romania’s Neptun Deep finally accelerate?

Against a background of rising upstream activity, cracks in the system are widening. Fiscal disruption in the UK has been at the forefront of the agenda and cost inflation is starting to bite – what will be the impact on new projects?

We tackle these questions and more in our insight, Europe’s upstream – key recent themes. Fill in the form for your copy, and read on for an introduction.

1. Energy security in the spotlight across Europe

Worries about whether Europe will get through winter are top of mind for policymakers right now. Pipeline imports from Russia are 55% down year-on-year, sending gas and power prices through the roof and causing deep uncertainty about supply. A colder than usual winter will only add to the pressure, depleting gas in storage to minimal levels.

While Norway has stepped up to the plate to increase output, there are headwinds on its ability to grow further. Elsewhere, regional supply is declining. The giant onshore Groningen field in the Netherlands is due to end sustained operations soon. In a prolonged supply crunch, it could contribute more – but it is firmly a ‘last resort’ option.

Romania’s Neptun Deep is belatedly moving forward – but it won’t solve everything. It’s the largest feasible upstream gas final investment decision (FID) within the EU in the next 18 months, and it will be an important project for Romania and for Europe. It has the potential to transform the country into a net gas exporter from the late 2020s, and will tick some boxes for the continent amid its accelerated efforts to diversify away from Russian gas supply.

But it still won’t be all plain sailing. Cost inflation will start to bite, and logistics will only be made more challenging by Romania’s close proximity to Ukraine.

How much could Neptun Deep contribute to Romania’s gas production capacity? Fill in the form on this page to get our forecasts.

2. Inflation is taking its toll; new capacity is limited

Neptun Deep will not be the only project to be hit by rising costs. Inflation is intensifying globally, driven by the rising cost of raw materials and compounded by service sector capacity and supply chain constraints.

In the offshore space, new rig capacity is limited, which will fuel day rates. An unprecedented level of FIDs – driven by the temporary tax package introduced in 2020 – has exacerbated the situation in Norway.

Using Wood Mackenzie Lens, we track project timelines and expected budgets for Norway’s FID boom in our insight. Fill in the form at the top of the page to get a closer look.

3. UK introduces windfall tax; Romania implements investor-friendly reforms

The UK government’s Energy Profits Levy is the latest in a series of marginal tax rate adjustments that it has implemented over the years.

The windfall tax will transfer £5 billion of free cash flow from oil and gas companies to the UK government in 2022 and a similar amount in 2023. The industry doesn’t like it – but with operators generating record profits, it was inevitable.

In contrast, the Romanian government has implemented changes that will put tax money back into investors’ hands. After four years of upheaval, Romania has finalised investor-friendly amendments to its controversial 2018 Offshore Law.

This insight provides a sample of our analysis of key trends in Europe’s upstream industry. Fill in the form to receive insight and charts on:

  • UK Government tax rates tracked against the Brent oil price since the UK oil industry’s inception in the 1970s
  • How changes to fiscal terms in both the UK and Romania will impact corporate value
  • The UK’s projected supply and demand gap to 2050, adjusted for our energy transition outlook scenarios
  • The backlog in offshore rig new builds and the impact on global rig day rates
  • The impact on Norwegian project delivery as operators rush to take advantage of the temporary tax package
  • And more.

Fill in the form at the top of the page for your complimentary copy.

Find out more about the key capabilities of Lens Upstream