UK government swoops on North Sea windfall profits

Wood Mackenzie’s research indicates that UK North Sea oil and gas producers are making more profits than ever before, in an era where the industry is in progressive decline.

“This new Energy Profits Levy (EPL) – effectively a windfall tax – means that if an operator is not investing in new projects between now and the end of 2025, they’ll pay significantly more to the Treasury,” said Graham Kellas, Senior Vice President, Global Fiscal Research.

“Operators developing new fields or improving existing facilities will however be able to claim huge additional reliefs against the new tax. During the EPL’s imposition, investors can save 91.25p on every £1 they spend on developing untapped resources.

“The timeframe could be enough for some discoveries, currently awaiting a final investment decision, to be developed with the bulk of costs receiving this tax relief. And if the field comes onstream after 2025 – and the government sticks to its plan and removes the EPL - they’re back to paying tax at 40% on the field’s profits.”

Expectations ahead of the Chancellor’s announcement were that a simple rate change would be applied. However, Government has amended the basis on which tax is payable so that those companies paying little tax because of carried forward losses and decommissioning liabilities will now see more of their revenue subject to the EPL.

“There will be a negative reaction from industry, who abhor ad hoc revisions to the tax system and regularly call for fiscal predictability. Avoiding this kind of short-term response could be achieved if the UK adopted the approach - already used in other territories – where tax rates are linked to the price of oil, rising and falling in-step,” adds Kellas.

Neivan Boroujerdi, Research Director, North Sea upstream, said: “The move is unlikely to render new or existing projects uneconomic and it could even accelerate ‘ready to go’ developments, such as Rosebank and Cambo. Moving those forward to a final investment decision has been incentivised. It may reshuffle the order of some projects in global portfolios and affect some longer-term investment decisions.

“It may also negatively influence investor sentiment toward searching for, and developing, new sources of supply in a very mature, fiscally unstable country with ambitions to be net zero by 2030.”

Boroujerdi adds: “Government has said that if prices were to come down to ‘historically normal levels’, they’ll phase out the windfall tax but it’s far from certain what those levels are and fiscal uncertainty in the UK will remain a key issue for investors.

“Ultimately, the industry won’t like it but it’s worth pointing out that no-one – industry or government – was anticipating over US$100/bbl Brent in their planning scenarios. Corporate profits will still be higher than what would have been anticipated six months ago.”