Are we expecting Job cuts in the North east

A North Sea oil firm’s petulant-seeming reaction to a major Government concession in the windfall tax saga will not help the industry win the friends it needs amid calls for a ban on new developments.

Following months of pressure from the oil and gas lobby over the tax, the Government has tried to pacify critics of the Energy Profits Levy by accepting one of their main demands.

It has agreed to introduce a price floor in respect of the tax, which was introduced last year as firms enjoyed a massive boost to their earnings after oil and gas prices soared amid Russia’s war on Ukraine.

Following the introduction of the levy, firms pay a tax rate of 75 per cent on North Sea profits, against 40% previously. Their bills can be reduced substantially by the generous investment allowance that was introduced alongside the windfall tax.

Amid the barrage of criticism directed at the Government, the biggest concern appeared to be that it didn’t appear to accept the levy should be cut if oil prices returned to ‘normal’ levels. Industry groups have insisted firms aren’t enjoying a windfall at all as prices have fallen significantly since last summer.

After signalling that it would introduce a price floor in the Budget only to backtrack, the Government finally confirmed that it would set one earlier this month.

The levy will cease to apply if oil and gas prices fall below $71.40 per barrel and £0.54 per therm respectively for six months. Oil is selling for around $76/bbl while gas fetches around £0.82 per therm.

Industry body OEUK has said the price floor will be helpful but much more needs done, although campaigners at Uplift claim the Chancellor appears to have put the interests of “profiteering” oil and gas companies ahead of the British public.

At current rates, the profit margins enjoyed by firms are the envy of companies in other industries.

North Sea-focused Habour Energy’s production costs averaged $13.90 per barrel oil equivalent last year. It got an average $78/bbl for oil output and 86p per therm for gas.

However, one of the biggest North Sea players decided to step up the campaign against the windfall tax after the price floor was introduced.

Apache said it plans to suspend drilling work that can help it maintain production from a portfolio which includes the giant Forties field.

“We are reassessing our investments, as we consider the challenging UK macro environment with its increasingly costly and burdensome tax and regulatory regime,” said Apache, which also has assets in the US and Egypt.

It added: “Given the business climate for the oil and gas industry in the U.K., these assets have become less competitive in comparison to the rest of our portfolio.”

The company said the move will cost jobs without giving details.

However, the website of the parent APA Corporation says the North Sea “provides competitive investment opportunities leveraging existing infrastructure, strong cash flow generation and potential reserve upside”.

Apache’s move was reminiscent of the intervention made in January by Harbour Energy in the windfall tax debate. Harbour said then it would shed 350 North Sea jobs and shift investment overseas.

On its website Harbour notes its UK portfolio includes “high quality, long life assets such as Elgin/Franklin and Clair”.

Apache’s move was depicted as a disaster for the UK by industry watchers who claimed it showed the windfall tax would undermine efforts to support the energy security drive.

But it may be unwise to regard Apache as representative of the North Sea industry.

Experts reckon the windfall tax will impact on firms in very different ways.

Neivan Boroujerdi at the Wood Mackenzie energy consultancy said: “The change could have wildly different bearings on companies and projects, according to where they are in the investment cycle.”

Mr Boroujerdi said most projects would benefit if the tax was removed. However, projects that are not due in production before 2028, when the tax is already set to expire, would lose the benefit of the investment allowance.

Shell bosses underlined the appeal of the Pierce and Penguins developments it is leading on in the North Sea in the capital markets day the company held in New York last week.

The oil giant said it expects to maintain oil and gas production to 2030 amid strong demand for both commodities.

It has said the introduction of the price floor should help to improve investor confidence in the UK.

At the other end of the scale, North Sea minnow IOG complained the price floor would provide little help for firms developing the kind of relatively small gas field it is working on.

The Government may be hoping the row over the price floor move will quiet down, although it has provoked fury among greens.

It was notable that ministers appeared to revive plans for the price floor after Labour alienated trades unions by proposing a ban on North Sea developments.

Equinor and Ithaca Energy are thought to be close to deciding whether to develop the giant Rosebank field off Shetland.

If other firms act like Apache, the Government may think again but not necessarily in the way the oil lobby hopes.

It could act to increase the state’s share of the revenues generated in the North Sea by introducing the kind of royalty system used in a range of overseas countries.

Wood Mackenzie’s Graham Kellas said the Government could scrap the windfall tax only to find prices return to $100/bbl or more. This could prompt it to intervene again, causing further fiscal disruption.

“That is why we’ve consistently argued for a high price royalty that would share sudden surges in company revenues,” said Mr Kellas

As it tries to balance the need to keep the economy growing with the net zero drive, the Government may ask if the current market-based system will deliver what society requires.

Some think the response should involve nationalising the industry or taking control of assets that firms are failing to make the most of. Keir Starmer yesterday said a Labour government would form a publicly-owned firm to lead on clean energy developments.

It should be remembered that in the early days of the North Sea industry the state controlled many fields through ownership of Britoil, which had headquarters in Glasgow.

When the Thatcher government set out to privatise Britoil in 1982 the Earl of Mansfield, of the former Scottish Office, told peers the move would create an independent free to seize opportunities. It would also “ substantially reduce the size of the public sector in an area where state ownership has no rational justification”.

Lord Bishopston responded for Labour: “In view of the fact that Britoil is a great public asset which has substantially helped the Treasury, does the noble Earl expect such help to continue after privatisation takes place, or are the public to be deprived of this assistance?”

While the resulting share issue appeared to generate little excitement among members of the public, BP gobbled up Britoil in 1988.

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