North Sea oil and gas activity shelved amid tax hike fears

Plans for windfall tax hikes which will play well in some quarters may cause unintended damage to firms that could help power growth as experts highlight Scotland’s dependence on oil and gas activity.

With a UK general election due within months, Labour has looked to consolidate its lead in the polls by announcing plans for change that could help it capitalise on anger about high energy bills and green opposition to fossil fuel.

Shadow chancellor Rachel Reeves has proposed increasing the rate of the windfall Energy Profits Levy in a way that will mean the total tax rate payable rises to 78% from 75%. Labour has also indicated it will cut the generous investment allowance that was introduced alongside the windfall tax in 2022.

It is not clear that the allowance will be scrapped entirely. However, the prospect of a reduction combined with uncertainty about what exactly is planned has delivered a further blow to confidence in a sector that has been hit by a series of changes since 2022.

The concern is that reforms the public expected would be targeted on oil giants that have made bumper profits in recent years are hitting smaller fish much harder.

Critics say the windfall tax is having most impact on the independents that have been playing a key part in the drive to help the UK maximise the recovery of North Sea resources by investing in assets that giants are not interested in.

North Sea deals collapsing amid tax fears warns entrepreneur Cuts in the investment allowance would make it much harder for such firms to generate the returns needed to fund spending and reward shareholders.

Industry body Offshore Energies UK has raised the prospect that Labour’s plans could cost huge numbers of jobs. Trades unions have also sounded the alarm.

Bosses at firms that have underlined the potential for independents to boost North Sea activity have made telling contributions to the debate in recent days.

Kistos Holdings chief executive Andrew Austin told The Herald that the firm had walked away from deals and put spending on new developments on hold amid concern about further tax changes.

This represents a major change in approach for Mr Austin. The former investment banker founded Kistos with veterans of the RockRose Energy business which he grew into a £250m business on the back of North Sea acquisitions.

Kistos acquired a £100m North Sea portfolio from Total and had a £1.2 billion takeover bid for Serica Energy rebuffed after the windfall tax was introduced.

The prospect of further changes may have prompted Mr Austin to change tack.

Kistos has acquired gas storage assets in Cheshire which will allow the firm to capitalise on strong UK demand. The earnings will not be subject to the windfall tax.

Mr Austin sees opportunities to invest in other countries.

It may not be easy for oil firms to shift investment from the UK to other countries but Kistos managed to move into Norway last year with the acquisition of Mime Petroleum.

The tax rate in Norway is 78% but firms benefit from more generous investment allowances than those currently available in the UK and the regime in the country has been in place for years.

Last week Europa Oil and Gas revealed it had decided to spurn the offer of a UK exploration licence in order to focus its attention on acreage in Equatorial Guinea, which it said offered a “very material” opportunity. The company noted: “Various aspects of operating conditions and the fiscal environment [in the UK] have changed and remain uncertain.”

Europa had been in negotiations with the North Sea regulator in connection with the latest UK licensing round.

The North Sea Transition Authority announced last week that it had offered a further 33 licences under the round, taking the total to 82.

Some 50 companies have been awarded licences, with beneficiaries ranging from majors to minnows.

The response to the round suggested interest remained strong despite the introduction of the windfall tax.

However, Europa’s comments provide a reminder that lots has changed since the round was launched in October 2022.

One of the firms awarded licences in the latest batch provides an example of how changes in the tax regime are causing problems for independents which giants could benefit from.

Deltic Energy enjoyed success in the latest round after helping to boost flagging exploration interest in the North Sea with its pioneering work.

The company launched an exploration drive amid the downturn that started in 2014 after deciding that it could identify opportunities that others had missed.

It generated excitement in the industry last year after making what looked like a bumper gas find on acreage that it persuaded Shell to buy into.

Late last month, however, Deltic said it might have to give up the licence concerned because it was struggling to raise the funding required to cover its share of the costs of appraisal work.

The London-listed company hopes to sell a stake in Pensacola to another firm. Debt markets are effectively closed to smaller firms which don’t generate production revenues that they could use to cover borrowing costs.

Deltic said: “The feedback from Deltic’s Pensacola farm-out process has indicated that the continual tinkering with the Energy Profits Levy and resultant fiscal uncertainty created by the current government, along with recent rhetoric emanating from the Labour Party, have had a severely negative effect on the ability of UK Exploration and Production companies to commit to long term investments in the North Sea.”

Deltic’s experience suggests large-scale opportunities like Pensacola are especially vulnerable.

Deltic said that if it couldn’t secure the funding required by the end of the month it would be required to withdraw from the Pensacola licence and transfer its interest to joint venture partners.

That puts Shell in line to acquire control of a significant gas resource. ONE-Dyas of the Netherlands has a minority stake in the Pensacola licence.

Shell and ONE-Dyas could put activity on hold for years in the hope that conditions might improve.

Other firms that expected to rely on farm-outs to fund activity could be forced to relinquish licences or to give them up cheaply.

The implications of the moves made by Deltic and others are alarming for Scotland.

The SNP Government appeared to turn its back on the oil and gas industry to keep greens onside.

However, the extent of the country’s reliance on oil and gas was underlined by a report from business services giant KPMG which was published days after First Minister Humza Yousaf said he would stand down amid a spat with the greens about emissions reductions targets. SNP veteran John Swinney is set to succeed Mr Yousaf.

Predicting that Scotland’s economy will grow by just 0.4% this year, economists at KPMG said the long-term decline of the oil and gas industry clouded the outlook for key business investment – which is expected to fall this year.

“Declining opportunities for extraction have made investment in the UK Continental Shelf less attractive, which in turn directs less demand towards the onshore economy via the related supply chains,” they said.

The announcement of the findings makes only a passing reference to the renewables industry which Mr Yousaf and his predecessor Nicola Sturgeon insisted would power a boom in Scotland.