OGV Energy's UK North Sea Energy Review – December 2022

The hike in the UK windfall tax on the profits of oil and gas operators in the North Sea and its implications for the industry, decommissioning challenges and opportunities, and field and prospect updates featured in the UK oil and gas industry this month.  

The UK government raised the windfall tax from 25% to 35%, drawing criticism from the industry and making some firms rethink their investment plans.  

In the Autumn Statement in the middle of November, the government said that “The Autumn Statement sets out reforms to ensure businesses in the energy sector who are making extraordinary profits contribute more.”

The Energy Profits Levy will be increased by 10 percentage points to 35% and extended to the end of March 2028, from December 2025, and a new, temporary 45% Electricity Generator Levy will be applied on the extraordinary returns being made by electricity generators. The investment allowance for oil and gas operators will be reduced to 29% for all investment expenditure (other than decarbonisation expenditure), broadly maintaining its existing cash value. The hike in the Energy Profits Levy is expected to raise over £40 billion in total over the next six years, the government said. 

After the announcement of higher windfall taxes, the leading industry association, Offshore Energies UK (OEUK), warned that the UK’s offshore industry would be “hit hard by the chancellor’s latest tax changes, which threaten to drive out investors, drive up imports and leave consumers increasingly exposed to global shortages.”

The offshore sector was paying 40% tax on oil and gas production even before the windfall tax was imposed in May. Since then, it has been paying 65%. The latest rise takes the overall tax rate to 75% from January 2023, OEUK said.

Deirdre Michie, OEUK’s chief executive, said that consumers were suffering, and it was right for all sectors to play their part but added: “These tax changes will undermine one of the UK’s most important industries. The UK offshore industry generates jobs for 200,000 people plus billions of pounds in taxes. The oil and gas it produces buffers the nation against global shortages. These changes put all those benefits at risk.”

The latest budget, warned OEUK, means much of the necessary investment in all energies could dry up.

“If it does then oil and gas production will plummet so fast that, by 2030, the UK could be forced to import up to 80% of its gas – double the current level,” OEUK said.

Commenting on the new tax, supermajor Shell said it would be re-evaluating its £25 billion planned investment in the UK energy system.

“We're going to have to evaluate each project on a case by case basis,” Shell’s UK Country Chair David Bunch said at the Confederation of British Industry's annual conference in Birmingham on 21 November.

“When you tax more you're going to have less disposable income in your pocket, less to invest,” Shell’s top executive for the UK said. 

In March 2022, Shell revealed plans to invest £20-25 billion in the UK energy system over the next 10 years, with more than 75% of this intended for low and zero-carbon products and services.

Neptune Energy warned that some of the new development opportunities across its global portfolio “are at risk from potentially poorly targeted windfall taxes, particularly in the UK, Germany and the Netherlands. Neptune is supportive of a fair level of taxation, but mechanisms must not discourage investment in incremental production to support energy security priorities, as well as carbon reduction initiatives.”

EnQuest said in an operations update, “While the recently announced increase and extension of the duration of the Energy Profits Levy is particularly disappointing and threatens the delivery of UK's twin objectives of long-term energy security and decarbonisation, we remain committed to the UK North Sea and delivery of value to our stakeholders.” 

At a decommissioning conference in St Andrews on 22 November, OEUK’s chief executive Deirdre Michie warned that the UK’s oil and gas production would drop in the coming years unless it supports energy companies in further North Sea exploration.

At the conference, OEUK presented its latest Decommissioning Insight report, which found that more than 2,000 North Sea wells involved in oil and gas extraction are to be decommissioned at a cost of around £20 billion over the next decade.

“The decommissioning opportunity is snowballing and could be worth around £20bn to the supply chain between now and 2031,” OEUK said in the report.

Decommissioning spend is forecast to increase dramatically over the next four years. Between 2019 and 2021 the average annual spend was £1.23 billion, or roughly two thirds what had been forecast for the period 2022-2025.

A tenth of UKCS oil and gas expenditure went on decommissioning in 2021, a proportion set to rise to 13.7% this year and to 19% by 2031. Overall, decommissioning will account for 15% of UK offshore expenditure over the next ten years, OEUK said.

However, an upturn in activities throughout the UKCS will pose a challenge for the UK supply chain.

“Continued pressure from new energies also adds to this challenge as the UKCS battles to meet increasing demand for labour and materials,” OEUK said.

The North Sea industry has made great strides cutting the overall cost estimate for decommissioning, by 25%, or £15 billion, since the start of 2017, but it can go further, the North Sea Transition Authority (NSTA) said on 22 November and challenged the sector to reduce costs by further 10% in next five years.

“The NSTA is challenging the sector to build on its strong progress by lowering the total estimate for decommissioning redundant platforms, wells and pipelines by an additional 10%, from £37 billion to £33.3 billion, between 2023 and end-2028,” the authority said.

OEUK’s Exploration Insight report showed in November hat unpredictable fiscal conditions are denting the confidence of offshore energy-producing companies to invest and revitalise oil and gas exploration activity.

“The waters off the coast of the UK still contain oil and gas reserves equivalent to 15 billion barrels of oil equivalent (boe), enough to fuel the UK for 30 years, but more investment in exploration is needed to slow down the decline in domestic production to safeguard the nation’s energy security,” OEUK said.

At the end of October, NSTA warned the industry that it would not hesitate to take action against companies that fail to meet their licence obligations. An investigation has been opened into whether a company, which was awarded a licence in the 28th Licensing Round in 2014, has failed to comply with several obligations, including drilling an exploration well and shooting a 3D seismic survey, NSTA said. Operators must meet their licence commitments to ensure a level playing field for all, the authority noted.  

NSTA also moved to cut red tape and scrap the requirement for Cessation of Production (CoP) reports, which will help industry to make significant savings in time and money.

“This move frees up time for operators to focus on those core tasks and creates time for NSTA staff to support the energy transition,” Brenda Wyllie, NSTA Area Manager, said.

In company news

Centrica has announced the reopening of the Rough gas storage facility, having completed significant engineering upgrades over the summer and commissioning over early autumn. The work done so far means that Rough is operating at around 20% of its previous capacity this winter, immediately making it the UK’s largest gas storage site once again and adding 50% to the UK’s gas storage volume.

Deltic Energy confirmed that operator Shell UK had started drilling on the Pensacola gas prospect with the Maersk Resilient rig.

“Pensacola is a high impact, potentially play opening prospect and represents what we hope will be the first of many wells as the Company continues to implement its strategy to identify opportunities and discover gas to support the UK's energy needs,” Deltic Energy CEO Graham Swindells said. 

Reabold Resources completed the sale of the entire issued share capital of Corallian to Shell for £32 million gross.

Hurricane Energy said in early November that it had decided to launch a formal sale process in order to establish whether there is a bidder prepared to offer a value that the Board considers attractive. Crystal Amber Fund Limited, Hurricane Energy’s largest shareholder with 28.9%, has indicated to the Board its desire to monetise the value of its shareholding, Hurricane Energy said.

In an update two weeks later, Hurricane Energy said that the sale process was progressing, “with multiple expressions of interest received from credible counterparties.”  

Finder Energy has entered into three farmout transactions with Dana Petroleum for three licences in the Central North Sea. Finder is assigning 40% in each of the three licences to Dana Petroleum, while retaining 60% in them. 

“Finder retaining a 60% interest allows for secondary farmouts to secure funding for wells whilst still retaining meaningful levels of participation in any discovery,” the company said. 

Wood has been appointed integrated services partner by Centrica Storage for the company’s UK Southern North Sea operations. The five-year contract includes the provision of engineering, procurement and construction solutions, operations and maintenance services, as well as project management services for the Rough gas field and the Easington Gas Terminal in East Yorkshire.

Wood’s scope also includes working with Centrica Storage to support their ambition to drive the UK’s clean energy transition by redeveloping Rough into the world’s biggest hydrogen storage facility.

Read the latest issue of the OGV Energy magazine HERE