UK North Sea Oil & Gas Review

By Tsvetana Paraskova

One of the biggest acquisitions in the European oil and gas sector in recent years, the UK’s tax and regulatory policies, and the consequences of those policies for North Sea operators were the highlights of the UK North Sea oil and gas industry in the past month.

The UK government announced in early June that the Energy Profits Levy, commonly known as the windfall tax, could fall back to lower levels if and when oil and natural gas prices consistently return to normal levels for a sustained period. The levy, which currently puts the overall tax rate for operators in the UK North Sea at 75%, will remain in place for the next five years while oil and gas prices remain higher than historic norms – but this will fall back to 40% when prices consistently return to normal levels for a sustained period of time, the government said.

The move is part of the government’s strategy to support households with energy bills while providing certainty to investors to secure the long-term future of domestic energy production.

However, the tax rate for oil and gas companies will only return to 40% if both the average oil and gas prices fall to, or below, $71.40 per barrel for oil and £0.54 per therm for gas, for two consecutive quarters.

Offshore Energies UK (OEUK), the biggest industry association, said that the price floor mechanism was a step in the right direction, but many more are needed for the industry to overcome the current challenges.

“This is a step in the right direction, but many more will need to be taken to restore confidence to our sector. We will now work closely with government and lenders to understand the detail of the measure and its effectiveness at unlocking investment,” OEUK Chief Executive David Whitehouse said.

“Enabling continued UK energy production now and in future depends on a predictable and fair fiscal environment. The UK must be competitive if we are to be successful in the global race for energy investment.”

Whitehouse also noted,

“By investing in homegrown production, we avoid costlier, less secure and higher carbon imports while supporting an industry we need to make cleaner, more affordable energy in the UK, for the UK. Our sector is expanding into renewable energy, supported by a world class supply chain.”

The opposition Labour Party, tipped to win the next general election, presented its vision for the UK energy of the future, saying it would ban new oil and gas exploration licences in UK waters.

OEUK’s Whitehouse commented on the proposed ban, saying that this would undermine the UK’s energy security, jobs, and attempts to reach net zero.

“Labour’s proposed ban on new exploration licences is too much too soon,” he said.

“The figures are clear. The UK has 283 active oil and gas fields but 180 will shut down by 2030. If we don’t replace them with new ones, then production will decline much faster than we can build low carbon replacements. It means the UK will become increasingly reliant on imports,” Whitehouse added.

The most recent comments of Labour leader Keir Starmer that the party would ban new oil and gas exploration licences will be viewed as a largely symbolic gesture, according to analysts at Wood Mackenzie.

Starmer has said that all activity on existing licences would be allowed to continue, which could be interpreted as a softening of Labour’s previous position, WoodMac’s Principal Analyst Upstream Greg Roddick said.

“Labour has said changes would only impact the offer of new licences,” Roddick commented. “Opportunities in existing licences are more material and, in recent years, exploration drilling has already dropped to historic lows.”

The industry has already largely secured the most prospective and promising acreage in the UK North Sea, according to Roddick.

“There is no guarantee that new, commercial discoveries will be found. Those that are will likely be small and are unlikely to reverse the trend given the maturity of the UK Continental Shelf,” Roddick added.

In early June, research by the Offshore Energy Digital Strategy Group (OEDSG) at an OEUK-hosted webinar showed that digitalisation across the oil and gas and renewable energy sectors was gathering momentum.

Digital maturity has improved by 8 percent across key metrics, the 2023 Offshore Energy Digital & Data Maturity Survey report found.

The 2023 Offshore Energy Data & Digital Survey was undertaken by Deloitte in partnership with OEUK, North Sea Transition Authority, The Crown Estate, Crown Estate Scotland, NZTC, ONE and the Technology Leadership Board.

The survey of UK organisations across the oil and gas and renewable energy sectors, including the supply chain, identified a lag in data maturity. This indicates that more companies need to focus on developing data strategies if they are to capitalise on the opportunities. Access to data and digital skills was found to be one of the key barriers to data maturity, the survey showed.

In addition, collaboration has made some progress, but organisations continue to be wary of data sharing, particularly where sharing of data may be seen to be a risk to an organisation’s competitive advantage, according to the key findings of the survey.

The North Sea Transition Authority (NSTA) launched in early June a digital platform which operators will now use to submit and update Supply Chain Action Plans (SCAPs) containing important information about their contracting activities.

“It will help the NSTA make better use of the huge volumes of information contained in SCAPs, which are a core part of our work to ensure that security of supply and net zero projects are carried out efficiently and support UK supply chain’s evolution into a world leader in energy transition,” said Pauline Innes, NSTA Director of Supply Chain and Decommissioning.

In response to popular demand, NSTA has also extended a pilot scheme providing free access to an online platform that raises awareness of emerging and field-proven technologies and encourages their use.

In deals and contracts, the biggest news of the past month was the agreement between Eni and Neptune Energy, under which Eni and Vår Energi—a company in which Eni holds 63 percent—will buy the global and Norwegian portfolios of Neptune for an enterprise value of $4.9 billion, including the operations in the UK North Sea. Eni will buy the Neptune Global Business with an enterprise value of around $2.6 billion, while the Neptune Norway Business with an enterprise value of $2.3 billion will be acquired by Vår Energi.

“This transaction delivers to Eni a high-quality and low carbon intensity portfolio with exceptional strategic and operational complementarity,” Eni’s CEO Claudio Descalzi said.

“Neptune will contribute predominantly gas resources to Eni’s portfolio,” Descalzi added.

The Prax Group has announced the successful completion of the strategic acquisition of UK-based Hurricane Energy Plc, which holds a 100 percent operated interest in the Lancaster offshore oil field in the West of Shetland basin.

Hartshead Resources has submitted its Phase I Field Development Plan for the Anning and Somerville gas field developments to NSTA, marking a major and material milestone in the company’s development of its UK Southern Gas Basin assets. The field development consists of an unmanned dual platform development with gas transportation via a subsea tie-in to the offtake route. After receiving NSTA feedback on the plan, Hartshead expects to take Final Investment Decision for the Phase I development with its joint venture partner RockRose Energy. If the planned development and milestones go according to plan, Hartshead expects First Gas from the fields in 2025.

Energy group Parkmead has reviewed its UK North Sea plans and concluded that amid the challenges the industry faces – including increased tax burdens that have made operators in the area extremely cautious – “it has become clear that without full and committed engagement from industrial partners it would not be practical to progress the Perth development to FID, particularly recognising the massive level of capital investment required.”

Parkmead therefore advises that the potential Perth oil development will not be pursued and that the P588 and P2154 licences containing the Perth discovery are not being extended.

In the UK Central North Sea, Skerryvore is an exciting area which, despite the new fiscal and regulatory challenges, could be developed in a timely and cost-efficient manner, Parkmead said. The company therefore plans to drill this high-impact well as soon as possible.

IOG plchas decided to defer the drilling of the Kelham and Goddard appraisal wells at this time. The IOG-CalEnergy Resources joint venture will continue to assess the best options to drill the two appraisal wells by 31 March 2024 as per the respective licence terms, and it is also offering potential farm-in partners up to 50 percent of the Goddard licence (P2438) via the previously announced farm-out process.

Kistos Holdings plc said that the exploration drilling on the Benriach well, West of Shetland, was completed in June. The well encountered gas-bearing sands in the target Royal Sovereign formation, but the discovered resource is expected to be sub-commercial, said the company, which is a minority holder of 25 percent in the licence operated by TotalEnergies.

Drilling, engineering, and technology provider KCA Deutag said it had been awarded new contracts and extensions with a total value of over $70 million, with existing clients for the provision of drilling and maintenance services in the UK North Sea.

“KCA Deutag has been the drilling contractor of choice on some of these assets since the early nineties and we are delighted to continue our excellent long-term working relationships with our customers in the UK North Sea,” said Peter Skinner, UK country manager.

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