Windfall tax: how the North Sea discards cash for oil and gas barons | Oil and gas companies

Payouts to shareholders to a large extent, soaring profits, booming valuations of assets: The oil and gas industry has returned from the depths of the pandemic with a vengeance.

After a difficult 2020, where declining demand at one point led to negative prices, crude oil recovered in 2021, and wholesale gas prices have rose in Europe and the UK. Gas has risen as much as tenfold to new record highs due to factors including low storage capacity, strong Chinese demand and low wind production during the summer.

BP boss Bernard Looney illustrated this bonanza when he said the oil and gas giant had become an “ATM”. North Sea oil and gas companies are expected to report near-record cash flows of nearly $ 20 billion. (£ 14.9bn) for the current financial year, according to industry experts at Wood MacKenzie.

The revival of industry fortunes has spurred demands for an unexpected tax on producers in the North Sea, where the proceeds are used to subsidize energy bills for households facing a cost of living crisis. The Liberal Democrats first put forward the proposal last week, and Labor took the call over the weekend. Rachel Reeves, shadow chancellor to the finance minister, said: “There is a global gas price crisis, but 10 years of the Conservatives’ failed energy policy and tremors and delays have created a price crisis that can be felt by everyone. We want to prevent bills from rising.”

Conservative former energy minister Chris Skidmore has also publicly backed the idea, which has been rejected by the government.

Shell, the world’s largest producer and distributor of liquefied natural gas (LNG), said last week that profits would be higher than expected thanks to the high prices. Unlike gas that arrives via pipelines from fields in the North Sea, LNG is sent across the oceans to the highest bidder, which means companies like Shell are benefiting from rising global prices.

Shell already planned to give investors a bonus of 7 billion. USD by offering to buy shares back from them, but has now said this will happen “at a pace”.

The largest North Sea researcher is not BP or Shell, but Harbor Energy, created through the merger of Premier Oil and Chrysaor earlier this year. In a recent update, Harbor said it expected “significantly higher free cash flows at current commodity prices” and announced a $ 200 million dividend. year (£ 147 million) to investors.

Many companies that drill for oil and gas in the North Sea are private companies that are not listed, which means that they do not have to publish accounts as quickly as companies like BP, Shell or Harbor.

Rachel Reeves
The Chancellor of the Exchequer, Rachel Reeves, is a vocal supporter of an unexpected treasure on North Sea oil. Photo: Ian West / PA

But some have provided insight into how high gas prices work to their advantage.

Rising oil prices have been good news for the chemical group Ineos, which is owned by Monaco-based British multibillionaire Sir Jim Racliffe and has drilling licenses in fields including the Breagh and West of Shetlands area.

Revenue increased by 87%, or DKK 2.4 billion. EUR, to 5.1 billion. EUR in the three-month period ending 30 September 2021. This was “primarily driven by higher prices and increased volumes”, the company said.

“The increase in sales prices followed the increase in crude oil prices, which rose to an average of $ 73 [per barrel] compared to $ 43 for the same period in 2020. “

In a recent update on trade, Ithaca, owned by the Israeli group Delek, said rising prices meant gas revenues per capita. barrel from its assets in the North Sea, which includes the Alba and Alder gas fields, nearly doubled in the third quarter, from $ 49 last year to $ 97.

As it increased production to meet demand and cash prices, gas revenues more than tripled from $ 59m to $ 180m over the three-month period.

The industry has warned of an unexpected tax, pointing out that its own improved fortunes mean a tax increase of several billion pounds.

“[The Treasury] will receive an additional 3.5 billion. pounds in tax in the two years from April last year – which in total amounts to more than 5 billion. pounds, ”said Oil & Gas UK Spokeswoman Jenny Stanning. “We already pay up to 40% corporation tax – about double that of any other sector.”

Graham Kellas, senior vice president of global tax research at Wood Mackenzie, said an unexpected tax could be counterproductive. “Higher taxes are generally dampening investment, and the upstream industry is currently under pressure to reduce activity, so this could get worse,” he said. ‘Some companies may not pay more tax even if the rate rises.

“If they invest in new projects or are involved in significant shutdown operations, the deduction from these costs can absorb most of their revenue. For others, it will reduce their profit margin.

“This may not have an immediate impact on activity, but it will reduce enthusiasm for future investment. Reduced investment will accelerate the decline in North Sea production and this will have to be replaced by imports unless demand for oil products falls at the same rate.”

Malcolm Graham-Wood, founding partner of Hydrocarbon Capital, said: “Those who propose an unexpected tax have very short memories. Not only did Chancellor Osborne have to cancel an unexpected drop due to a massive drop in activity in the North Sea, but it was only two years ago that oil traded to a negative number when demand was so weak.

“The bottom line is that it has proved counterproductive to tax the oil companies operating in the North Sea.”

Green advocates have also argued strongly that the answer to high energy prices is to generate more green electricity, and criticized ministers for their lack of action. Tessa Khan, director of Uplift, which fights for a fossil-free UK, told the Guardian: “This government has abdicated responsibility for securing affordable energy for for-profit oil and gas companies, with disastrous results for households. As long as the government fails to plan and “Supporting renewable energy on the scale we need, we will continue to depend on expensive gas imports in this country. Opening new oil and gas fields in the UK will not change the energy bill and will only lock us in long-term dependence on fossil fuels.”

She added: “If you want to know why the government has relinquished control to the industry, just look generous donations from oil and gas companies received by the Conservative Party, or the dozens of Lords and MPs employed by or holding shares in the industry. But in reality, it’s a lack of vision, planning and investment in Britain’s enormous potential for renewable energy. ”

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