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City A.M

City A.M

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North Sea Oil And Gas In Jeopardy As Financing Falters

  • The Treasury's efforts to attract lenders to the North Sea are facing resistance, with many major banks avoiding domestic fossil fuel investments.
  • The UK government's introduction of a tougher windfall tax and changing policy landscapes have eroded investor confidence in the North Sea.
  • The dwindling number of lenders in the North Sea is further impacted by expectations of a Labour victory in the upcoming election, as well as heightened emphasis on meeting climate change financial criteria.
North Sea

The UK’s oil and gas sector faces the growing prospect of a cash crunch, with the Treasury’s latest attempts to lure lenders back to the North Sea this week likely to fall on deaf ears, City A.M. understands.

The Treasury has invited some of the world’s major banks to a meeting this Friday including multiple lenders, including British lenders such as Barclays, Nat West and Lloyds, alongside European banks such as BNP Paribas, Deutsche Bank, DNB, ING and Societe Generale and US financial institution Wells Fargo.

However, only a handful are expected to attend the meeting, with dozens of banks already pulling out of investing in domestic fossil fuels due to concerns over the UK’s poor investment climate and growing pressure to fulfil ESG obligations.

Most recently, this included BNP Paribas which followed in the footsteps of HSBC last year – which committed to stopping new oil and gas financing for freshly approved projects.

The Mail first reported the meeting.

While Shell and BP are sufficiently resourced to fund projects with their own cash flows, the vast majority of producers – which actually make up the lion’s share of North Sea output – are smaller and depend on favourable lending terms from banks to finance projects.

However, the government’s decision to toughen the windfall tax last year so that it is a six-year policy has weakened investor confidence in the North Sea, with banks considering the levy to be a policy change – making their terms of financing oil and gas exploration more stringent for producers.

The introduction of a price floor for oil and gas from The Treasury has not been sufficient to boost confidence, with Whitehall not even expecting the mechanism to be triggered during the duration of the Energy Profits Levy.

Meanwhile, recently unveiled plans to consult on the tax regime with the industry will not include the windfall tax.

Worsening stability are the growing industry expectations Labour will win the next election, which will likely take place next winter.

Opposition leader Keir Starmer wants to both maintain the de-facto 75 per cent tax on the North Sea oil and gas sector and also ban new licensing rounds for further projects.

City A.M. understands this has contributed to only a few active lenders remaining in the North Sea alongside the push for funding to meet climate change criteria around carbon emissions.

This follows projections earlier this year from the North Sea Transition Authority, exposing that capital expenditure in the industry will decline from £5.42bn to £2.5bn over a ten year period from 2019 to 2028.

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Ithaca Energy and Harbour Energy are both set to unveil their results later this week, which will give further indications of the country’s investment conditions.

By CityAM

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