The government needs to do more than ease the windfall tax to reassure troubled North Sea oil and gas companies over the UK’s investment climate and protect future production, warned Offshore Energies UK (OEUK).
The industry body’s chief executive David Whitehouse welcomed the Treasury’s decision to introduce a price floor into the Energy Profits Levy, and said it was only fair that “when the windfall conditions go, the windfall tax should go.”
However, he believed this had to be the starting point for improving investment conditions in the North Sea rather than a conclusive policy.
“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,” he said.
This follows the Treasury unveiling the Energy Security Investment Mechanism (ESIM) earlier today, which establishes a price floor at $71.40 per barrel and 54p per therm.
At this point, the Energy Profits Levy – known as the windfall tax – would fall away entirely, with taxes on earnings dropping from 75 to 40 per cent.
However, oil prices would need to fall below the price floor for a period of six months for the windfall tax to be removed.
Based on forecasts from the Office for Budget Responsibly, ESIM will not be triggered before the tax’s planned end date in March 2028.
City A.M. first revealed the industry was pushing for a price floor earlier this year, which was being considered by the Treasury ahead of ‘Green Day’ – the government response to the US Inflation Reduction Act which turned out to be highly underwhelming.
ESIM is designed to bolster certainty in the oil and gas sector to raise capital, following fossil fuel producers including Total, Enquest and Harbour Energy withdrawing from key projects this year.
Meanwhile, Rosebank – the largest undeveloped oil and gas field in the North Sea – faces an uncertain future with minority stakeholder Ithaca Energy weighing up whether to invest in the project.
It has been locked in talks with the government over the project for months, as exclusively covered by City A.M.
North Sea oil and gas exploration is featured in the government’s energy security strategy – as it looks to reduce its reliance overseas supplies.
However, today’s announcement has been panned within the industry, with criticisms aimed at the price floor’s low oil price and forecast lack of usage.
This meant they feared it would fail to encourage more investment in the North Sea.
An industry source told City A.M. that the ESIM “doesn’t do anything” to change investment conditions and will not encourage banks – which have toughened lending rules – to provide more capital to oil and gas companies.
They dismissed the floor threshold as below conventional conditions – with six month periods of oil prices that low typically representing only severe economic conditions.
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