UK Energy Profits Levy could stall major offshore projects

June 20, 2022
Equinor could withdraw from one of the U.K.’s largest remaining offshore oil developments in response to the government’s windfall tax on the industry.

Offshore staff

LONDON  Equinor could withdraw from one of the U.K.’s largest remaining offshore oil developments in response to the government’s windfall tax on the industry.

According to a report in the Sunday Telegraph newspaper, Equinor is reviewing the impact of the recently announced Energy Profits Levy before committing to the deepwater £4.5-billion Rosebank project West of Shetland.

The company, which had pushed back an investment decision on the project until 2023, recently gained an extension to licenses containing the Rosebank field.

The levy, which imposes an additional 25% tax on the profits of North Sea oil and gas companies, was announced last month following public pressure over high energy prices.

Britain’s government aims to raise about £5 billion ($6.12 billion) from the measure, which it says it will return to U.K. households to offset some of their costs.

In the same region, Shell is said to have informed analysts it is less likely to move forward with the £2 billion ($2.45 billion) Cambo project. Ithaca Energy recently agreed to acquire Cambo from operator Siccar Point Energy.

The report also claims that U.K. Business Secretary Kwasi Kwarteng wrote to Chancellor Rishi Sunak last week about the risk the levy presented to investment in the North Sea and the lack of consultation with the sector.

Industry association Offshore Energies UK (OEUK) commented that the levy “may already be undermining the major investments needed to keep Britain’s lights on.”

It pointed out that the U.K.’s oil and gas operators, which include many smaller independent companies, were already paying 40% tax on profitsthe highest rate of any sector in Britainand that the new 65% rate makes investing in new gas and oil fields in U.K. waters far less attractive.

Without such investment, U.K. offshore production could fall rapidly, so by 2030 about 80% of U.K. gas supplies and more than 70% of oil supplies would have to be sourced abroad.

“This is an industry that thinks and plans long term, so sudden new taxes will always disrupt investment plans," OEUK CEO Deirdre Michie said. “The windfall tax may not affect projects already underway but is likely to deter investments under consideration, for which funds have yet to be committed. The U.K.’s offshore sector includes many independent companies who spend years planning investments that can be very risky.

“That is why the industry always considers a stable and predictable fiscal regime to be key to its investment criteria.”

If new taxes are imposed, she added, there is always a negative impact on investor confidence.

“In particular, such moves increase the cost of borrowing for new projects, making it more difficult to raise the money needed to maintain existing energy supplies and build the low-carbon energy systems of the future,” Michie said.