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Roula Khalaf, Editor of the FT, selects her favourite stories in this weekly newsletter.
Business lobbyists cry wolf all the time — especially if governments threaten to push up their costs or taxes. The oil and gas industry has been guilty of frequent hyperbole and exaggeration. But when it comes to the UK North Sea, for once their warnings aren’t all bluff.
The normally tight-lipped North Sea oil producer Neo Energy warned this week that it would slow UK investments, blaming “fiscal and regulatory uncertainty”. The development of its Buchan Horst oil project, 115km north-east of the Aberdeenshire coast, will be delayed while it awaits “clarity” on the UK’s tax position in October’s Budget. Neo, owned by Norwegian private equity group HitecVision, had targeted first oil in late 2027 from the £1bn scheme.
There are several issues. First, the new Labour government confirmed in July it would add 3 percentage points to the UK’s energy profits levy. The EPL is an additional tax on the UK industry introduced in 2022, after Russia’s invasion of Ukraine triggered a surge in energy prices. The latest change will take the cumulative tax rate up to 78 per cent.
More significantly, Sir Keir Starmer’s government is making changes to the investment and capital allowances. Introduced by previous administrations, these were designed to ensure that, even as taxes rose, companies would still invest in production.
Some of these allowances looked overly generous: from 2022 for every £100 companies invested in new projects they could receive tax relief of about £91. This autumn, the industry expects tax relief to revert to pre-2022 levels of 46 per cent. The difference is that in 2021, profits were taxed at only 40 per cent. Sharp cuts to capex seem a pretty obvious consequence: lobby group Offshore Energies UK estimates nearly £12bn of capital investment is at risk between 2025 and 2029.
Fears that the North Sea is moving into run-off mode has left valuations for oil and gas specialists there in the doldrums. Serica Energy, which has a 30 per cent holding in Buchan Horst, trades at just 3.5 times forward earnings. Another London-listed group EnQuest is at 1.2 times.
The UK is a mature basin. Companies must invest to slow its rate of decline. Production will not drop immediately as groups benefit from recent drilling campaigns. (And awkwardly, the next few years of corporate cash flows may be robust, as investment is reined in.) But redundancies could soon follow in exploration units.
Many companies want to buy outside the UK. Easier said than done. Shareholders last year objected to not one but two potential merger partners proposed by Capricorn Energy. Some may opt to consolidate. Either way, North Sea operators need a fable-like tale to convince investors they can keep the wolf at bay.
