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The UK Labour party recently released its election manifesto, including additional detail on its plans for UK oil and gas fiscal terms. In our interpretation, these plans would represent a limited, though still significant, deterioration in fiscal terms, and, on confidence from the industry that these would be unlikely to change again, we believe incentives to invest in new projects remain. The following is a direct quote from the manifesto: “Labour will therefore extend the sunset clause in the Energy Profits Levy until the end of the next parliament. We will also increase the rate of the levy by three percentage points, as well as removing the unjustifiably generous investment allowances. Labour will also retain the Energy Security Investment Mechanism”. Two elements of what Labour has said appear straightforward. First, under a Labour government the EPL would be increased to 38% from 35%. Second, the EPL would be extended to the end of the next parliament in mid-2029 (current end date is March 2029). These elements have both been announced as Labour policy previously, and are not very surprising. Indeed, we are encouraged that the 2029 end date is again reiterated, lending this further credibility. Third, there is also greater clarity around tax allowances. Labour has previously talked about closing “loopholes” in the EPL structure. The manifesto appears to clarify what is meant by this, where it talks about removing the investment allowance. In our view, the language used is important here. Labour has specifically talked about “investment allowances”. If we look at the current UK oil and gas tax structure, as published by the UK government , there are only two elements referred to as an “investment allowance” – the 29% uplift for capital allowances against the 35% EPL, and the 62.5% uplift for capital allowances against the 10% Supplementary Charge. Given that Labour speaks about investment allowances alongside the EPL, we assume it is only referring to the 29% uplift granted against the EPL (with the uplift against the Supplementary Charge being a long-standing element of the fiscal regime). Under the current tax system, new CAPEX spending attracts 91p of tax relief per £1 of CAPEX spent. This creates significant incentives among existing UK producers for new CAPEX spending during the period of the EPL. If the 29% uplift against the EPL were to be removed, this 91p would become 81p of tax relief. If the EPL itself then rises to 38%, this 81p would become 84p of tax relief. So, in our view, it appears to be the case that under a Labour government, tax relief for new oil and gas CAPEX spending would move from 91p per £1 of CAPEX to 84p, and the EPL would still be expected to end in 2029.
DYOR
The ultimate risk here might be with the major oil companies committing to expenditure in these oil fields even with current licences, it might pay them to move abroad lock stock and barrel if Labour don't make it worth there wile with tax allowances with there expenditure outlays. risky situation.
GLA
Zeus Capital has published a new research note onJOG suggesting Labours manifesto pledges should not prevent Buchan going ahead.
‘I’m smart as dick and all of you :)’
‘Not as smart’ I meant. I’m so dumb I couldn’t even express my dumbness :)))
Personally I think our project will be on hold.
I didn’t say any of that :) it’s from the article I link. I’m smart as dick and all of you :)
OT6, I don't really understand why you think any O&G company would ever trust the UK government again after the recent confiscatory tax regime changes? How would this provide stability, when the UKG have, for the second time now, shown that they are willing to rape NS oil companies whenever they need to buy votes (my bad, I really meant to write whenever they need to fund their 'progressive' and compassion-based social welfare systems.) Fool me once.... but thrice, if coming back after this latest kick in the b4lls?
Also, when you say, "This could include permanently higher tax rates that would lead to higher tax revenues when oil prices are high without the need for windfall taxes" it is worth pointing out that an unmodified 40% tax rate would also have provided higher GBP tax revenues when oil prices rise without the need for any additional taxes of any kind! Apparently though that approach wasn't considered sufficient to satisfy the greed and desperation for votes by our political lords and masters.
So - the UK will continue to consume the same amount of oil and gas next year as it did last year, but in future years the hope is to be do it in a more environmentally-friendly way: by purchasing it from less carbon efficient jurisdictions, and then shipping it to the UK (in a carbon-zero form of transportation? I'd love to hear what form of transportation that might be!) And then when the price of oil and gas rockets, they will want to keep the barbarians from the gate by issuing energy payments funded by what - tax on the NS oil and gas we no longer extract? (Or perhaps they will tax the real windfall gains after all - those of the utility companies who made an absolute killing since Ukraine!)
Pass me a knife, I've an appointment to take out the UK's only remaining golden goose...
It actually wouldn’t surprise me if they’d eventually do this.
Https://ifs.org.uk/articles/labour-party-manifesto-initial-response
If it’s of interest and importance.
Labour are proposing to raise just over £6 billion across the next parliament through increasing and extending the Energy Profits Levy - a ‘windfall’ tax on the profits of oil and gas companies. Labour acknowledge that this revenue would be temporary. Rather than frequent change it would be preferable to get a long-term regime in place. This could include permanently higher tax rates that would lead to higher tax revenues when oil prices are high without the need for windfall taxes.
Re DU - " It's the paltry amount forecast to be raised that intrigued me most. £1.2bn a year taken off " gas giants making record profits" would hardly make a dent on the industry overall."
But it seems to say only £1.2 bn p.a. taken of energy giants to go into the ' Gren Prosperity Plan '.
That does not seem to debar a lot more being taken from them for ' general balancing of the government books'
Interesting indeed, Mr Upham! The biggest issue for the forseeable future is that the NS now presents a "return-free risk" proposition. I *hope* LIEbour get it, but I wouldn't bet the farm on it, given how financially and economically illiterate these people appear to be.
Agree Dick. This isn’t what most people think it is… I felt a lot more relaxed when I saw that…
IMHO
We need to remember that in a sense the manifesto is a 5 year plan not something to be achieved in 5 weeks or 5 months. Thus there is a lot of room for manoeuvre in terms of timing as well as interpretation. Given that Labour have stated that they will not revoke existing licences their approach may be to phase the implementation or even delay removing the "unjustifiably generous investment allowances". Depending on how this might work Labour could effectively introduce a "cut off" point for progressing existing licences in, say, 2028 which might suit their objectives. Of course, the alternative could be to make wholesale immediate changes which would have the effect of revoking the licences in all but name, but other phrases in the manifesto suggest that this is less likely.
The wording in the manifesto is certainly sufficiently open to interpretation.
RR (assuming she becomes chancellor) has stated that she would get forecasts from the Office for Budget Responsibility before any fiscal event, which requires ten weeks’ notice. Thus barring any leaks the Budget will not be happening before very late September/early October, which could feel a lot longer for some of us.
It's the paltry amount forecast to be raised that intrigued me most. £1.2bn a year taken off " gas giants making record profits" would hardly make a dent on the industry overall.
JOG, NEO and SQZ combined = perhaps a large enterprise, hardly a GIANT.
The use of the word "giants" intrigued me as well, and it's used more than once... simple rhetoric playing to a particular audience or in there for a reason.. or both? Also the phrase the market didn't like about removing the "unustifiably generous investment allowances".. rhetoric or relevant, it also leaves wiggle room for Labour in that they only need remove the ones they feel are "unjustifiably generous" which may not be all of them otherwise they needn't have qualified it. And as you point out it also leaves the door open to the allowances being removed only from certain company situations and not all which, as we and surely Labour themselves know, would decimate NS investment (I'm also not niave enough to completely rule out that being exactly what Labour want anyway without they themselves havng to do it outright. Interesting,..
The OBR forecasts were of course based on the Conservatives' proposals
Https://obr.uk/forecasts-in-depth/tax-by-tax-spend-by-spend/oil-and-gas-revenues/
..............the above is for comparison purposes. Shows that expected total tax take from UKCS oil & gas cos from 2024 to 2030 falling from £10bn in 2023 to £2bn by 2030. Nearly half of this would be from the EPL (35% vs Ringfence CT of 30% plus added 10% supplementary charge = 40%). Plus bfwd losses, interest and decommissioning costs aren't allowable after the rhyming Hunt's uneducated interference with an industry he doesn't understand.
Somewhat strangely - HMRC has removed all projected numbers from its .Gov.UK website. Possibly at the behest of its anticipated new masters??
"The Green Prosperity Plan will be funded in part by a time-limited windfall tax on the oil and gas giants making record profits, with the rest of the funding coming from responsible borrowing to invest within Labour’s fiscal rules – catalytic investment that will leverage higher private investment and boost economic growth.
For transparency, we have given an annual average across the parliament given the exact profile of projects will be driven by partnership with business".
"Funding (annual average): Windfall tax on oil and gas giants £1.2bn"
"Policies (to be) funded (annual average - inc Great British Energy) will total £4.7bn. Balance of £3.5bn to be provided by borrowing to invest within fiscal rules".
Is the use of the term "oil giants making record profits" relevant here? Does this description give Labour the flexibility it needs to back off the cases of the many independents who are the lifeblood of the UKCS, who are fleeing the basin in droves because there are no profits to be made? These independents could not in any context be viewed as: "oil giants making record profits". Shell, BP and a few other international players do still have some interests in the NS, so maybe a light has dawned on Labour's ultra-left thickos (perhaps after an adult in the Treasury wised them up to the fact that the proposals they've broadcast so far would lead to the loss of countless thousands of highly skilled jobs that aren't transferrable to the renewables sector, plus cost £20bn in lost tax revenues by 2030) that their initial proposals made no sense at all to anyone except the countries we'll still be look to provide us with at least 50% of the energy we'ree short of following Labour's last destructive act of 2008, when Brown raised the tax rate on oilcos to 60%, then Osborne added 2% for posterity - the ultimate d.ickhead.
£1.2bn is a paltry amount to be raising pa. One possibility is that Labour is playing both ends against the middle and banking on the Green zealots buying their words about: "no new production licences from now on". When the huge tax rate imposed on independent companies, all of which are experts in maximising returns and whose efforts keep Britain's lights on, are either reduced or lifted altogether. Perhaps companies with a market cap of - say - £5bn) will be excluded altogether? Labour could legitimately say it was all there in the manifesto - surely no one seriosly thought it would be a good idea to cause so many job losses, cost the UK even more on importing energy from abroad (oil & gas imports currently account for one third of the UK's total imports), reduce tax receipts etc .
It's the paltry £1.2bn that interests me most. Maybe the O&G's industry representatives, the GBA and Unite trade unions and a body of sage people whose concerns genuinely focus on the economic and physical safety of the nation has finally got through to Labour?
https://labour.org.uk/change/labours-fiscal-plan/
Views
Surety, I agree. - all to play for.
re " … try not to get caught in the sentiment of the pre budget noise " - you give wise advice
Good reminder post CHF.
We won’t know anything until the AW budget … try not to get caught in the sentiment of the pre budget noise
A responsible transition means it won’t be a rash choice on day 1. They need the revenue for the exchequer. Jog already have the licences and a low carbon plan..
There is all to play for IMHO
DYOR
Regardless of the election result the oil is going no where and it will come to the surface when JOG is ready to pump it out in 2027, so fill your boots now before the SP takes off.
From WH Ireland on 6/6/2024
"In effect, we anticipate the UK Government will provide fiscal clarity such that the operator of the Buchan redevelopment will have sufficient confidence in the fiscal regime to progress with project sanction. We remind investors of our view that the Buchan field is overwhelmingly the best undeveloped oilfield of its kind in the UK North Sea in terms of it being of considerable scale and low-risk. "