RE: Energy Policy Battle-LinesToday 08:06
Part 2
estimated that £16bn in potential investment could be lost because of uncertainty about tax policy.
The Labour party, which is currently favourite to win the next general election, has proposed increasing the total tax rate to 78 per cent and removing tax relief on new projects.
The industry is likely to feature in election campaigning in Scotland as a weakened Scottish National party seeks to ward off challenges to its dominance.
In one of the few major deals in the UK North Sea since the introduction of the windfall tax, London-listed Ithaca Energy last month agreed to buy almost all of the UK upstream operations of Italian major ENI for about £750mn. This includes the UK assets of Neptune Energy, which ENI agreed to buy last year for $4.9bn.
Under the deal, ENI will receive a 38 per cent stake in the enlarged group.
Chris Wheaton, oil and gas analyst at Stifel, said consolidation in the sector was an essential “defensive move” that would allow companies to combine resources and fund the decommissioning of old assets.
“The UK needs a national champion to manage the decline [in oil and gas production],” he said, adding that while two Norwegian groups — Equinor and Aker BP — accounted for about four-fifths of production in Norway, the top five in the UK were responsible for 45 per cent.
While Labour’s proposed tax rate is the same as that in Norway, analysts argue that Norway has a less mature basin, which makes is cheaper to exploit, generous investment allowances and a tax regime that has not changed for more than three decades.
“After four tax changes in two years . . . the appetite for investment in the UK continental shelf is in a worrying place,” said Ryan Crighton, policy director at Aberdeen & Grampian Chamber of Commerce.
UK-focused producers are trailing a 30 per cent rise in the MSCI World Energy Sector Index since the start of Russia’s Ukraine invasion. Shares in Serica Energy are down 37 per cent, while Harbour Energy, the biggest independent UK producer, has lost 23 per cent.
Gilad Myerson, executive chair of Ithaca, said the prospect of unexpected changes in taxation meant it was “easier to do mergers” than pursue acquisitions that are funded with cash.
Before you consolidate, you have to put a value on the assets, and it’s very difficult to do that if you don’t know what the fiscal regime is going to be,” said Mitch Flegg, the former chief executive of Serica, who has become an adviser to the company.