Member Info for Dumbly

garyn, you're assuming the EPL would apply on realised sales price after hedging costs and not the broader market price as it does now. IF this did become the case it would be another massive gamechanger addressing the disproportionate impact the EPL has had on the UK-focussed Independents compared with the Supermajors.

Banburyboy, thanks. Agreed with your point. IF there is a floor price and IF it is a taper, so the EPL only applies to the profit element from revenue above the floor price, then it would be an absolute gamechanger.

Banburyboy, in your calcs if a floor price is announced are you assuming when the price of oil was is above the floor EPL that would not apply on the profit element below the floor ?

Tarmak, 2 things. First, I’d missed the $50M which will be payable the second half of 23 as the Brent average July 21 to June 23 will be over $65. It will not concern Suncor that for 13 months of this period the EPL applies and therefore EnQuest did not really benefit. Second, your point that tougher “sanctions” have been placed on UK O&G than on Russia (O&G) is an interesting one. Far from being a “Windfall of War” beneficiaries, the UK-focussed Independents are “War Casualties”. This point needs to be made by industry leaders – they need to start shouting. What are they worried about? Offending the government? The distain from the public? On both counts, they should head this off by explaining the situation and underlining that further investment will stop and the consequences of this. Let the government invest! As they do in Norway, which leads me to another point/question.

On a slightly different point for all, reports suggest the possibility of Equinor pulling out of the Rosebank project could be a major factor to cause the government to bring in a price floor to the EPL. Rosebank is massive, nearly three times the size of the Cambo field, and is potentially the source of 500m barrels of oil and gas. Equinor are owned 67% by the Norwegian government and own 80% of the Rosebank project. Rosebank is currently awaiting a final investment decision - expected later this year. In 2021 the UK imported £14.5 billion of gas from Norway, which accounted for 77% of all UK gas imports. Norway was the UK's main crude oil supplier in 2021, with 49.9% (£8.8 billion) of the total crude oil imports coming from Norway. In 2020, 40% of Norway's exports stemmed from the petroleum sector, and 87% of Norway’s O&G production is exported. I can’t find the percentage of production from government controlled companies. Must be… 30% or so. Anyway, the tax rate is 78%, so in any case the Norwegian government gets a big cut of all production. Coming back to Rosebank and the EPL, Equinor’s leverage with the UK government would appear significant, as why would they plough funds into the UKCS and, eventually, pay 75% to the UK government (the assumption has to be, until evidence suggests otherwise, that the EPL will be permanent) when they could put the funds into their own CS (assuming the reserves are there) and keep the 78% or more for themselves, plus create jobs etc etc. And probably sell this extra production from Norway to… the UK. This reasoning, that Equinor has big leverage re Rosebank and really could pull the plug if the tax conditions are not modified, stacks up?

chilting, the opposition would comment for sure, but if the floor price is at or below the inflation-adjusted historical average then there should not be much traction, altho what would probably happen is the opposition would still attack oil and gas producers. There has to be some pushback against the demonisation of hydrocarbons requiring the government to lay out the case of o&g's role in energy security and the energy transition. It has to be explained how lucky the UK is to have the capability it has and not squander this and import anyway the O&G that's going to be needed. Not an easy message, politically, but it needs to be made. (And explain that renewables are not 9x cheaper :))

Chilting, re your 1420 post "Its unlikely he would make the announcement about an EPL floor in the budget - much more likely to see it hidden away in the Finance Bill resulting from the budget", looks like you may have called it right. The thinking could have been why "pollute" the positive messages and give Labour and co the chance for an easy attack?

mrc, if a price floor is set too low not sure there would be a positive impact on EnQuest. The market would see through a ****take price floor and it would not motivate to invest in the UK to reduce EPL. To be fit for purpose there should be bands of prices and taxation, and to be really "fair" and hit the Independents and Supermajors somewhere like equally, the tax should apply to realised prices, which include hedging results, rather than broader market prices.

The first line from HMT’s Energy Taxes Factsheet states:
“From 1 January 2023, the rate of the Energy Profits Levy will be increased to 35% TO ENSURE OIL AND GAS COMPANIES BENEFITTING FROM EXTRAORDINARY PRICES PAY THEIR FAIR SHARE.”
What BS! EnQuest, and other Independents, have not benefitted from “extraordinary prices”, or if they did it was for 10 months or so and with a muted benefit due to hedging requirements obligatory to secure funding for development/production. These Independents, the very companies needed to maintain production in the UKCS, are being discriminated against. Is this “fair”.
Only actions count and as communicated in the last Trading Statement the company should consider new energy and decarbonisation ambitions at the Sullom Voe Terminal, review capital allocation strategy and its UK production growth ambitions, prioritise organic investments (the three infill wells at Magnus and three new wells at Golden Eagle) with quick pay backs and accretive M&A opportunities that allow to leverage operating capability and tax loss position.
So, in the short-term, invest in most cost effective way to get best return from existing UK resources, keep an eye out for cost-effective UK M&A opportunities, all whilst consuming the tax credit, but avoid longer-term UK investment i.e. defer drilling at Kraken, and look to grow production outside the UK.
Even if a floor price is announced, for sure it would be set too low ($85 is Brent’s inflation adjusted price since 2000) and unless it was a sliding scale with several floor prices and associated tax rates it would be too blunt a measure. The UK-focussed Independents who have the choice/capability have to accept to run down UK assets in the most return-effective way and look to invest in other jurisdictions. No turning back unless… the investment case became excellent and cast iron guarantees given from Cons and Labour. And this is just not going to happen, even considering the ray of hope from the Reuter’s article so…

Jan24, I don't see how a raise in UK corporation tax would hit the Supermajors when 95% or so of their production is outside the UKCS and on which UK corporation tax does not apply.

https://news.yahoo.com/hunt-considers-limiting-uk-energy-150221417.html

https://news.yahoo.com/hunt-considers-limiting-uk-energy-150221417.html

The heading of the earlier version of the "same" article was "Jeremy Hunt PLANNING A Windfall Tax "Price Floor" For Oil And Gas Companies", whereas the later/current version's headline is "Jeremy Hunt CONSIDERED A Windfall Tax "Price Floor" For Oil And Gas Companies". Maybe someone leaked something they should not have and then had to retract or maybe things are per the later/current article.

The heading of the earlier version of the article was "Jeremy Hunt PLANNING A Windfall Tax "Price Floor" For Oil And Gas Companies", whereas the later/current version's headline is "Jeremy Hunt Considered A Windfall Tax "Price Floor" For Oil And Gas Companies". Maybe someone leaked something they should not have and then had to retract or maybe things are per the later/current article.

Stumpy, exactly, no real point.

This is a different version of the same article: https://www.politicshome.com/news/article/treasury-windfall-tax-price-floor-budget-energy-profits-levy where it looks less likely anything will be announced tomorrow.

Agreed, Jeff79, IF a floor is announced it is most likely EPL would remain payable on all the profit not just the marginal profit above the floor. However... if they really want to address the disproportionate impact on the Independents and considering RBL constraints allow them to be able to invest, at the same time as collecting EPL tax from the Supermajors, they should make the floor price based on actual realised sales price after hedging.

Yes, Modestus, nice find.
"The "price floor" would mean the EPL would only kick in when the price of oil and gas reached a certain level." Does this mean a separate "price floor" for both oil and gas?
Logically, only the profit from revenue generated above the floor price should have the EPL applied i.e. if the floor price was $80 and oil price was $85, only the profits on the $5 should have the EPL applied. (Better still, if the EPL was applied on actual price oil sold at.) Otherwise, it would be better for producers that oil dropped below the floor price. Why should the EPL apply on all profit rather than just "super profits"? A simple floor price trigger would remain a blunt instrument.
Anyway, probably all conjecture. We will see tomorrow,

Aim, IF a floor was put for the EPL and IF it was $80, and it meant no EPL while Brent below $80 and 35% EPL if Brent over $80, that would mean we would want Brent to go and stay,,,, below $80? Anyway, it's not going to happen.
I still cannot believe the government has taken an extra 35% on all profits resulting from investments over the last 5-10 years. A retroactive tax not taking into account the risks investors take. There might as well be a sign hanging from both Number 10 and 11 stating "UK Closed for Inward Investment", for the message the EPL gives is a government which can do this to such a critical industry could invent any explanation to do it to any industry. Foreign investors are and will be giving the UK a wide berth.

Jan24, if EnQuest used the same accounting technique as used by HBR to book EPL costs what would their profit profit be for 2022?

Stevo12, regarding your comment "The problem is that it is gas prices that have driven the Energy Price Guarantee and the EPL". I understand this is the case due to the "marginal cost" basis that is used to calculate the price of electricity with gas being the fuel used to create the last amount of electricity at times of peak demand. As stated before, Brent is currently around its long-term inflation adjusted price. The same is the case for natural gas at $2.6, having spiked to around $9 in August last year. Therefore, the conditions which led to the Windfall Tax have largely disappeared and if The Chancellor is true to his words of having “no objection to windfall taxes if they are genuinely about windfall profits caused by unexpected increases in energy prices.” and that any such tax “should be temporary, not deter investment and recognise the cyclical nature of energy businesses” the EPL should be modified to reflect his words and be fit-for-purpose, including addressing the disproportionality of the impact on the UK-focussed Independents. The reality is the the EPL was a politically expedient money grab on the sector to plug the state's budged hole not a true "windfall tax". Apart the inequity of the move, the unintended consequences, as already listed will only get worse if the EPL is not modified.