Member Info for Dumbly

GA, unlikely as the expectation is standard Corporation Tax will be increased. The best outcome could be that the standard CT remains as-is. But, O&G pay a special sector-specific CT at 30% plus a supplementary CT at 10% for a total CT of 40%. EPL at 35% is on top of this, for an overall total of 75% tax. Past losses can be used to offset the CT, and relevant investments can be used to reduce the EPL.

Pelle, hehe, that sums it up pretty well how I feel.
Deluded from Dumbleton (that’s why I am Dumbly - well… at least one reason :) ;) :))

A couple of side comments.
First, it felt like it was getting personal between Linda Cook and Hunt, as if he felt she was challenging him. Cook warned Hunt of the outcome if the EPL was increased to 35%, yet given the guy’s style it feels like he decided to take her on and call her bluff. Just she and others, as is now clear, were not bluffing. Events have make Hunt look stubborn/inflexible.
Second, Looney stating the EPL would not deter investment was a nice way, intended or not, to give the Supermajors in the UK a competitive advantage over the Independents.

As I write I wonder…what’s the point? I do it anyway.

For “energy security” the UK needs the NS to be producing at least at current levels. For the next… 15+ years?
The UK-focussed Independents need to remain committed to the NS to maintain production (and other things).
The EPL impacts “UK loyal” Independents disproportionally.
The Independents must hedge to borrow and therefore realise a lower real price, and must borrow to invest, and borrowing capability is in good part based on the profit estimate from a reserves estimate.
To address these points could the EPL be voided or reduced on a sliding scale based on the group’s… worldwide production? (I don’t mean worldwide production would be taxed in the UK, that’s not possible, but that the EPL rate charged on UKCS production would be based on worldwide production.) Would such an arrangement stand up to legal challenge as not being discriminatory? I think it could as, for example, individuals can get a higher UK income tax rate based on their UK plus worldwide income.

Both a floor price mechanism to ensure the EPL is applied only on genuine windfall profits (to remind, Mr Hunt after announcing the EPL increase to 35% and until 2028, told MPs he had “no objection to windfall taxes if they are genuinely about windfall profits caused by unexpected increases in energy prices.” He said any such tax “should be temporary, not deter investment and recognise the cyclical nature of energy businesses”. ) and a mechanism to address the disproportionate impact on Independents is required. To note, at the first EPL announcement on 26/5/22 Brent was $112, while on 17/11/22 at the second EPL announcement Brent was $20 lower at $92. The inflation adjusted Brent average since 2000 is around $82, being where more or less where it has been over the last 3 months. These numbers and Hunt’s statement do not reconcile.

Could when and how much EPL applies be based on a matrix of a floor price/s and worldwide production? Complicated? Yes, but given the issues and sums of money involved, such a blunt taxation approach as now in place is absolutely not fit-for-purpose and dangerous for the UK. Addressing the flaws of the EPL to support UK energy security and investment in the UK cannot wait for some all-singing all-dancing multi-party supported energy fiscal policy to give investors long-term knowledge/confidence. Action is needed now to make the EPL fit-for-purpose. As the EPL was thought up and announced in a week or so, so improvements to it in light of outside events and unintended consequences, i.e. the drop of the oil price to or below historical levels and the announcements of reduced investment in the NS, could be quickly devised and implemented.

Kamrat.
Respect for what you provide.
On the EPL, first was 25% until 25, then 35% until 28. As easy as they did the government of the day can make it… 28% and permanent or worse. Without a long-term fiscal policy for O&G production in the UK supported by both Labour and the Conservatives all the other details become secondary and bordering on irrelevant.

Jan, the difference now is that decisions/actions have been taken showing the impact of the EPL in terms of reduced investment. Will this make the government listen? My guess is there is some co-ordination between the independents and that every week or so another one will announce pulling investment. Announcing now new buy-backs or dividend payments would seem counter productive to the narrative the independents want to create. The argument therefore, for me holds water, but I am not going to defend my view more than this cause i just don’t know.

…and therefore their investment decisions.

Auson, as said before, would it be smart to announce shareholder returns before the Spring Budget and while, presumably, representations are still being made for changes to the EPL, in particular to the way it impacts the independent NS producers and there their investment decisions?

Your draft looking very good, romaron. I like the approach you’ve taken, the content, and the style. Clever stuff. Yes, adding something to elicit a response would be the cherry.

Frac, yeah, just saw John Redwood on 18/2 tweeted:
“Oil companies are cutting back on investment in the North Sea following UK tax rises. That means more oil imports, less UK tax revenue, fewer well paid UK jobs and less growth. Why so much self harm?”
Seems some pressure to be building. I revise my view on likelihood of changes to the EPL to a third of next to nothing.

An extract from: https://www.telegraph.co.uk/business/2023/02/19/britains-energy-market-blatantly-rigged/
"Any additional “windfall tax” on North Sea oil and gas extraction, however politically tempting, would be deeply counterproductive. At a time when energy security is centre-stage, we should be encouraging domestic energy production instead.
Oil and gas companies operating in the UK already routinely pay 40pc corporation tax, more than twice the rate applying to other companies. As Chancellor, Rishi Sunak last year imposed an additional 25pc “energy profits levy”. And last month, his successor Jeremy Hunt hiked that to 35pc – raising the total tax on UK energy extraction to an eye-watering 75pc."

Below an extract from: https://www.telegraph.co.uk/business/2023/02/19/britains-energy-market-blatantly-rigged/
"For years, global energy giants have been drifting away from the North Sea. As a result, more than two-thirds of operations in our offshore fields are conducted by small, independent firms.
Lacking the deep pockets of their multinational rivals, they’ve collectively warned the current 75pc tax rate is an “existential threat”, risking a “complete collapse” of our North Sea industry. Do we really want it to go higher?
What policymakers must do is instead make our energy market work better for both domestic and commercial consumers."

romaron, thanks, and no probs as I expect you're right re effectiveness of comms via twitter. So why I did it? From the desire to at least have the deluded feeling I am doing something that could possibly have an impact. I have also emailed a letter to the Treasury. I received an automated reply:
"We want to let you know that if you have sent in a policy suggestion, comment, budget or spending review representation then we are really grateful that you’ve taken the time to write to us and can assure you these have been received and will be reviewed."
My view on the chance of a change to the EPL in the near-term? Half of next to nothing.

Just tweeted in a reply to Grant Shapps:
Energy security–just empty words? The EPL has a disproportionate effect on Independent NS producers, who in the UK produce and are taxed on 90% of their production. For the Supermajors it is just 3%. Act now or watch the NS production crumble accelerate to an irredeemable collapse.

Krak, Jan, another consideration regarding buy backs right now is how it would look and effect the representations being made now to modify the EPL, either in general or in a way to mitigate the disproportionate impact on independent UK producers. Maybe the company thinking is to hold on communicating shareholder returns until a modification of the EPL is obtained or they are sure no change is on the cards?

BattleFIS. Thanks for the thanks. (The Resolution guy who said he did not expect the EPL to have a negative effect on investment in the NS is not even the CEO. Mike Brewer is the Resolution Foundation's Deputy Chief Executive .)

davef24. Just tweeted to GS:
No floor price to EPL=less domestic production=more imports=more emissions=less energy security+less growth+less jobs+less GDP+less tax income+less UK investment in renewables.A disastrous policy-the unintended consequences will demonstrate this. Act now as soon will be too late.

Romaron, The 33rd Licensing Round attracted 115 Bids across 258 Blocks or Part-blocks. Broadly in line with previous rounds. I guess tho you mean the result in terms of award of licences, and this is scheduled for Q2 23.

IR considered it a positive update and that it communicated a pragmatic approach to capital allocation as a result of the EPL. Obviously they were disappointed with the market reaction. They confirmed the management team is targeting shareholder returns but they are clear that they have to be sustainable and consider the knock on FCF due to the EPL. They would not be drawn to provide more detail on the conditions precedent to allow shareholder returns to be communicated/materialise. I said this lack of clarity was a part of the cause of the market reaction.
Their thinking on the EPL is in line with the views I have recently posted here. They have and will continue to make their case strongly to government, both through trade bodies and directly themselves. These representations include highlighting the disproportionate impact on smaller independent UK-focused companies and proposals to mitigate this. To date their views have fallen on deaf ears. I said would it be good to see more of a push-back from the industry, especially if the “energy security” target is real, as otherwise it will soon be too late.
I am taking the 0.5 debt:EDITDA leverage target as a sort of proxy for the earliest point more detail on shareholder returns will be communicated, and my guess is they will be in the form of buy-backs.

Sekforde, in your 12:33 post do you mean tax credits or tax losses were $2,627M as a 30th June 2022? Thanks.

You’re going to love this from the House of Commons Library Research Briefing of 29/11/22 on Taxation of North Sea Oil and Gas: https://researchbriefings.files.parliament.uk/documents/SN00341/SN00341.pdf. See Page 79:

“The potential impact of the Levy on investment was raised briefly in one of the Treasury Committee’s evidence sessions after the Autumn Statement. Alison Thewliss asked witnesses if they thought the new 75% headline rate would “put off energy companies from investing in the UK.” Mike Brewer (Deputy Chief Executive at Resolution Foundation) thought not: “I do not think it should, no.”

The Resolution Foundation is an independent think-tank focused on… improving the living standards of those on low-to-middle incomes. https://www.resolutionfoundation.org/ . WTF, how did this guy become relevant or knowledgeable about the impact of taxation on investment in the NS?

Also worth reading from page 69 Sunak’s comments.

From page 73 Mike Tholen does his best to give his view on the impact of the EPL.