The latest Investing Matters Podcast episode featuring Jeremy Skillington, CEO of Poolbeg Pharma has just been released. Listen here.
Modestus, thanks for posting the article by Ryan Crighton (Aberdeen & Grampian Chamber of Commerce)
A provocative comment that no MP of any party north of the border can ignore – okay, maybe the Greens would choose to ignore it..
An interesting dig at the SNP, who are under the cosh at the upcoming election, but they can’t ignore the opportunity Labour is providing in the debate on a ‘proper windfall tax’. A couple of weeks ago Gillan Martin (MSP) who is Scotland’s Minister for Energy, said she wasn’t in favour of a policy described as ‘a presumption against oil and gas’.
There’s much to play for in Scotland.
" $60m ish margin on the gas pass through arrangement."
They don't. I don't know what margin they receive from the pass through, if any. The $60m net gross relates to total Enquest gas volumes. In 2023, the net gross number should include the additional gas (c. 700 boepd) sold through Senegi, which is subject to some sort of fee arrangement.
Enquest don't post their oil/gas mix, but the numbers on crude oil sales are provided near the end of the accounts. I've referenced these pages in previous posts.
Hi Tamovv, I'm not looking at 2024 estimates or producing my own until after the next update - too many moving parts.
On the 5Kboepd drop due to the pullback from Harrier development: a portion of this drop relates to the loss from development with the balance from current production numbers. From memory, I think the decision followed the pullback in gas prices. By my numbers, gas accounts for c. 85% of Harrier/Stella production.
A key factor from mid 2024 is the performance of Captain with the new polymer injection in place.
Combined, these factors should increase the % of oil in the mix, which is positive given the recent pullback in gas prices. But the big numbers will be estimated production and CapEx. I'm not giving 2024 much thought until I know those numbers.
We could see a trading update and dates on the dividend payment before the end of Feb.
Worth adding, when the gas price spiked there was speculation here that if the gas contract pricing was fixed then Enquest would gain from higher gas price. This speculation was fuelled by what I considered to be misleading comment by Enquest in a trading update.
I don't know the terms of the contracts but essentially it is a neutral pass through of gas with respect to pricing.
Stevo12, thanks for that clarification on decom. It isn't as bad as I projected - last man standing. Though the commentator was correct in his debunking of the idea that taxpayers subsidise decom.
On Magnus gas.
Originally, gas injection was used on Magnus. This gas was supplied from 3rd parties (BP and fields WOS) under long term contracts. These contracts were inherited by Enquest as part of the acquisition. The gas essentially flowed into and out of the Magnus field and was piped onward to the Scottish coast. In 2019 Enquest decided water injection was more cost effective than gas injection.
The bottom line is that much of the gas revenue shown in the accounts is actually gas flow from 3rd parties in the WOS. This is adjusted in the cost of sales. The net, I think $60m in 2023, is the gas gross profit number for Enquest.
As a follow up.
I guess the point you are highlighting is that if 2024 Rosebank CapEx is say $200m, that $200m will come from current funds and only be reimbursed through the EPL allowance in 2025.
Yes, that is my understanding.
Tamovv, my understanding is that the schedule of cash tax payments in 2024 is now fixed, or will be once the 2023 accounts are closed. As tornado10 says, the 2023 Q4 CapEx may be higher than the original guidance, which was for CapEx in producing assets. There will be the first phase of CapEx on Rosebank - the higher the better. CapEx spending in 2024 reduces the cash payments in 2025.
I understand from comment on HBR that this phasing of payments changes when a company returns to the normal CT payment schedule. Although, Ithaca has c. $1,800m of tax losses from the 2022 acquisitions, I recall a comment that CT payments would be in the low single digits (I don't know if that's $m or % but if you have the transcript you might).
As I say, this is just my understanding. I'd guess we'll get clarity with the results, when the Rosebank payment schedule should be disclosed.
Hi romaron, I think I read the same article.
The commentator debunked the myth that the taxpayer subsidies the decom of North Sea infrastructure.
When a company develops an oil field, drilling wells and installing infrastructure on the seabed, it incurs a decom liability. Conventional tax policy would allow for the amortisation (?) of this liability against production profit during the life of the field. (stevo12 – Norway?) To maximise tax revenues the authorities deferred consideration of the decom costs until they were incurred after the field had ceased production. This required the company to initiate or obtain a 2nd project to produce profits that would allow for the tax deductible decom allowance from the 1st field. A sort of musical chairs, or last man standing. (I think I have that right).
Not an attractive option, and I’d guess ‘first year capital allowances’ were the sweetener.
Time moves on.
The SC is introduced, but finance costs are not allowed.
The EPL is introduced as a temporary measure, but finance costs, decom costs and past CT losses are not allowed.
If the EPL isn’t temporary, and the EPL allowance is removed, then the musical chairs end.
I repeat. I believe a viable tax solution will be found under Labour. The North Sea O&G sector will continue for the foreseeable future. But there will be volatility, and failures.
I’ve long viewed my O&G investments on a medium-term investment horizon. I’ve only recently come to realise how brutal the UK O&G tax regime is compared to the taxing of other industries.
I now realise that Stevo12’s description of the tax regime was much as I viewed the 85% of my portfolio that isn’t in the O&G sector. As a rule of thumb, I use a Capex spend on 50% of depreciation as a maintenance of existing production. Any Capex over this amount I consider organic growth investment.
I thought that the O&G tax regime might have had some concession for the fact that CapEx on 100% of 2P reserves developed is fully written off over the life of the field. That’s before decom costs.
For independents operating in the North Sea, a retail investment is about timing, with long term projects such as Kraken, Catcher and Rosebank a high-risk gamble. I was in CNE with holdings in Kraken and Catcher launched at a similar time, each with 50K bopd targets. Catcher exceeded its target hitting 60K bopd and covered costs within 18 months (as I recall). Kraken never achieved target and struggled though the first year of operations to get over 40k bpd, while finance costs built up. A few years ago, I posted a breakdown of finances which implied Kraken would never be profitable. Baring the inclusion of a successful extension to Bressay I expect Kraken never will make a return on the investment. Not to say that if you get your timing right you can’t profit as an investor.
I continue to monitor EnQuest, Harbour and Ithaca as investment opportunities. But the North Sea is a tough gig
Stevo12, thanks for you reply. Clearly, you are qualified in this area.
I'm an engineer. There's something in this that still bugs me so I'll look into it further and if I come back with anything I'd appreciate your critique.
Stevo12, are you professionally involved in tax law, or are you, like me, an enthusiastic amateur?
Referring to EnQuest’s 2022 accounts, as an enthusiastic amateur, I see a component of $317m called ‘depletion of oil and gas assets’ included in cost of sales of $1,200m. Subtracting cost of sales from revenue results in a gross profit of $653m. Profit is subject to tax.
When EnQuest developed Kraken, they received ‘first year capital allowances’ against CT and SC taxes in place at the time. Ahead of production, in Dec 2016, EnQuest had accrued $6,787m of oil & gas assets at cost, and had accumulated depletion and impairment charges of $3,846m, leaving a net carrying value of $2,941m.
In Dec 2022, EnQuest has accumulated depletion and impairment charges of $7,000m.
If not through the application of depletion charges at the income level, how has EnQuest acquired the c. $3 billion of tax losses, which today result in no CT payable?
I may have this all wrong, but I like to understand where I’m wrong.
Stevo12, I agree with your overall assessment on the economics – madness - of new development under a scenario where the full allowance associated with the EPL is withdrawn by Labour.
Which is why I don’t expect it to happen.
Yesterday, I posted a comment by a spokesperson saying Labour would abolish the full 45% allowance. In hindsight, I suspect this was an ill-informed low-level response creating a good headline for the press. Over the coming days and weeks there will be discussions between Labour and the EOUK amongst others.
I expect Labour to clarify their intent to raise the EPL to 38% and remove the additional allowance (c10%) – the ‘loophole’.
On the detail of your Rosebank calculation do you allow for the depletion of assets against the CT and EPL taxes?
In recent years the Supplementary Charge (SC) has been the mechanism for adjusting the UK tax regime to the volatile nature of O&G pricing. The SC was introduced under Labour in 2022, not in response to oil pricing but simply as an additional tax on the industry. However, it increased in 2006 in response to rising oil prices. Unlike CT the SC excludes finance charges. Under the Coalition government the SC peaked at 32% between 2011 and 2014. In 2016, following the SA initiated oil price collapse the SC reduced to its current level of 10%.
In 2022 calls were made to implement a windfall tax on gains made due to the impact of Putin’s invasion of Ukraine. The result, 25% EPL until Dec 2025, was a measure I supported.
I guess rather than modifying the SC, the EPL was invoked because there was a need for accelerated cash flows, hence the disqualification of previous tax losses and decom costs from the EPL. It was also temporary.
I thought the allowances were very generous, no doubt framed by the energy security concerns. However, given the timetabling of oil and gas investments Dec 2022 was a ridiculous time limit, so I wasn’t surprised by the extension to 2028, but I was disappointed by the tax increase to 35%.
If Labour use Norway as justification for their 78% tax other aspects of the Norwegian tax regime may be considered.
Here’s a link I found. If anyone has a better one, particularly on the handling of decom I’d appreciate it.
https://www.norskpetroleum.no/en/economy/petroleum-tax/#:~:text=The%20overall%20objective%20of%20Norway%E2%80%99s%20petroleum,partly%20obtained%20by%20the%20tax%20system.&text=The%20overall%20objective%20of,by%20the%20tax%20system.&text=objective%20of%20Norway%E2%80%99s%20petroleum,partly%20obtained%20by%20the
I’m looking forward to Thursday’s update when we’ll see much of the conjecture here replaced by facts.
I wish that were true of Labour policy in government, but this week’s revelations are helpful.
The updates we saw this week on Labour’s EPL plans represent the policy that is going into their manifesto in preparation for a possible May election. I do not know if an election will be called, but if it is not it provides some clarity on intent which the likes of the OEUK can challenge and might lead to amendment in the next iteration of the manifesto.
Under labour, I was anticipating the removal of the additional allowance to the EPL, worth c.10%. I’d guess the EOUK and Conservatives had a similar expectation. Yesterday, Labour challenged a civil service costing of their plans, which said the Labour numbers fell short of the £10.6 billion over five years anticipated from a ‘proper windfall tax’. The labour challenge is:
-----------------------------
Labour spokesperson
Labour noted that the Government costings assume the first-year capital allowance within the energy profits levy is retained, although Sir Keir’s party wants to scrap both that and the investment allowance.
The costing therefore only accounts for £10 out of every £45 of the allowances Labour would abolish, it said.
------------------------------------------
I could make the case for NS investment with a 38% EPL and the loss of the EPL additional allowance, but the loss of another 35% could be a game changer.
(At this point in the post, to add clarity, I expanded on the current tax regime. Due the word limitations I’ll post it separately.)
But there’s a wider and more important point on how such a policy impacts the North Sea sector at a national level rather than simply an investor level. Let’s be honest, as things stand Labour will not lose a single seat south of the border due to EPL. It might be different in Scotland, where 43 SNP Westminster seats are up for grabs.
The ending of the EPL in Mar 2028 presents a bonanza to the NS sector, particularly those companies that invest significantly ahead of 2028, and frankly I never expected it under a Labour government.
Removing the full 45% allowance under the EPL while maintaining the disqualification of decom costs has far reaching consequences that I don’t think Labour has considered, and which is why I don’t expect it to happen.
romaron, you touched on a very important aspect - the economic life of fields. Companies don't make balance sheet adjustments on the basis of manifesto policy, but companies can highlight the potential impact. I can imagine that impact will be the basis of argument from the OEUK and individual NS companies.
Romaron, I added my reference to the Drew Hendry interview and my take from it as a follow on from my post on Bressay.
For some time, I’ve been doubtful that the Bressay development would happen, largely due to the talk from Labour of no new licences, and partly due to my view that Enquest can’t finance it – particularly following the withdrawal of Equinor and Chrysor (now HBR) from the licence.
On the financing:
The news of RockRose’s investment put Bressay back in the frame. I feel the arrangement provides cover to RockRose if Enquest is unable to progress the development, while providing some incentive with the modest payment from cash flows. But importantly, it looks like RockRose are on board for a development providing gas fuel to Kraken as well as ‘an early production solution’, which I interpret as a low-cost development of Bressay with the Enquest Producer FSPO as part of the solution.
The deal with Equinor in which a contingency was payable by Enquest if an FDP was approved, suggested to me that Equinor saw a probability that the FDP might be a low-cost development with the EP and Kraken key parts of the solution. In which case, perhaps too small in scope for Equinor. Hence the contingency, which doubles under the ‘sole risk’ scenario. At the time I queried this with IR who described it as a scenario where Enquest gain an 81.6% interest in the field and Equinor receive an additional $15m in consideration/compensation for that purchase. There may be other terms under which this contingent is no longer payable.
The threat of Labour:
Although Labour has said that no new licences would be issued under a Labour government, I was unclear how this related to approval to move existing licences into development/production. I expected in-fill type developments to continue, but what about a new field development like Rosewell, Cambo or Bressay. The political reaction to the clearance for Rosebank indicated to me that a Cambo or Bressay would not get clearance from Ed Miliband as Secretary of State for Energy Security and Net Zero, under Labour.
Recent events including the news on a dialog between the Scottish First Minister and the Ithaca CEO, and the interview with Drew Hendry, indicate to me that despite the public rhetoric on the O&G industry we’ll see pragmatic implementation of energy policy once Labour take office, irrespective of what Ed Miliband’s supporters hope or expect.
What happens to Bressay under labour?
The Scottish First Ministers has been making public statements against new O&G development, however, a freedom of information release strongly suggests that in private conversations with Ithaca’s (now Ex) CEO Alan Bruce, the First Minister was supportive of the Roswell project and by implication, Cambo to follow, as communicated recently by Ithaca’s interim CEO.
Yesterday, Drew Hendry, the SNP energy minister in Westminster, was questioned on the SNP’s stance on the recent licence awards given the First Minister’s public statements. To be clear O&G activities are not a devolved issue, so the FM views are not enforceable. It’s for Westminster to decide. I thought the (Westminster) SNP Energy Minister’s response to questioning was interesting, and I think it provides insight into Labour’s likely response in government.
Here's my take:
O&G developments, including the award of new licences, will be subject to tough, perhaps tougher, environmental considerations, probably the toughest in the world, but they will be permitted. That will be the sell to the ‘progressives’.