Discussion29 Nov 2024 20:05
Article IC 28 Nov:
"A government set on limiting development in the North Sea has left the oil & gas sector in a funk. Major operators have said they will wind down operations in the UK, and one insider says this feels like the “final cycle”, given tax and regulatory pressures and environmental targets.Macroeconomic trends don't help. A heavily cyclical industry will always have its ups and downs, and at the moment, prices are under pressure. All this said, the sector does at least now have more certainty after the Budget. For most of this year, it had been in a holding pattern: first as companies awaited an election, then in the lead-up to new chancellor Rachel Reeves’ first major fiscal statement. Share prices, not helped by lower oil and gas prices, reacted accordingly.Political uncertainty related to how Reeves might modify the investment allowance regime, brought in alongside the energy profits levy by the previous government. A rise in the total tax rate from 75 per cent to 78 per cent was confirmed mid-year, and then the Budget itself largely kept the allowance regime intact.Given talk that Labour might scrap completely what it had called “unjustifiably generous investment allowances”, this could be seen as a win for the industry.“It leads to a scenario where we have a 78 per cent marginal tax rate and an 84 per cent tax relief on capex, [versus our] previous view of 78 per cent marginal tax and 78 per cent of tax relief on capex,” said Jefferies analyst Mark Wilson after the Budget. “This is a positive outcome versus most expectations, in our view.” But there are other things to complain about: pre-Budget unease has been replaced with longer-term questions, given the energy profits levy will now run until 2030. A consultation will begin in the new year on what happens after that, potentially with a view to taxing windfall profits as they are happening rather than retrospectively. Amy Miller, chief executive of consultancy Pragma Energy, asserts that professional investors have already turned away from the North Sea. “Raising money in the UK is like pulling teeth,” she says, flagging a lack of exit options, such as IPOs, that are critical to attracting private equity and similar sources of investment. The other side of the coin is that there remain opportunities for companies stacked with tax losses and a willingness to eke out production from older wells in the maturing basin. The UK is Europe’s second-largest oil and gas producer, and while oil is mostly exported, around 50 per cent of the gas extracted from the North Sea is used locally. Gas-fired power plants provided 28 per cent of the UK’s electricity supply in the past year, compared with 31 per cent from wind and 15 per cent from nuclear. Deals are still being done at a large scale – the latest beingIthaca Energy’s (ITH) tie-up with Italian major Eni’s (IT:ENI) UK arm – and consolidation will continue. Even Shell (cont)
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