No dusters anymore: No wonder new North Sea licences are in demand16 Sep 2022 19:12
Friday 16 Sep 2022
No dusters anymore: No wonder new North Sea licences are in demand
New tax reliefs effectively gives producers a free hit when it comes to exploration.
North Sea investors need not fear the dreaded duster much longer, not while the UK government is effectively underwriting exploration drilling.
It should not have needed an RNS from London-listed Serica Energy for the full significance of the new tax reliefs, brought in as a sweetener to Rishi Sunak’s windfall tax, to really sink in.
Nevertheless, a single line in an otherwise disappointing announcement really helps spell out just how much the UK is backing domestic oil and gas developments.
Serica announced that its North Eigg exploration well had been struck with a six-week delay that’ll add an extra £3mln to the programme’s cost.
But the company, which produces close to 30,000 barrels a day, sought to calm investors.
“It is expected that all well costs will benefit from the Investment Allowances available under the recently introduced Energy Profits Levy,” the company noted.
In case you missed it, at the same time as the government rolled out its Energy Profits Levy – aka the ‘windfall tax’ – it also massively increased the amount of tax relief available to company’s that invest in new UK project.
It now means that some 91p of every pound of new investment can be lopped off the tax bill for UK-based production.
More importantly, for exploration, in the old regime so-called tax losses were totted up and claimed as relief only once fields were brought into production.
Significantly, an explorer never actually advanced an asset so far as to make money off it, then those accrued tax losses may never claimed.
Instead, the new scheme allows for immediate relief allowing the benefit to be taken in the same year as the investment.
So, your well overruns and your budget goes up £3mln – so, what. Who cares? The government will cover the first 91%.
Now, lets say, the well fails to find any gas or oil at all. Well, the government will cover the first 91% of what you spent on that well too.
High interest in licensing round
It should therefore be no surprise to anyone when the Liz Truss government release the hotly anticipated results of the new North Sea licensing round it is very likely to reveal a fresh enthusiasm for the mature oil basin.
The North Sea has been somewhat overlooked over the past decade or so, and, at times portrayed as the ugly cousin, compared to the more alluring deep-water territories in the Gulf of Mexico, South America and West Africa.
It’s anticipated that more than 100 new licences will be handed to oil companies.
It was, until recently, a very unlikely turn of events.
Whatever about the North Sea’s relative stature on the world stage, the idea that the government would be promoting new oil and gas projects would’ve been unthinkable as recently as late 2021 given the momentum that had built behind the decarbonisation m
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