Roundtable Discussion; The Future of Mineral Sands. Watch the video here.
Londoner
Tax law does not allow depletion of assets to be offset against CT or EPL. Depletion is is replaced by capital allowances which currently provide a 100% allowance in year of investment for all uk companies with O&G currently being entitled to an additional allowance. Effectively we get the full depletion write off in Year 1.
I think the Unions are going to be key to bringing some common sense to this ridiculous Labour policy. I can imagine there are some very interesting conversations going on at Labour HQ .
It is the pure illiteracy that concerns me or more likely Miliband has got his way.
Sorry i got my maths slightly wrong. Equinor/Ithaca will fund $2b of initial investment or approx $8.5 per barrel of 2P. This raises interest costs to $100m per annum initially and operator FCF of $164m per annum for $2b investment.
Excluding interest costs, total operator FCF over field life equals 245m barrels x $13 per barrel = $3.1b. Initial investment $2b, decom at $5 per barrel equals $1.2b. Broadly no return from operator and tax paid $11.4b. Madness!
i think rosebank will be the bell weather. i am expecting/hoping that equinor and ithaca announce that plans to develop rosebank are put on ice until after the election and labour’s policy implemented (if they win the election).
i don’t believe equinor received a guarantee from conservatives regarding tax treatment and accordingly back of the *** packet calculation of the new economics of rosebank
phase 1 cost $3.8b of which equinor will have to fund $1.7b ($7 per barrel of 2p) - due to all investment allowances against epl being removed.
production target of 55k per day equals revenue of $1.6b per annum at $80 oil.
opex of $20 per barrel generates taxable profit of $1.2b per annum, operator share at 22% equals $264m ($13 per barrel)
interest coast at 5% equals $85m or $4.25 per barrel.
so in broad terms, $1.7b of investment required to generate $179m of fcf per annum with is approximately a npv of 10%, excluding decom costs. when you add decom costs of which operator will pay 60%, the npv drops to low single digits and makes any investment value destructive.
we really need the sector and equinor in particular to call out the labour idiocy. over the life of any new project under labour, the government will pretty much tax 100% of fcf over project life once you factor in initial capex and decom costs
Buzzard
Firstly this is currently a labour proposal not tax law yet.
If the labour proposal was enacted in early 2025 then it would be number of years before fields are decommissioned. The cessation of all UK CAPEX would result in several years of declined production until fields became uneconomic. It may be that Harbour can generate a positive FCF during those years from their 22% share of profit - $600- 800m per year- which covers the relatively low level of current decom of say $300m per year before decom costs ramp up.
It will be a slow death but enough time to diversify overseas and we really need the WD deal which secures the future of Harbour.
Sek
The cash advance from our JV partners is normally for Capex and not OPEX. The JV partners share of OPEX is deducted from their share of revenue and the net operating profit distributed to the JV partners on a periodic basis (could be monthly or quarterly).
The JV partners share of ongoing CAPEX is paid to the operator by a cash call once the agreed investment programme is agreed by the JV partners. The $40m advanced in H1 2023 was classified as not due to be spent until after Q3 2024 at the earliest which is interesting.
I agree that FCF around the year end looks strong and we will see next week what 2024 will hold. Short term cash flows over a couple of months can be impacted by timings of loading or working capital movements. Need to be careful. I am also concerned that while Enquest is reporting $300m plus of cash, it is not generating a lot of interest income given deposit rates have been 4%+.
Great insights from Romeron and it has been recognised for a long time that Ukraine has incredible gas reserves under the Donbas and down through the Sea of Azov to Kherson. SUrprisingly the Russian areas of occupation almost exactly mirror the Ukrainian gas reserves. It has always been thus.
Buzzard
I think ultimately Labour will have to change their policy as a removal of all capital allowances against EPL, increased rate, no interest offset and operator responsible for 60% of decomm would mean no further investment.
However if the current Labour intent stood, i just can not see how operators (inc Harbour) can fund decom costs from what will be limited FCF., particularly if decom timing is pulled forward.
The problem is that joe public still think oil companies are making windfall profits and they have deep pockets.
Sekforde
There are one off cash costs such as Golden eagle and, as the company highlighted, there was also a one off $40m cash advance by one of our JV partners. This is not Enquest”s cash and belongs to our JV partner, although Enquest reported it as a component of its FCF. The advance is to cover our JV’s partners share of future Cap EX and we should exclude both the Golden Eagle payment and our JV partner’s cash advance in determining 2023 FCF as a basis for future projections.
Dumbly
There is no way the tax losses can be removed and are probably worth over £100m per year of reduced tax payments.
The question I am asking myself is do I prefer Enquest with an effective 50% tax cash charge and debt to repay or Harbour with no debt or tax losses, who will have a tax cash charge which will be in the high 80%.
The operational update should reveal more.and my focus will be to understand the cash cost per barrel projected for 2024
Yes sorry guys. Feeling very negative today as I see our politicians striving to destroy a critical industry that is a true world leader in many aspects. If renewables had any chance of working I could sort of understand.
The reality for Enquest is that EPL is closer to an effective 50% tax rate due to interest and decom not being an offsetable. However we do have tax losses protecting Enquest from core 40% tax and accordingly we will be able to continue to pay down debt. I was really trying to emphasis how valuable these losses are and we would be screwed without them.
BT faith
There is no one going to takeover Enquest with the Labour Sword of Damocles now hanging over the sector.
The inconvenient truth is that without the tax losses, Enquest would probably be bankrupt as it would not be able to repay debt and fund decom costs from post tax FCF.
Nitro
The threat was to backdate to 2022 but this would be against all established tax precedent and would be subject to legal challenge. It was never going to happen.
I am struggling to see whether Harbours UK operations are a going concern under Labours proposal. How can we retain enough profit/cash to pay for the $4.3b of decom liabilities if almost all profits are nationalised.
I estimate the reduction in FCF as a result of labour changes from 2024 to 2025 at £200-300m. This assumes UK CAPEX decreases from approx $1b in 2024 to $500. This would basically wipe out FCF and leave $300m for overseas CAPEX which will not be enough for the 2025 overseas programme including ZAMA.
Reducing UK CAPEX to Zero in 2025 would save a net $110m and would still leave Harbour with close to Zero FCF without a major restructuring and downsizing which is in itself expensive. I cannot see how we can fund CCS. Ultimately due to decommissioning and interest not being offsetable the effective new tax rate will be 90% plus.
Sekforde
Let’s put this on hold until we get 2024 guidance next week. We know FCF was $132m for 10 months to October 23 which included some one off cash outflows and inflows and obviously a much lower EPL cost than 2024.
Tornado
I hope so but if it goes in the manifesto it will be difficult to back out of. I agree the unions are our key allies but the O&G companies need to come out very loudly, pre manifesto, and state that they will not invest in new field developments if the tax changes are made.
They should also be clear that they can not fund CCS projects post these changes and we need to get away from constantly referencing Shell and BP who have largely vacated NS upstream.
The real killer in all this is that the government still expects the companies to pay 60% of decom costs while only receiving 22% of profits during production (unlike Norway) and to bear any losses in downturns (unlike Norway)
Sekforde
Is 15 Feb a confirmed date for the operational update?
Only another week before we can have an informed debate on 2024 FCF and debt reduction. My gut feel is you are overestimating 2024 FCF by $100-120m due to your assumptions on payments to Malaysia government, interest expense and 2024 EPL, but lets wait until we get guidance next week and we can have a proper debate.
Londoner
Extracts from yesterdays Aberdeen times.
LABOUR has published its plans for a “proper windfall tax” which will see the North Sea taxed at an eye-watering rate of 78% should Sir Keir Starmer become Prime Minster this year.
In a briefing note for its “Prosperity Plan Policy”, Labour confirmed its manifesto would propose a hike to the tax rate from 75% to 78%, the same as Norway, and “end the loopholes in the levy that funnel billions back to the oil and gas giants”.
“A General Election win for Labour will also see the Energy Profits Levy (EPL) extended to 2030 and investment allowances removed, making it one of the most punitive energy tax regimes in the world. Together the measures will raise £10.8billion in the five years from 2024-25, the party claimed.”
The labour party have confirmed their plan to raise an additional £2.4b per year from O&G from the current Conservative plan. The rise in the EPL from 35% to 38% will only raise £500m at the most. The impact of reducing investment allowance would need to make up the difference.
Kraken
Fully agree that the the permits we already hold for Bressay and Bentley would not prevent these projects going forward even under labour’s mandate.
The issue is that they are just going to be uneconomic if labour enacts its proposed changes to EPL. We need a large operator than can take a 50% plus stake and has access to cheap finance to fund. However if the EPL additional investment allowance is removed these projects will just not be financially viable.
I fully agree with you that there may be an increased opportunity to buy producing fields from exiting players and use our tax losses against core tax, does not help against EPL unfortunately.
The bigger impact than the 3% increase in the EPL is the removal of the additional investment allowance which will increase the net capital cost of new projects from 8.6% (after 91.4% tax relief) to 22% which is an almost 250% increase in cost of investment, which, combines with post tax returns falling from 25% to 22% massively changes IRR and paybacks.
Clearly there is going to be a gold rush to get short cycle projects completed in 2024, but beyond 2025 I can not see there being any major new HS developments that are not near field extensions. Massive drop in investment and overall NS depletion rates at 15% per year, as opposed to 7% expected. Net impact - more imports, less jobs and less taxes in a couple of years.