Offshore Energies UK (OEUK) has delivered a letter to the Chancellor with three key asks ahead of the Spring Budget next week.
Chief executive David Whitehouse told Jeremy Hunt these amendments are “time critical” for the industry to deliver a mooted £200bn of investment opportunities over the next decade.
He underlined a point made in December – that banks are now lending the sector 50% less due to the windfall tax, heavily impacting investment decisions which rely on reserves-based lending (RBL) facilities.
Ithaca Energy just last week said that very issue could impact the timeline for its Cambo oilfield decision.
The letter also states that “a number of billion-pound M&A deals” have gone overseas due to the windfall tax, which has already “eroded millions” from the values of North Sea firms.
The three asks relate to a windfall tax price floor, incentives for decarbonisation investment and creating a long-term investment regime.
Mr Whitehouse said: “Any delay to delivery to a later point in the legislative calendar risks irreversible damage to the sector’s long-term objective of delivering clean energy security and accelerating an energy transition to net-zero.”
1: Immediate term (Price Floor for Energy Profits Levy (EPL)).
OEUK has asked for the Budget, on March 15, to introduce a “trigger price” for oil and gas, which “switches off” the windfall tax.
Industry has concerns that, as the oil price is cyclical, companies could face a big drop in profits if a global event (like Covid) brought commodity prices down – and the industry would still be faced with a 75% tax rate.
A “transparent market price” for these commodities is being asked for, so that situation can be avoided.
Mr Whitehouse said: “Government giving this certainty in legislation would materially improve the economics of projects and ensure investors could make informed decisions when modelling investment opportunities.
“Secondly, this would allow commercial banks to take a more favourable position on reserve-based lending facilities which are an essential lifeline to financing North Sea production.
“Finally, companies investing on an international level could make clear to their group that a 75% tax rate would not be applied to their profits when low prices are realised in the EPL window, therefore improving UK capital allocation chances.”
2: Short term (Decarbonisation investment)
OEUK is seeking as “simple and efficient” as possible means of incentivising decarbonisation investment for oil and gas operations.
The windfall tax already includes an allowance – a subsidy – for decarbonisation via electrification.
Mr Whitehouse asks the Treasury to “legislate for an effective decarbonisation investment allowance that adopts a hybrid approach and avoids retrospective approval to ensure the measure is applied in as simple and efficient way as possible.
“Decarbonisation expenditure is an essential element of delivering the UK’s net-zero ambitions and the North Sea Transition Deal emission targets. The allowance is an opportunity to reduce some of the risk associated with expenditure to decarbonise UKCS activity.
“We welcome HMT’s commitment to super-charge expenditure in decarbonisation. Certainty that this relief will support the full spread of the spend needed will be critical, including recognition of the range of business models likely to be implemented to decarbonise oil and gas. We look forward to continuing to work with HMT and HMRC as they legislate this and have included our paper submitted December 2022 for completeness.”
3: Medium term (Establish long-term fiscal regime)
The third ask is a big one – especially for a political party which may not be in power come the next general election (likely next year).
It seeks to deliver “a long term competitive fiscal and regulatory regime that maximises local opportunities and de-risks UK investment)”.
That comes after a series of tax changes since May last year which have shocked the market, leading to drawbacks in spending and even job cuts in the UK.
Mr Whitehouse said: “We need a fiscal and regulatory regime that supports lowering investment risk in the UK with an objective to maximise investment in energy security and accelerate the transition.
“The review should focus on mechanisms that can deliver this such as dynamic capital allowances, appropriate taxation of profits and commitment to driving investment in the total offshore energy amongst others. The sector takes investment decisions that span decades, and we need legislation to consider this timeframe also.”
In reply to the letter, a spokesperson for HM Treasury said: ““The Energy Profits Levy strikes a balance between funding cost of living support while encouraging investment in order to bolster the UK’s energy security.
“We have been clear that we want to encourage reinvestment of the sector’s profits to support the economy, jobs, and our energy security, which is why the more investment a firm makes into the UK, the less tax they will pay.”
The Spring Budget will be delivered on March 15.
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