More than £8billion of North Sea energy projects could now be given the green light quickly as fossil fuel companies take advantage of tax relief in Rishi Sunak’s windfall tax, analysts say.
Last month the Chancellor introduced the one-off levy on North Sea oil and gas operators who have reaped outsized profits as energy prices soared in a bid to raise £5billion to help to finance measures aimed at offsetting the increase in household bills.
The Energy Profits Tax also offers 91 cents in tax savings for every pound of investment made by companies, with the aim of encouraging companies to reinvest their windfall profits in the UK and boost the domestic energy supply. The tax rate increase is in place until prices return to a “historically more normal level” or the end of 2025.
However, campaigners have warned that increased production in the North Sea risks hampering efforts to tackle climate change. Mike Childs, policy manager at Friends of the Earth, said: ‘The financial stimulus offered by the Chancellor to encourage more oil and gas exploration means projects on the verge of approval or rejection now look more likely. .
“If there has ever been confusion about whether the UK is a climate leader or a laggard, it has certainly dispelled any doubt. The science couldn’t be clearer that new oil and gas are incompatible with a safe and livable planet.
Broker Shore Capital said the tax breaks offered “a powerful incentive to existing producers who have so far been reluctant to press the button for development-ready discoveries.”
Analysis shows that there are over £8bn of oil projects awaiting a final investment decision in the North Sea. These include the Rosebank field, owned by Norwegian firm Equinor, which lies 80 miles northwest of the Shetland Islands and could hold more than 300 million barrels of recoverable oil. It is estimated that it would cost £4.5bn to expand.
Earlier this year, Ithaca Energy of Aberdeen bought Siccar Point, owners of the £2bn Cambo field off Shetland. Ithaca said the field was a “huge opportunity” and would create thousands of jobs, but the project has faced significant opposition from climate activists.
Other potential projects include Orcadian Energy’s pilot field, which could cost around $900m (£717m) to develop, and Jersey Oil’s $1.4bn Buchan redevelopment project. and Gas.
Oil majors BP and Shell have warned that the tax could affect future investment decisions. However, tax breaks could also encourage a short-term increase in spending.
Shore Capital analyst Craig Howie said he expected more investment from North Sea players, adding: “We certainly think that because losses carried forward cannot be used to offset the levy, new capital spending may be the only effective way to mitigate the tax hike. burden that has now appeared.
Wood MacKenzie North Sea research director Neivan Boroujerdi said: “This decision is unlikely to render new or existing projects unprofitable and could even accelerate ‘off the shelf’ developments, such as Rosebank and Cambo. Moving these forward to a final investment decision was incentivized.
On Monday, Serica Energy, which produces around 5% of the UK’s gas, reassured investors that it could use investment incentives to reduce its tax bill.
Serica said it plans to spend £60million in the UK this year, including on the North Eigg development in the North Sea. He said this will “offset much of the energy profit tax that would otherwise be due on Serica profits this year.” Serica shares have recovered some of the ground lost since the announcement of the windfall tax.
The windfall tax, originally a labor policy idea, remains a contentious issue in Westminster. Speaking in the Commons on Monday, Shadow Chancellor Rachel Reeves accused the Government of using ‘sleight of hand’ to create a ‘reimbursement policy’ and called investment allowances a ‘commitment clause’. gigantic output.
Workers are demanding that a third or more of any revenue from the tax could be returned in the form of tax breaks. Lucy Frazer, the Treasury’s financial secretary, responded: “We’re making sure we tax windfall profits while protecting those struggling with the cost of living. »
Meanwhile, Sunak was questioned by Treasury Committee MPs on whether he would expand the tax to include electricity generators. Sunak declined to say whether the program would be expanded, but said the Treasury was “working urgently” to assess the extent of the excess profits the generators are making.
Oil prices have soared since the start of the year, driven by Russia’s invasion of Ukraine, and topped $120 a barrel. Shell and BP posted record profits as their shares rebounded above pre-pandemic levels.
Last week, climate experts reacted angrily after the government announced it had given the Jackdaw field, which will be developed by Shell, “final regulatory approval”. It is estimated that Shell will pay £200m less in windfall tax over the next few years.