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Oil and gas executives have warned that Labour’s pledge to scrap North Sea tax exemptions threatens their investments in the basin, with several projects already on hold.
Extraction companies have not drilled a new well in the area this year, industry leaders said, as the sector waits to see what tax regime it will face after the July 4 election.
Labor said this week that, if elected, it would increase the windfall tax on North Sea oil and gas profits to 78 percent, and scrap “the unjustifiably generous investment allowance” that companies can use to reduce their tax revenue.
The party expects that the measures will generate billions over the next five years if they are fully implemented.
While Labour’s plan to stop licensing new oil and gas exploration was expected by the industry, several companies told the Financial Times they are now uncertain about the profitability of projects they already have licenses for.
The super-big companies like BP and Shell have all but abandoned the basin, but dozens of smaller operators are still working in the subsea fields to extract the remaining reserves.
“Frankly, you need to get a return of 15 to 20 percent to even get out of bed,” says David Latin, chairman of Aim-listed extractor Serica. “Under the new regime they don’t pay back at all. You’re not likely to be able to cover your capital costs, you’re not going to get close to that.”
Production at the top 20 companies in the North Sea was down 11 percent last year, despite £4.4 billion in investment, he added.
Serica, along with its partners Jersey Oil and Neo, have postponed a decision on the Buchan field until after the election.
An experienced North Sea oil and gas banker said that under Labour’s proposals all new projects would struggle to cover their costs, including the largest undeveloped project in the North Sea, the Rosebank field. “The real danger is that companies decide to invest their money elsewhere,” he said.
Equinor and Ithaca have invested £3.8 billion in the first phase of Rosebank, but neither company would comment on its future under a different tax regime. Equinor said: “The project is progressing as planned, with a planned start in 2026-2027. There is nothing new to report from our side.”
The abolition of the investment tax credit, which allows companies to reclaim 29 percent of their taxes if they reinvest their profits in oil and gas production, will reduce the taxes paid by three of the largest companies – Harbour, Serica and EnQuest – by Increase $200 million. per year, Jefferies analysts estimate.
Labour’s large lead over the Conservatives meant that its promises could become British government policy within weeks, and the announcement of the manifesto sent the share prices of major explorers plummeting.
Since the announcement, Deltic Energy is down 24 percent, EnQuest is down almost 13 percent, Serica is down 11 percent and Harbor Energy is down 5.4 percent.
David Whitehouse, chief executive of industry lobby group Offshore Energies UK, said: “Stability and trust are important. We are seeing a significant decline in confidence in the sector. What that means is that fewer projects will go ahead and that the abolition of the investment deduction and the way in which that works out will be a further step in that direction.
“We are already halfway through the year and not a single exploration well has been drilled on the UK continental shelf under the existing tax regime.”
Last year Apache, which bought the historic Forties oil field from BP in 2003, halted drilling at the field due to the “challenging” environment. Harbor Energy, meanwhile, plans to expand to other parts of the world.
Serica chairman Latin said that even making a small decision in another area last year “was incredibly challenging”.
“It’s the first time I had to make them do five tax scenarios to make a decision, to convince ourselves that it would work out. We convinced ourselves based on the fact that if we didn’t do it, it would send a message,” he said.
But Labor remains unapologetic about the policy, which is part of the party’s Net Zero 2050 strategy.
“No one in the oil and gas industry in Norway had a problem with a 78 percent tax rate,” said a Labor official. “The industry says: if you tax us more, we will withdraw and go home. . . That’s what industries always tend to say when you’re about to raise their taxes.”