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Oil and gas manufacturing within the North Sea might halve by 2030, far sooner than presently anticipated, under tax proposals that might trigger “irreversible damage” to the sector, in accordance to a report from energy consultants Wood Mackenzie.
North Sea oil and gas firms have already dramatically scaled again their exercise whereas they watch for a call on taxes in subsequent month’s Budget. “The ongoing uncertainty makes planning extraordinarily hard and financing all but impossible,” mentioned the report.
Companies could have to pay 78 per cent tax from November, after a rise within the “energy profits levy” (EPL) windfall cost that was initially launched within the wake of Russia’s full-scale invasion of Ukraine, when energy costs jumped.
They additionally face the prospect of dropping capital expenditure and funding allowances, after the federal government mentioned it deliberate to shut “unjustifiably generous” tax loopholes.
Wood Mackenzie mentioned within the absence of extra info, firms have made contingency plans for the EPL to proceed indefinitely and for all allowances to be eliminated.
“This scenario would wipe out £19bn, or 65 per cent, of the UK’s remaining development capital expenditure, halve UK production by 2030, and all but eliminate industry cash flows by the 2030s,” mentioned the report, circulated amongst its purchasers and seen by the Financial Times.
In a better-case situation for oil and gas firms, during which the EPL expired in 2030 and capital allowances had been retained, oil and gas manufacturing would fall by 30 per cent by 2030.
Graham Kellas, one of many authors of the report, mentioned that they had chosen these situations as a result of they’re what oil and gas firms themselves are utilizing to make their plans.
Several North Sea oil and gas firms have paused or halted new initiatives this yr, and the business has warned that new investments is not going to be attainable.
The Wood Mackenzie report added that it was additionally seemingly that smaller firms would fail, leaving their companions, and doubtlessly the UK authorities, on the hook for future decommissioning prices.
The North Sea Transition Authority, which regulates the business within the basin, believes that the price of eradicating oil platforms and capping wells at their finish of their lifetime will likely be £40bn.
While Wood Mackenzie’s analysts mentioned they didn’t count on the federal government to select the worst-case situation for the business, the report added: “Having stated it believes UK oil and gas must be kept healthy and productive ‘for decades to come’, [the government] is creating an investment environment where the industry is fatally wounded in less than five.”
Wood Mackenzie is among the most revered consultancies within the energy business however has traditionally specialised in, and nonetheless attracts a lot of its purchasers from the oil and gas sector.
Following the dramatic rise in oil and gas costs in late 2021 and 2022 and the introduction of the energy earnings levy in May 2022, tax revenues from the sector reached a peak of £9.8bn in 2022-23, in contrast with £2.6bn the yr earlier than, official figures present.
By 2028-29, the receipts from numerous oil and gas taxes are forecast to fall to £2.2bn. The Office for Budget Responsibility, the UK’s impartial forecaster, said in April that future tax revenues will wane as funding and manufacturing within the North Sea dries up.
In September, Offshore Energy UK, a foyer group, mentioned the federal government’s tax proposals would put 35,000 jobs within the North Sea in danger and would see firms reduce their capital funding in UK initiatives from £14.1bn to simply £2.3bn between 2025 and 2029.
Fraser McKay, one other of the authors of the report, mentioned: “The UK does not have four or five years to get this wrong because of the maturity of the basin. That is why we use the word irreversible in the report.”
In July, the Treasury mentioned it recognised “the importance of providing the oil and gas industry with long-term certainty on taxation” after a collection of adjustments to the tax regime previously.