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Oil and gas executives have warned Labour’s pledge to axe North Sea tax allowances threaten their investments in the basin, with several projects already put 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 election on July 4.
Labour this week said, if elected, it would increase a windfall tax on North Sea oil and gas profits to 78 per cent, and remove “the unjustifiably generous investment allowances” that companies can use to reduce their tax take.
The party expects the measures to raise billions over five years if implemented in full.
While Labour’s plan to stop issuing licences for new oil and gas exploration was expected by the industry, several companies told the Financial Times they are now unsure about the profitability of projects they already have licences for.
The supermajor companies such as BP and Shell have all but exited the basin, but dozens of smaller operators are still working across the undersea fields to extract the remaining reserves.
“You need to make a return of 15 per cent to 20 per cent to even get out of bed, frankly,” said David Latin, chair of Aim-listed extractor Serica. “Under the new regime they won’t pay back at all. It is not likely you will cover your cost of capital, you won’t get anywhere near it.”
Production among the top-20 companies in the North Sea had declined 11 per cent last year, despite £4.4bn of investment, he added.
Serica, together with its partners Jersey Oil and Neo, have delayed a decision on the Buchan field until after the election.
One veteran North Sea oil and gas banker said that under Labour’s proposals, all new projects would struggle to cover their costs, including the biggest undeveloped project in the North Sea, the Rosebank field. “The real danger is companies decide to invest their money somewhere else,” he said.
Equinor and Ithaca have invested £3.8bn 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 start-up planned in 2026-27. There’s nothing new to communicate from our side.”
The removal of the investment allowance, under which companies could claim back 29 per cent of their taxes if they reinvest profits into oil and gas production, will increase the taxes paid by three of the largest companies — Harbour, Serica and EnQuest — by $200mn a year, analysts at Jefferies estimated.
Labour’s commanding poll lead over the Conservatives mean its pledges could become UK government policy within weeks, and its manifesto announcement sent share prices of major explorers tumbling.
Since the announcement, Deltic Energy has fallen 24 per cent, EnQuest by nearly 13 per cent, Serica 11 per cent and Harbour Energy 5.4 per cent.
David Whitehouse, chief executive of the industry lobby group Offshore Energies UK, said: “Stability and trust are important. We’re seeing a significant reduction in confidence in the sector. What that will mean is that less projects will move ahead and the removal of the investment allowance and how that plays out will be a further step in that direction.
“We are already halfway through the year and there has not been a single exploration well drilled in the UK continental shelf under the existing fiscal regime.”
Last year, Apache, which bought the historic Forties oilfield from BP in 2003, halted drilling on the field because of the “challenging” environment. Harbour Energy, meanwhile, is planning to expand to other parts of the world.
Serica chair Latin said that even taking a small decision last year on another field “was incredibly challenging”.
“It’s the first time I had to get them to do five fiscal scenarios to make a decision, to convince ourselves that it would be fine. We convinced ourselves, based on the fact that if we did not do it, it was going to send a message,” he said.
But Labour 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 per cent rate of tax,” one Labour official said. “Industry says, if you tax us more we’ll pull out and go home . . . that’s what industries always tend to say when you’re about to put their taxes up.”