“Anticipated layoffs as major operator points to ‘difficult macro environment’ for the energy sector.
The recent cut in the windfall tax on oil and gas producers by the UK government, aimed at encouraging North Sea investments, was met with a setback as Apache, a leading operator in the basin, halted drilling, blaming the tax for its decision.
Following several months of industry lobbying, the government set a minimum limit on the windfall tax on Friday. The sector argued that the tax was impeding investments and threatening jobs and energy security.
However, immediately after the announcement, Apache, which has been managing the Forties oilfield for the past two decades, declared it would suspend all North Sea drilling. The company attributed this to the ‘difficult UK macro environment with its progressively expensive and onerous tax and regulatory scheme’.
Repeated attacks on North Sea oil and gas are economically illiterate
Apache confirmed this move would result in job cuts in Aberdeen.
With a production of about 50,000 barrels of oil equivalent daily, according to Wood Mackenzie analysts, Apache is the ninth largest operator in the North Sea.
The Forties, being one of the largest and oldest oilfields in the UK North Sea, is part of the supply that underlies the Brent crude oil benchmark contract. This ageing asset requires continuous work to maintain production levels.
This decision by Apache comes after months of concern among producers about the tax regime changes, with the North Sea’s largest producer, Harbour Energy, warning it would redirect investment to the US.
The Labour Party has stated that if they win the general election expected next year, they will end new gas and drilling licenses in the North Sea.
Last year, during the height of the energy crisis, the government raised the tax rate on North Sea oil and gas drillers to 75% in an attempt to raise money to protect households from surging wholesale energy prices.
Under the new policies declared on Friday, the rate will return to the pre-crisis level of 40% if oil and gas prices drop below their long-term average under the Energy Security Investment Mechanism.
The minimum levels have been set at $71.40 for crude oil and £0.54 a therm for gas. To activate the tax reduction, both must average below that level for two successive quarters.
This decision sparked protest among campaigners, who highlighted that consumers still have to deal with high energy bills. Despite wholesale oil and gas prices decreasing significantly in recent months, government support for households and businesses has also been cut.
Georgia Whitaker, a climate campaigner at Greenpeace, compared the tax to a ‘Swiss cheese full of holes’.
However, industry leaders have expressed dissatisfaction that the government will still seize most of the profits when prices are high, claiming this will still discourage investment in an industry known for its cyclical nature.
On Friday, David Whitehouse, CEO of Offshore Energies UK, stated that the price floor was a ‘positive step’, but added that ‘much more needs to be done to restore confidence in our sector’.
Meanwhile, Norway’s state oil company, Equinor, and its partner Ithaca Energy are deliberating whether to proceed with their significant new North Sea project, Rosebank.
Gareth Davies, Exchequer Secretary to the Treasury, emphasized the importance of securing investment in domestic supply and deemed it ‘reckless to abruptly stop North Sea production’.
After a peak above £6 a therm last summer, UK wholesale gas prices have dropped to just above 60p a therm, slightly higher than the long-term average of the past decade. Oil prices have returned to around $75 a barrel, almost the same level before Russia’s invasion of Ukraine, after peaking at $130 a barrel last year.”
On Friday, the Treasury expressed that it does not anticipate the price floor to be activated before the planned termination of the windfall tax in 2028, according to predictions by the Office for Budget Responsibility, the fiscal monitor. It revealed that the tax has so far generated about £2.8bn and is projected to yield nearly £26bn by March 2028.
Following the announcement, oil producers’ stock values saw a surge. Harbour Energy’s shares rose 1.45 per cent to £2.49, while Serica Energy saw an increase of 1.86 per cent to £2.46.
Neivan Boroujerdi of Wood Mackenzie commented: “I believe it’s a positive progression and could have a beneficial effect on short-term investments. However, it fails to alleviate the long-term uncertainty that has overtaken the industry.”
