TotalEnergies, a French oil giant, has been the first major North Sea operator that has cut investment directly as a result of Rishi’s windfall tax.
The EUR157bn (£134bn-listed company) will reduce its planned spending on new wells by 25% next year, as drilling companies are forced to reexamine plans.
This decision will be seen as a setback for Prime Minister, who earlier in the year stated that it was vital we encourage continued investment in the North Sea oil and gas industry to protect energy security from foreign competitors.
Total is believed to have pulled planned investment of about £100m, 25pc of previously planned spending. There are now plans to scrap the drilling of an additional well at the Elgin gasfield about 200 km east of Aberdeen.
Paris-based, the business is North Sea’s second-largest operator. Fields extend from the centre of the country to the Shetland Islands.
According to an industry source, while the Elgin well was small in its own right, Total’s decision was “big” and should be a concern for the government.
Jean-Luc Guiziou is Total’s UK chairman. He stated that the windfall tax penalizes short-cycle investments like these additional “infill wells,” which are vital tools to sustain production at existing fields.
He stated that “a competitive and stable fiscal regulatory regime is essential to invest in critical energy projects and infrastructure projects that will support the UK’s supply security and net zero ambitions.”
The windfall tax was introduced for the first time in May when Mr Sunak was chancellor. was then increased at the Autumn Statement in October after he was elected Prime Minister.
North Sea oil and natural gas profits are being taxed at 75 percent until 2028. This is an increase from the usual 40 percent. Ministers seek to recover what companies make from higher wholesale price so that they can help households.
Last week, Shell, an FTSE 100-listed company, stated that it was reviewing plans for £25bn in Britain’s energy system. This includes renewables and oil and gas projects. David Bunch, Shell UK chairman, stated that the tax is a “strong headwind”.
It is also known as the energy profits levie. However, companies will not be subject to these allowances unless they are at the right stage of a project and for how long.
Equinor, the Norwegian oil and gas giant, will decide in February whether it will proceed with its £8bn Rosebank Project. It claims that this project could account for 8 per cent of the UK’s oil production between 2030 and 2026.
A spokesperson for Equinor stated that the Autumn Statement had not helped investor confidence. We are currently evaluating the impact on our projects of the energy profits levy.
He said, “We are still working towards the final investment decision to Rosebank in Q1 next Year.”
Despite efforts to reduce the use of fossil fuels, oil and gas provided 75 per cent of the UK’s energy in 2021. This includes about 40 per cent of electricity generation. The UK received 42pc of its gas from the North Sea in 2021. Imports accounted for the remainder.
There are concerns about the UK’s dependence on imports if North Sea investment falls. This could make the UK more susceptible to international supply shocks like the one caused by Russia’s war against Ukraine.
Offshore Energies UK, a trade group, stated that 2,100 wells will be shut down by 2032. Chief executive Deirdre Mchie urged the Government help to rebuild investor confidence.
Total and other companies have requested a review of this levy in the event that wholesale prices drop before the current expiration date in 2028.
Guiziou stated that the energy industry is a cyclical business and is therefore subject to volatile commodity prices.
A Treasury spokesperson said that the energy profits levy is a compromise between funding costs of living support and encouraging investment to boost the UK’s energy security.
“We made it clear that we want to encourage the reinvestment in the sector’s profits to help the economy, jobs and energy security. This is why the UK pays less tax for every investment a company makes.”
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