TotalEnergies, a French oil company, has announced that it will reduce North Sea investments by 25% in 2015 after the UK windfall tax was increased.
This company is cutting PS100m from its spending for new wells in this region.
In the Autumn Statement, 25% was increased to 35% and now will remain in effect until March 2028.
According to the government, the levy is a “balance between financing cost-of-living support and encouraging investment”.
A Treasury spokesperson stated that “we have made it clear that we desire to encourage the reinvestment in the sector’s profit to support the economy and jobs to ensure our energy security. This is why the greater the investment of a company into the UK, then the lower tax they will be required to pay.”
A spokesperson for the Scottish government stated that the decision “underlines the fact that the UK’s fiscal and economic troubles are already having real consequences for Scottish industry.”
We have been consistent in our belief that the application of a windfall income tax should be balanced across all sectors and companies. This includes energy companies, which are disproportionately located in Scotland.
TotalEnergies, one of the largest North Sea oil and gas producers, will reduce its investment to drill new wells at Elgin.
Jean-Luc Guiziou, chairman of TotalEnergies UK said that there had been a change in the financial environment for investors in energy. “We are currently evaluating the effect this will have on our planned and current projects.”
The energy sector is a volatile market that operates on cyclical markets. If prices fall before 2028, we believe the government should continue to review the Energy Profits Levy.
After oil prices rose sharply, the windfall tax was introduced on May 1st.
Covid restrictions around the globe had led to an increase in oil prices. However, they increased when Russia invaded Ukraine. This caused worries about energy supply.
Initially, the EPL rate was 25%. In the Autumn Statement, Chancellor Jeremy Hunt stated that it will rise to 35% starting in January 2023 and remain in place until March 2028. The original plan was for it to end at 2025.
Taxes on oil and gas companies operating in the North Sea differ from other businesses. Their profits have higher taxes – 30% corporate tax and an additional 10% are added to that. Corporation tax is currently paid at 19% by other firms.
Energy firms may also be eligible for tax savings of 91p per PS1 spent in fossil fuel extraction in Britain.
Neivan Boroujerdi, an energy consultant Wood Mackenzie stated that although TotalEnergies has the North Sea’s second largest producer, the company is unlikely to become one of the top investors in the coming years.
Boroujerdi stated that this was partly why the levy (windfall taxes) is so detrimental to the economy in the first instance. They can’t offset the payments with investment allowances.
Brindex, a group representing small independent North Sea oil exploration companies, wrote last week to the chancellor stating that the tax hike was an “existential danger” to the North Sea industry.
Robin Allen, chairman of Brindex stated in the letter that members could “no longer bear this extreme open-ended tax burden” and that it would have an impact on jobs and national energy security.
Brindex, like TotalEnergies has called for an oil price floor mechanism so that the windfall tax could only be activated above a specific price for oil or gas.
Both Shell and BP both stated that they would review North Sea investments after the tax hike, but did not announce any cuts in spending.
Offshore Energies UK, the main North Sea industry organization (OEUK), stated that the increase in the EPL would “undermine investor confidence.”
Deirdre Mchie, chief executive at OEUK said that the industry had planned to invest PS200bn into the broader sector of energy – which includes low-carbon options – by 2030. It would ensure the UK’s net-zero climate and energy goals are met and increase its energy security, while simultaneously enabling it to make the low-carbon transition.
But… tax changes do really jeopardize this.”
Wood Mackenzie’s Mr Boroujerdi stated that many industry people agreed to do something when the EPL first came out in May.
We saw spiralling energy prices and eye-watering profits. However, the six-months have seen the goal posts moved twice more and this has not been a good sign for future investments.
Philip Evans, an oil activist at Greenpeace UK said that the windfall tax wasn’t strong enough.
TotalEnergies investments are terrible for British citizens. Their jobs are becoming increasingly unstable. He stated that the fossil fuels they are seeking to extract would only destroy our climate targets.
The future of North Sea energy is renewable energy. We need to get the government on board and help them realize this sooner rather than later.