Achi news desk-
Steve Brown said Jeremy Hunt had put renewed pressure on the industry in his Spring Budget by randomly extending the tax season by a year after hammering companies in one of his first moves as Chancellor.
Mr Hunt increased the tax rate on windfall sites and extended the period by four years in November 2022 shortly after taking office.
The latest move has created new complications for companies hoping to develop North Sea projects although Mr Brown says claims they are enjoying windfall following the fall in oil and gas prices in recent months are false. .
“When the tax on random sites first came out, there was a lot of gnashing of teeth from the industry.
I might have gritted my teeth a little less because you could see oil prices very high, gas prices very high. There had to be some mechanism to capture some of that excess profit and it looked very clear that it was a temporary tax,” recalled Mr Brown.
He added: “Then a lot of Westminster shenanigans and we end up with Jeremy Hunt as Chancellor and he threw a huge wet blanket over the whole industry when he extended for another four years, increased the level and reduced the allowance.”
Mr Brown, who is chief executive of heavy oil specialist Orcadian Energy, is concerned that the situation will worsen if Labor wins the upcoming general election.
Labor has said it will increase the tax rate on windfalls and scrap the investment allowance introduced in 2022.
The fear is that such a move could prevent companies from developing discoveries in a way that would support the regulator’s efforts to maximize the economic recovery of North Sea reserves in line with the net zero drive.
Orcadian is leading work on the 80 million barrel Pilot field east of Aberdeen, which Mr Brown believes could pave the way for the development of a host of other discoveries in the North Sea.
Overseas heavyweight Pilot was bought last year after Orcadian developed a plan to harness the output from floating wind farms to power production operations. This will allow it to significantly reduce the use of gas turbines.
Against that background, Mr Brown believes that the tax changes proposed by Labor could have unwanted implications for the net zero drive.
Delayed projects
Regarding Labour’s threat to scrap the investment allowance introduced alongside the windfall tax, he said: “Certain projects will not happen or will be delayed and the industry may not invest in electrification as much as the Government wishes.
“If you’re sitting on an old platform and you’re trying to decide should I electrify the platform or not a big reason to electrify is the smaller projects that would tie back into that facility and used for many years to come.
“If those projects are pushed into the future, then those infrastructure owners will say ‘I give up: I’ll shut down’.”
Mr Brown is hopeful that if Labor wins the election economic reality will prompt party leader Keir Starmer to think again about allowances. However, he thinks it is likely that Mr Starmer would still raise the total rate of tax payable by North Sea companies to 78%, from 75%.
“When you object, you can object to everything so you never have to make the balance between North Sea jobs and the tax rate, between energy security and taxation projects out of existence,” observed Mr Brown.
“I believe that with the next Government, there will be a bit of tinkering to meet the headline, I’m sure they will put it up to 78%, but they may not take the allowances off. If they do, they will bring them back quite quickly because then it would be all over and the GMB [trade union] knocking on the door.”
Industry leaders are warning that an increase in the tax rate could cause huge damage to the North Sea industry following years of turmoil which has seen the burden on companies increase significantly. The rate of tax on windfall sites was set at 25% when the Energy Profit Levy was introduced in May 2022 and increased to 35% six months later. That has left companies paying a total tax rate of 75% on profits.
“The reality is that we are now completely out of what was a windfall,” complained Mr Brown.
Fears of inflation
The oil industry veteran is angry that the mechanism under which the tax will be reduced if prices fall below a certain level is based on a 20-year price average that fails to take inflation into account. This means that it will only kick in if prices fall well below current levels.
Mr Brown expects demand for heavy oil to hold up amid the transition to a lower carbon energy system.
The use of lighter crews will decrease as the electrification of cars etc. leads to cuts in the use of gasoline. However, heavy oil will be needed for use in industries that are difficult to decarbonize such as asphalt production which means that output from the North Sea reserves will be in demand for years.
In February last year, Mr Brown said: “We believe our Pilot project is a key UKCS development project. Not only should it pave the way for the industry to unlock up to three billion barrels of sticky oil discoveries on the UKCS, but Pilot is also a potential flagship project showing how to reduce global emissions and make a contribution to safe transition to net zero. .”
The comment reflects confidence that the renewable energy facilities planned for the Pilot could be harnessed to develop other discoveries in the North Sea.
Mr Brown has spent 10 years leading Orcadian’s plan to become a significant producer in the North Sea in the face of major challenges.
The petroleum engineer founded the company in 2014 to focus on developing the Pilot discovery, made by Fina in 1989.
The industry fell into a deep recession in 2014 after growth in global production far outpaced demand.
Mr Brown worked on the Orcadian plans with a small team of colleagues before securing funding from a Shell division in 2019.
The onset of the pandemic the following year halted work on oil and gas projects around the world.
Investor funds
Orcadian listed on the Nod stock market in 2021 and has since raised money from investors but remains a relative minnow. It has a stock market capitalization of around £7.5m, compared with more than £80bn for Mr Brown’s former employer BP.
Orcadian won a major vote of confidence in December last year when Malaysian-owned Ping Petroleum agreed to buy a majority stake in Pilot for $3 million. Ping manages the Anasuria cluster of oil fields east of Aberdeen with Malaysia’s Hibiscus Petroleum. Ping and Hibiscus bought into the Fyne heavy oil field in September.
Mr Brown concluded that the commercial potential of heavy oil fields was underestimated in the industry after he led work on the successful development of the Harding heavy oil field at BP.
He noted that companies are now using polymers to boost recovery rates from heavy oil fields. This helps them reduce production costs and associated carbon emissions, compared to the use of conventional steam flooding techniques.
