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Windfall Tax Impact

RockRabbit
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Windfall Tax Impact

#510570

Postby RockRabbit » June 29th, 2022, 10:32 am

Both North Sea and green energy projects appear to be under threat from the proposed new windfall tax. The government's answer to high energy prices appears to be to reduce the supply of energy. Seriously, this government is thick as sh*t.

https://www.proactiveinvestors.co.uk/co ... 85260.html

88V8
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Re: Windfall Tax Impact

#510576

Postby 88V8 » June 29th, 2022, 10:39 am

RockRabbit wrote:Both North Sea and green energy projects appear to be under threat from the proposed new windfall tax. The government's answer to high energy prices appears to be to reduce the supply of energy. Seriously, this government is thick as sh*t.

Depending how it's applied, and I can imagine it's already being watered down, it will certainly be unhelpful.

As regards the govt, we don't pay MPs very much and eventually it becomes apparent that one doesn't get a champagne govt for lemonade salaries.

Meanwhile, if I had any inclination to invest in little UK oilies, that has vanished fttb.

V8

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Re: Windfall Tax Impact

#510621

Postby Hallucigenia » June 29th, 2022, 12:05 pm

RockRabbit wrote:Both North Sea and green energy projects appear to be under threat from the proposed new windfall tax. The government's answer to high energy prices appears to be to reduce the supply of energy.


I'm no fan of the current government but the price of oil is set at a global level, and UK production is a tiny fraction of global production so the impact on prices is minimal. And the windfall tax is heavily offset against investment so it only really targets the companies that aren't making an effort to increase the supply of energy. Plus some of this is posturing and negotiation, we'll see how it affects things in the real world.

Certainly if you read RNS's from small oilies with projects to farm out in the North Sea at the moment, they think it's great, as the way to get round most of the windfall tax is to invest in new projects in the UK so they've seen a rise in interest.

See eg Baron's AGM statement this week :
We are encouraged by the UK Government's recent updated policy paper (British Energy Security Strategy, 7 April 2022) which has the potential to revive the business and regulatory hydrocarbon exploration environment in the UK North Sea. In addition, an initial understanding of the UK Government's proposed "windfall" tax (the Energy Profits Levy) is that it may lead to producing oil and gas companies re-engaging in exploration drilling. Both aspects could have a positive impact on the chances of the Dunrobin prospect, with its relatively large size and ease of drilling, being tested.

Or Orcadian:
the Directors understand that the introduction of the Energy Profits Levy ("EPL") by the UK Government last month, has radically improved the economics of a farm-in deal for some potential farminees. Whilst the EPL did introduce a further tax on profits from UK oil and gas companies, it also introduced significant investment allowances to encourage oil and gas companies to reinvest their profits to support the economy, jobs and UK energy security. Accordingly, for companies that pay both EPL and UK ring fence corporation tax (a modified form of corporation tax only payable by the UK oil and gas industry), the after-tax cost of development could be reduced by up to 75% when compared with a non-tax paying company. The Board believe that this will make investment in the development of the Pilot oilfield an increasingly attractive opportunity.
There is more information on the workings of the UK ring fence tax system, and the impact of the EPL, available in a Treasury briefing note here: https://bit.ly/Treasury_EPL


From the other side of the fence, companies throwing off money like Serica are now looking at more investment :
Although fiscal instability is unwelcome in an industry with long lead times for capital expenditure, this new Levy is part of a package that includes significant investment incentives designed to encourage companies like Serica to continue to reinvest profits. Serica already has an ongoing investment programme including the LWIV campaign and the North Eigg exploration well in 2022. Based on our current understanding of the Levy, this programme will qualify to benefit from these incentives with each £1 invested by Serica offering an overall tax saving of up to 91.25 pence. Our planned 2022 expenditure on the North Eigg well and the LWIV campaign is around £60 million which we expect to be eligible towards this tax saving. This will offset a large element of the Energy Profits Levy that would otherwise be payable on Serica's profits this year.
Moreover, we are evaluating additional candidate projects designed to increase the productivity of the Bruce hub.


Listen to the companies, not the commentators...

RockRabbit
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Re: Windfall Tax Impact

#510636

Postby RockRabbit » June 29th, 2022, 12:44 pm

Hallucigenia wrote:I'm no fan of the current government but the price of oil is set at a global level, and UK production is a tiny fraction of global production so the impact on prices is minimal. And the windfall tax is heavily offset against investment so it only really targets the companies that aren't making an effort to increase the supply of energy. Plus some of this is posturing and negotiation, we'll see how it affects things in the real world.

While UK production is a tiny fraction of global supply, it is very necessary for the UK's energy security and balance of payments. The US has been debating an oil export ban and the UK is also proposing stopping NG exports to the EU in an emergency (which is incredibly stupid given we're a net importer of NG during winter so lets hope EU/Norway don't retaliate). In an environment of increasing O&G protectionism we should be doing everything we can to boost our own supply. I suspect that most North Sea investment is now on hold pending the final legislation being passed - who knows when that will be.

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Re: Windfall Tax Impact

#510745

Postby Hallucigenia » June 29th, 2022, 5:58 pm

RockRabbit wrote:While UK production is a tiny fraction of global supply, it is very necessary for the UK's energy security and balance of payments. The US has been debating an oil export ban and the UK is also proposing stopping NG exports to the EU in an emergency (which is incredibly stupid given we're a net importer of NG during winter so lets hope EU/Norway don't retaliate). In an environment of increasing O&G protectionism we should be doing everything we can to boost our own supply. I suspect that most North Sea investment is now on hold pending the final legislation being passed - who knows when that will be.


They're pushing it through as a standalone bill which has already been published - my understanding is that they are looking to get Royal Assent before Parliament breaks for the summer on 21 July.

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Re: Windfall Tax Impact

#510982

Postby Hallucigenia » June 30th, 2022, 8:23 pm

Another example today from Orcadian's placing :
https://www.investegate.co.uk/orcadian- ... 51088098Q/

Pilot is one of the top five development projects on the UKCS, with 79MMbbls of 2P reserves. We believe the immediate investment allowance, included in the Energy Profits Levy, has transformed the attractiveness of domestic oil and gas projects for companies extracting oil and gas in the UK and it should spark further investment in the North Sea.

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Re: Windfall Tax Impact

#515941

Postby Hallucigenia » July 20th, 2022, 11:28 am

Another example of the windfall tax and production, Serica's announcement today of two well interventions at Bruce that have added 3,350boepd :

The results from these two wells are at the upper end of the range of expectations and it is expected that there will be an uplift to our independently assessed reserves. This programme has increased confidence that further uplift can be achieved from future well interventions. Capital investment in the Bruce and Keith fields qualifies for investment relief under the recently announced Energy Profits Levy.
Plans to perform similar interventions on other Bruce and Keith wells, both subsea and from the platform, are now being accelerated.


https://www.investegate.co.uk/serica-en ... 00050365T/

The Energy (Oil and Gas) Profits Levy Act 2022 received Royal Assent last Thursday :
https://bills.parliament.uk/bills/3306
https://www.legislation.gov.uk/ukpga/20 ... ts/enacted

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Re: Windfall Tax Impact

#531485

Postby Hallucigenia » September 22nd, 2022, 10:55 am

Another one today from Jersey, who happen to have a juicy farmout to offer within the next few weeks :
https://www.investegate.co.uk/jersey-oi ... 00122293A/

The Energy Profits Levy ("EPL") that was introduced by the Government in May 2022 caught the industry off guard, particularly those that have invested and built production portfolios in the UKCS over the past few years. Fiscal instability has made some question their North Sea investment strategy. The silver lining, however, was the introduction of a generous investment allowance that is specifically ring fenced to attract capital spend into new investments. A full taxpayer in the North Sea now has the ability to secure 91% tax relief through investing into new projects, essentially meaning that for a cost of only 9p a company can get £1 of investment value. Projects of the scale of the proposed GBA development should benefit from this investment allowance.

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Re: Windfall Tax Impact

#538476

Postby Fudgenfun » October 18th, 2022, 10:06 am

How quickly would they be in a position to spend money though? Feels like still a few years off so maybe a company farming in won't benefit that much?

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Re: Windfall Tax Impact

#547712

Postby Hallucigenia » November 18th, 2022, 1:38 pm

So the levy will go up from 25% to 35% in the New Year (fun for the accountants having three different tax rates in a year if they're April-March financial year) with the investment allowance dropping from 80% to 29% for non-decarbonisation investment :
https://www.gov.uk/government/publicati ... -factsheet

This 80% Investment Allowance meant businesses would get a £91.25 tax saving for every £100 they invest – providing them with an additional incentive to invest. This nearly doubled the tax relief available and means the more investment a firm makes, the less tax they will pay.
Under the 35% levy rate, the government is reducing the rate of the allowance to 29% which, due to the higher rate, will broadly maintain the existing cash value of the allowance.
This means business will be able to claim £91.40 in tax relief for every £100 invested rather than the previous £91.25...

decarbonisation expenditure such as modifying existing installations to use power from offshore windfarms, installing bespoke wind turbines to power the installation or running electricity cables to the installation from shore will continue to qualify for the current investment allowance rate of 80%.
This means from the 1st of January 2023, a company spending £100 on upstream decarbonisation will now be able to deduct £109.25p when calculating its levy profits.


It will end on 31 March 2028. They are also taxing electricity profits above £75/MWh (except renewable CfDs) at 45% on top of the usual 25% - took their time about it.

Hurricane :
https://www.investegate.co.uk/hurricane ... 00058386G/
the EPL charge for the Company for 2022 is currently expected to be less than $5 million taking into account capital allowances available in the period as well as the effect of the Investment Allowance that is included within the EPL legislation.
The Company is assessing the impact of the proposed changes to the EPL, in conjunction with its tax advisers. Currently it anticipates that, assuming oil prices remain at current levels, the impact of the increased EPL charge for 2023 and for 2024 will be a similar amount, but this is heavily dependent on the Company's cost base at the time and the achieved level of revenue, driven by the price of oil.


Ithaca :
https://www.investegate.co.uk/ithaca-en ... 30039440G/
The Energy Profits Levy favours companies that are reinvesting their profits in the UK North Sea, such as Ithaca Energy. The Company has a strong pipeline of development opportunities, which have the ability to increase domestic energy supply in line with the British Energy Security Strategy and allow the Company to benefit from tax relief under the levy's investment allowance. The Company will work with Government and its industry partners to evaluate its development opportunities under the revised Energy Profits Levy.
The Company remains committed to its communicated dividend policy.

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Re: Windfall Tax Impact

#555316

Postby 88V8 » December 16th, 2022, 3:51 pm

Harbour today:
Britain’s largest North Sea oil producer is refusing to bid for new UK oil and gas wells and reviewing its investments in response to the Government’s tax raid on the sector. Harbour Energy said it had decided not to bid for new blocks in the ongoing North Sea licensing round, the first since 2019, after the Government imposed a windfall tax on oil and gas producers earlier in the year. - Telegraph

V8

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Re: Windfall Tax Impact

#555325

Postby Sorcery » December 16th, 2022, 4:07 pm

88V8 wrote:Harbour today:
Britain’s largest North Sea oil producer is refusing to bid for new UK oil and gas wells and reviewing its investments in response to the Government’s tax raid on the sector. Harbour Energy said it had decided not to bid for new blocks in the ongoing North Sea licensing round, the first since 2019, after the Government imposed a windfall tax on oil and gas producers earlier in the year. - Telegraph

V8


I own Harbour and Enquest, two of thee most affected by the windfall tax. Bravo Harbour for telling HMG that they are the most stupid, business unfriendly imbeciles on the planet. The Conservatives should be calling themselves Labour 2 or too. I won't be voting for any Conservative government with Sunak or Hunt in it, ever again.

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Re: Windfall Tax Impact

#555408

Postby Hallucigenia » December 16th, 2022, 7:14 pm

Conversely Orcadian who are looking for a development partner for Pilot had this to say today :

https://www.investegate.co.uk/orcadian- ... 00039757J/
This has been a tumultuous year with much uncertainty around the UK's fiscal regime. We consider it has always been the case that the UK government has adjusted upstream energy taxes in response to market conditions, a tad quicker to raise rates than lower them, but responsive nonetheless. We believe such volatility has induced uncertainty and a degree of caution in making a commitment to spend large sums of capital on new developments. However, we also believe the structure of the Energy Profits Levy will massively encourage investment in new production so with that support confirmed in the Autumn Statement, we expect 2023 to be a better environment for our continuing farm-out process....

No one enjoys the prospect of a higher tax rate, but we consider the EPL has been well designed and we believe it will encourage producing oil and gas companies to invest in new projects. We would call on the government to be even-handed with non-producing companies and to offer tax credits to these companies. The Norwegians adopted this model in 2005 to encourage exploration, with great success. We believe a similar approach could unleash a wave of new developments on the UKCS.


Serica are less happy :
https://www.investegate.co.uk/serica-en ... 00045220I/
The recent action by the UK Government to increase the marginal rate of tax on the UK Upstream Oil & Gas sector to 75% with no floor to prices, will make it challenging for the industry to invest in new longer-term UKCS projects. Nevertheless, we remain committed to expanding our portfolio through M&A....
Elsewhere, our production performance has been strong, and we will continue to invest in our existing portfolio in order to maintain this performance. In parallel, as a significant North Sea operator, Serica will continue to selectively review new potential projects to maintain our North Sea presence whilst also seeking greater clarity and stability on the taxation regime to enable these projects to proceed.

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Re: Windfall Tax Impact

#555429

Postby Sorcery » December 16th, 2022, 8:36 pm

Hal,
It depends on where a company is on their investment cycle. I undertand Harbour having invested a lot over the last few years were hoping to now reap the rewards. Enquest shareholders consider themselves to be a year behind Harbour. It's bad for both of them but will hit Harbour earlier.
I tend to think of oil companies as worth the discounted cash flow of it's future profits (without actually working it out!).

Given the ratio of retained profit to tax is now 33.3% of what it was, I tend to think oil companies' investments are now worth 33.3% of what they were. There is no immediate 80% tax relief on prior year's investments AIUI. I don't believe HMG will be tempted to reduce the tax take in future years either.

The share prices tell the story so far (I don't think it's been fully priced in yet),
Harbour down from a peak this year of 538p to 306p today.
Enquest down from a peak this year of 37.3p to 20.6p today.

Companies with geographically diverse incomes or no UK income should be OK, BP and Pharos (if anyone cares about them) for example will be largely unaffected. That is, unless the rest of the world start to copy the UK's tax regime.

I seriously think this is a disaster for oil investment.

Sorcery

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Re: Windfall Tax Impact

#555431

Postby Hallucigenia » December 16th, 2022, 8:40 pm

88V8 wrote:Harbour today:
Britain’s largest North Sea oil producer is refusing to bid for new UK oil and gas wells and reviewing its investments in response to the Government’s tax raid on the sector. Harbour Energy said it had decided not to bid for new blocks in the ongoing North Sea licensing round, the first since 2019, after the Government imposed a windfall tax on oil and gas producers earlier in the year. - Telegraph


Original quote seems to have been given to Reuters :
https://www.reuters.com/business/energy ... 022-12-15/

"As a result of the extension of the energy profits levy... we are reviewing investment levels and company-wide capital allocation," a Harbour Energy spokesperson told Reuters on Thursday. "This review is ongoing and, in the meantime, we have decided not to submit bids as part of this licensing process."....Harbour will focus on growth opportunities within its existing portfolio, the spokesperson added.


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