North Sea sector confident Sunak will decide against windfall tax

North Sea energy companies believe they have a tacit agreement with UK ministers that if they step up investment in oil and gasfields they will be spared a windfall tax in the chancellor’s Spring Statement on Wednesday.

Shell announced last week that it has resubmitted plans for approval of the large Jackdaw North Sea gasfield, while it has left open the possibility of reviving interest in the Cambo oilfield off Shetland.

Chancellor Rishi Sunak is under heavy pressure from the Labour party to levy a windfall tax on the North Sea sector after soaring energy prices boosted companies’ profits, but he has consistently rejected the idea, warning this would undercut investment.

Government officials do not expect Sunak to levy a windfall tax in his Spring Statement, but the chancellor wants the energy companies to sharply step up investment in oil, gas and renewables.

One North Sea executive said business secretary Kwasi Kwarteng had, before Russia’s invasion of Ukraine, talked of a “quid pro quo” with the industry, where the sector was spared harsher taxes in exchange for more investment.

“Now they are even more desperate for companies to invest,” the executive said. Kwarteng is opposed to a windfall tax, arguing that Britain needed the energy companies to invest to reduce reliance on imported power.

Kwarteng’s allies insisted that he had only referred to a “quid pro quo” in relation to granting exploration licences to the companies if they agreed to make their operations more environmentally friendly.

On Tuesday, a senior business figure said he thought the chancellor had decided not to impose a windfall tax on the sector or increase taxes on the North Sea, but needed to show “a return”.

He said Sunak expected the companies to pledge to increase investment in new drilling and greater domestic production of oil to increase energy security. “I expect the two to be linked,” he said.

Making life more difficult for Sunak, Lord John Browne, chief executive of BP for 12 years until 2007, said a windfall tax was “justifiable” because the energy resources were owned by the nation and extracted by companies under licence.

Rachel Reeves, shadow chancellor, is expected to pillory Sunak if he fails to introduce a windfall tax. Bernard Looney, BP’s chief executive, last year said rising energy prices had turned his company into “a cash machine”.

Prime minister Boris Johnson earlier this month held a meeting with leaders of the UK’s offshore oil and gas industry, during which he “reaffirmed his steadfast commitment” to the sector. Downing Street said it remained committed to its 2050 net zero carbon target.

Shell signalled last December that it was withdrawing from the Cambo field. At the time Britain had just hosted the COP26 climate change conference and the political mood had turned strongly against fossil fuels.

But since then crude oil prices have risen from under $70 a barrel to over $100, while the Russian invasion of Ukraine has reawakened interest in Britain becoming more self-sufficient in hydrocarbons.

Siccar Point Energy, the lead partner in Cambo, has applied to the UK’s oil and gas regulator for an extension to its licence covering the project, which is due to expire at the end of March.

People familiar with the process described the licence application as a “formality” and said it did not necessary mean the oil project was definitely being revived. The BBC reported Shell was reconsidering its position.

Siccar Point Energy, which is backed by the private equity groups Blackstone and Bluewater, put the Cambo project on hold last year after its junior partner in the scheme, Shell, indicated it no longer intended to commit the investment required to bring the reservoir into production.

Siccar Point Energy declined to comment. Shell said its position remained unchanged since December when it said the economic case for investment in the project was not strong enough, particularly given the potential for delays in the event of political and social opposition.

Source: Financial Times