UK oil and gas producer Harbour Energy warns on windfall tax risk

Some of the UK’s biggest oil and gas producers have warned the government they may be forced to reconsider investments in the country if a windfall tax on their profits is increased.

The comments from companies including Harbour Energy, the biggest oil and gas producer in the UK North Sea, and Serica Energy come as chancellor Jeremy Hunt examines a rise in the UK’s “energy profits levy” from 25 per cent to 30 per cent — a move that would push their headline rate of tax to 70 per cent.

Linda Cook, chief executive at private equity-backed Harbour which has bought a substantial number of fields in the North Sea over the past five years, cautioned that investors were pushing the company to diversify into other geographies because of the energy profits levy.

“While we fully recognise the significant challenge in the UK to put public finances on a sustainable footing, we urge the government to carefully consider the consequences of any increase in, or extension of, the EPL,” Cook said in a trading update on Thursday.

“At a time when oil and gas producers are being asked to invest more to help ensure the UK’s energy security and are considering longer-term, material investments in CCS [carbon capture and storage], additional taxes would run the risk of undermining our ability to do either.”

“Evaluating expected returns from long-term investments has become more difficult and investors are advocating for geographic diversification,” Cook added.

Serica Energy, which is responsible for 5 per cent of the gas produced in the UK, told the Financial Times an expanded EPL would make further investment in UK waters “even more challenging as well as increasing fiscal instability yet further”.

Any further tax burden in the UK would push the company “to consider investment opportunities outside of the UK”, the London-listed group added.

Hunt is also considering extending the levy’s duration from the end of 2025 to 2028, as the UK races to plug a roughly £50bn fiscal black hole that was created in part by the energy crisis.

The windfall tax includes, however, a “super deduction” for investments in new oil and gas production, that rewards companies with an overall 91p tax saving for every £1 they invest. It has not yet been extended to investments in cleaner energy technologies such as CCS.

Mike Tholen, sustainability and policy director at Offshore Energies UK, a trade body for North Sea oil and gas producers, said the industry understood “the pressure facing the economy but changeable and escalating taxes could prevent the investment we need to unlock more home-produced energy”.

In the first nine months of the year Harbour had revenues of $4.1bn but highlighted that the amount it received for its oil and gas was significantly below market rates, due to an extensive hedging programme.

The company received an average of $80 a barrel for its oil in the first nine months compared with a market price of $105, while its gas sales delivered an average 86p a therm vs an average market price of 209p a therm.

Harbour has nevertheless raised its expected UK tax liability to $900mn, $400mn of which is from the EPL. It had previously forecast a tax liability of about $500mn for the year.

The group is also returning substantial amounts of cash to shareholders, with $500mn paid out so far this year, along with a new $100mn share buyback programme. It expects to be debt-free in 2023, from net debt of $1.1bn at the end of September.