'Wet blanket' brings a chill to the North Sea

Steve Brown said Jeremy Hunt had piled fresh pressure on the industry in his Spring Budget by extending the windfall tax term by a year after hammering firms in one of his first moves as Chancellor.

Mr Hunt increased the windfall tax rate and extended the term by four years in November 2022 soon after taking up the post.

The latest move has created fresh complications for firms that hope to develop North Sea projects although Mr Brown says claims they are enjoying windfalls are wrong following the fall in oil and gas prices in recent months.

“When the windfall tax first came out there was a lot of gnashing of teeth from the industry.

Maybe I gnashed my teeth a bit less because you could see oil prices were very high, gas prices were very high. There had to be some mechanism to capture some of that excess profit and it looked really clearly like it was a temporary tax,” recalled Mr Brown.

He added: “Then much Westminster shenanigans and we end up with Jeremy Hunt as Chancellor and he threw a massive wet blanket over the entire industry when he extended it out 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 get worse if Labour wins the coming general election. 

Steve Brown, CEO of Orcadian Energy

Labour has said it will increase the windfall tax rate and scrap the investment allowance that was introduced in 2022.

The fear is that such a move could deter firms from developing finds in a way that would support the regulator’s efforts to maximise the economic recovery of the North Sea’s reserves in accordance with the net zero drive.

Orcadian is leading work on the 80 million-barrel Pilot field east of Aberdeen, which Mr Brown reckons could pave the way to the development of a raft of other North Sea discoveries.

An overseas heavyweight bought into Pilot last year after Orcadian developed a plan to harness the output from floating wind farms to power production operations. This will allow it to reduce usage of gas turbines significantly.

Against that backdrop, Mr Brown reckons the tax changes proposed by Labour could have unwelcome implications for the net zero drive.

Projects delayed

Regarding Labour’s threat to scrap the investment allowance introduced alongside the windfall tax, he said: “Certain projects won’t happen or will get delayed and the industry may not invest in electrification as much as the Government wants. 

“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 to that facility and use it for many years to come.

“If those projects are getting pushed into the future, then those infrastructure owners will just say ‘I’m giving up: I’ll just shut down’.”

Mr Brown is hopeful that if Labour wins the election economic realities would prompt party leader Keir Starmer to think again on allowances. However, he thinks it likely that Mr Starmer would still hike the total tax rate payable by North Sea firms to 78%, from 75%.

“When you’re in opposition you can just oppose everything so you never have to make the balance between North Sea jobs and the tax rate, between energy security and taxing projects out of existence,” observed Mr Brown.

“I believe that come the next Government there will be a bit of tinkering to satisfy the headline, I’m sure they’ll put it up to 78%, but they might not take the allowances away. If they do, they’ll bring them back pretty quickly because then everything would stop and the GMB [trade union] would be knocking at the door.”

Industry leaders warn a hike in the tax rate could cause huge damage to the North Sea industry following years of upheaval which have seen the burden on firms increase significantly. The rate of the windfall tax was set at 25% when the Energy Profits Levy was introduced in May 2022 and increased to 35% six months later. That has left firms paying a total tax rate of 75% on profits.

“The reality is we’re now completely outwith what windfall profits were,” complained Mr Brown.

Inflation fears

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 account of inflation. This means it will only kick in if prices fall to much lower than current levels. 

Mr Brown expects demand for heavy oil to hold up amid the transition to a lower carbon energy system. 

Consumption of lighter crudes will fall as electrification of cars and the like leads to cuts in gasoline usage. However, heavy oil will be required for use in hard to decarbonise industries such as asphalt production meaning output from 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 viscous oil discoveries on the UKCS, but Pilot is also a potential flagship project demonstrating how to reduce global emissions and make a contribution to a secure transition to net zero.”

The comment reflects confidence that the renewables-powered facilities planned for Pilot could be harnessed to develop other North Sea finds.

Mr Brown has spent 10 years leading Orcadian’s plan to become a significant North Sea producer in the face of big challenges.

The petroleum engineer founded the firm in 2014 to focus on developing the Pilot discovery, which was made by Fina in 1989.

The industry fell into a deep slump in 2014 after growth in global production ran well ahead of demand.

Mr Brown worked on Orcadian’s plans with a small team of colleagues before securing funding from a division of Shell in 2019.

The onset of the pandemic the following year brought work on oil and gas projects around the world to a halt.

Investors' funds

Orcadian listed on the Aim stock market in 2021 and has raised funds from investors since then but remains a relative minnow. It has a stock market capitalisation of around £7.5m, compared with more than £80 billion for Mr Brown’s former employer BP.

Orcadian won a big vote of confidence in December last year when Malaysian-owned Ping Petroleum agreed to buy a majority stake in Pilot for $3 million. Ping controls 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 had been under-estimated in the industry after he led work on the successful development of the Harding heavy oil field at BP.

He noted that firms now use polymers to boost recovery rates from heavy oil fields. This helps them to slash production costs and related carbon emissions, compared with the use of conventional steam-flooding techniques.