Oil and gas investors have made clear they see long term potential in the North Sea even as some fear the area is set to become ‘uninvestable’.

With Labour threatening to hit firms with fresh tax increases if it wins the General Election that must be held soon, industry leaders have warned firms will abandon the UK and shift spending overseas.

Trade body Offshore Energies UK sounded the alarm about univestability last month in response to Labour’s announcement that it would hike the rate of the windfall tax introduced in 2022. The party also plans to scrap the investment allowance that was introduced that year, which environmentalists claim provides massive subsidies for wealthy corporations.

OEUK said Labour’s plans would put thousands of jobs at risk and undermine the UK’s energy security by increasing reliance on imports.

The fear in industry circles is that the planned changes could be the final straw for many firms following a raft of changes in the last two years.

But sceptics may feel they have heard such warnings before. North Sea firms enjoyed boom conditions amid the surge in oil and gas prices fuelled by Russia’s war on Ukraine.

READ MORE: North Sea giants expect oil price amid SNP tax bluster

Within hours of OEUK sounding its uninvestability warning overseas heavyweights announced deals that could pave the way to them investing in some big North Sea developments.

The following day the firm that is leading work on plans for the controversial Cambo development West of Shetland, Ithaca Energy, revealed it had entered exclusive talks to merge with the North Sea production portfolio amassed by Italian giant Eni.

The deal will create a firm that produces more than 100,000 barrels per day.

The assets concerned include interests in a range of fields that Eni acquired through the $4.9 billion (£3.9bn) takeover of private equity-backed Neptune Energy. That deal was announced in June 2023, months after the rate of the windfall tax was increased to 35% from 25%.

Some commentators have said one should not read too much into Eni’s proposed deal with Israeli-owned Ithaca, which may yet fall apart.

But the transaction shows the parties clearly think there will be opportunities to generate good returns on investment in the North Sea in coming years.

It was negotiated amid growing suspicions that tax increases were in the pipeline.

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Eni could have chosen to sell the UK North Sea assets it acquired with Neptune, which also has interests in North Africa and Indonesia.

Instead, Eni is set to take shares that will give it a near 40% holding in the enlarged group that will be created if the deal completes.

By combining Ithaca and Eni’s North Sea production operations the group should be able to increase the profit margins it achieves and the amount of cash it generates.

The group could use the cash to help fund the development of big fields in which it will have interests.

In addition to Cambo, these include the huge Rosebank field off Shetland, which Ithaca has agreed to develop with Norway’s Equinor. The firms gave the go-ahead to the multi-billion dollar Rosebank development in September.

The deal with Eni could get Ithaca out of a tricky position regarding Cambo. Shell scrapped plans to develop the field in 2021 citing economic factors and the potential for delays leaving Ithaca to find a new partner.

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Ithaca and Eni could time the development of Cambo so that the field only comes onstream after the scheduled end date for the windfall tax in 2029.

Even if the tax remains in force longer Cambo may make a profitable investment. Labour has said it plans to increase the overall North Sea tax rate from 75% to 78%. That would put it in line with Norway which has had no trouble attracting oil and gas investment.

Eni has prospered in Norway after combining its interests in the country with the Point Resources operation in 2018 to create Var Energi.

If Labour goes head with the threat to cut the investment allowance introduced in 2022 the tax regime in the UK could still be seen as being relatively supportive by international tax standards. In 2021 a study by the Rystad Energy consultancy found the UK fiscal regime allowed firms to generate better returns on offshore investment after tax than in many other states.

Some investors think Labour would have to back down on the threat to cut allowances because of the potential threat to jobs and energy security considerations.

The party may have to reconsider threats to ban the issue of new licences for similar reasons.

“When you’re in opposition … you never have to make the balance between North Sea jobs and the tax rate, between energy security and taxing projects out of existence,” Steve Brown of Orcadian Energy told The Herald.

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Orcadian has just won a vote of confidence from a Malaysian heavyweight as it works on plans for a major North Sea development.

Last week the company completed a deal to sell a stake in the Pilot heavy oil field to Ping Petroleum. This was approved by Ping's parent group after Labour unveiled its plan for tax increases.

Ping noted last week that it had also acquired licences containing the venerable Hutton field, which has been out of production since 2001, and an undeveloped find. It said the additional licences established a considerable development portfolio for the business.

The company said the projects will potentially come to first oil soon after the projected end of the windfall tax, in 2029, but noted uncertainty about the fiscal outlook.

“The new UK licences will remain in the planning mode for the medium-term while the energy sector seeks further clarity in the coming months over the direction of a potential new fiscal environment,” it said.

However, the choice of projects to buy in to provides a reminder that oil and gas firms have managed to keep coming up with new ways of squeezing more out of North Sea assets.

Heavy oil fields such as Pilot were left idle for years because it costs more to produce crude from them than lighter alternatives. Advances in technology have transformed the economics of production.

Polymers can be used to push oil out much more cheaply than traditional steam-flooding techniques, which entail much higher emissions.

Ithaca has used polymers to ramp up production from the Captain field. This was included in a basket of North Sea assets acquired from US giant Chevron in 2019 for $2bn, amid challenging industry conditions.

Ping thinks advances in technology may allow it to recover much more oil from Hutton, which was in production throughout the 1980s and 1990s.

READ MORE: Historic North Sea field to be revitalised by Malaysian firm

Ping has also acquired the licence containing the Glenn field. It said Glenn could be brought into production as part of the development of the Avalon field, which it bought in 2021.

The company launched a growth push in the North Sea in 2015 when it acquired control of the Anasuria Cluster with Malaysia’s Hibiscus Petroleum amid a deep downturn in the industry.

The firms bought interests in Anasuria from ExxonMobil, which went on to sell a $1bn North Sea portfolio to Norwegian investors in 2021 as it focused on US shale fields.

Those deals continued a cycle which has seen firms investing heavily in North Sea fields before selling them on to buyers who believed they could make more of assets that looked tired to some.

The cycle looks set to continue despite concern in some quarters about what politicians could do in coming months.