Oil traders have shown they believe there is lots of money to be made in the North Sea even as industry leaders warn looming tax hikes will devastate the area.
Chancellor Rachel Reeves last month confirmed plans for sweeping changes to the tax regime which Labour included in its manifesto despite warnings from unions that the moves could take a heavy toll on jobs.
The changes include a windfall tax hike that will take the total headline rate paid by oil and gas firms to 78% while the term of the levy has been extended by a year to March 31 2030. The “unjustifiably generous investment allowances” introduced alongside the windfall tax by the former Conservative Government in 2022 will be scrapped from November.
The confirmation appeared to end industry leaders’ hopes that economic realism would prevail and Labour would go easier on the industry than threatened if it won the election.
Trade body OEUK appeared furious. Accusing the Government of confirming the tax plans in a late-afternoon paper without warning, it said the announcement jeopardised jobs in communities across the UK.
“This is something the Prime Minister committed in his manifesto not to do,” complained OEUK chief executive David Whitehouse.
READ MORE: Green energy output slump poses challenge for SNP Government
OEUK is seeking urgent engagement with the Treasury in the hope that it can secure concessions before the Budget is published on October 30.
However, the day after the changes were announced came news of a significant North Sea deal which suggested the prospect of higher taxes did not put some buyers off the area.
Viaro Energy confirmed it had struck a deal to acquire what it described as one of the largest and longest gas producing asset portfolios on in the North Sea from Shell and US giant ExxonMobil.
The terms were not disclosed but the deal was reported to be worth $500 million (£390m).
The portfolio includes 11 fields that are in production along with exploration assets. Viaro sees potential to recover more than 120 million barrels oil equivalent from the portfolio, which it said could help meet UK demand for years.
The company also highlighted the potential to use the acreage concerned to support the transition to a low carbon energy system by developing windfarms and the like on it.
READ MORE: Labour focuses on wrong problem amid GB Energy hype
Chief executive Francesco Mazzagatti said the portfolio provided the backbone of the UK’s energy production and security and represented “one of the best strategically placed solutions that have the potential to play an important role in the energy transition”.
He said the “major” deal with Shell and ExxonMobil was a crowning achievement in the campaign to become a major North Sea player that Viaro has conducted amid years of upheaval in the industry.
Mr Mazzagatti decided to diversify into the oil and gas production in the North Sea after making a fortune in the global oil trading business.
Viaro entered the North Sea through the £248m acquisition of RockRose Energy in 2020. RockRose acquired North Sea assets from majors amid the downturn that started in the industry after oil prices plunged in 2014.
Viaro acquired West of Shetland assets in March last year, 10 months after the windfall tax was introduced and four after the rate of the levy was increased.
In December Viaro bought into the huge undeveloped Bressay field East of Shetland.
READ MORE: Scottish wind energy drive will be hit by Labour Government move
Viaro negotiated the deal with Shell and ExxonMobil during a period in which the odds on Labour winning the general election shortened dramatically and Keir Starmer made clear the party would increase the tax burden on the North Sea significantly.
Mr Mazzagatti may have decided the polls were wrong or that Viaro could still generate good returns on its increased investment following the tax changes that were in prospect.
The deal with Shell and ExxonMobil was concluded a month after another business backed by oil traders expanded in the North Sea.
In late June Prax announced that it had agreed to acquire the West of Shetland production portfolio developed by French giant TotalEnergies. This includes a stake in the giant greater Laggan area development.
Chief executive Sanjeev Kumar Soosaipillai described the acquisition as major and said it would support a long term push for growth in the North Sea by Prax.
The company entered the area in March last year through the £250m acquisition of Hurricane Energy.
The deals involving Prax and Viaro suggest that oil and gas industry players reckon there is still lots of money to be made in the North Sea even if the headline tax rate has almost doubled, from 40% before the windfall tax was introduced.
It is significant that both deals involved relatively recent entrants to the North Sea increasing their exposure to the area.
READ MORE: Scottish turbine plant delay highlights energy jobs challenge
As far as the majors are concerned the latest deals continue a strategy under which they have sold what are regarded as mature North Sea assets. ExxonMobil is investing heavily in Guyana and in US shale assets.
Viaro and Prax may have been able to strike the latest deals on better terms than would have been available before Labour raised the prospect of a fresh windfall tax hike.
However, Shell has continued to invest in North Sea assets that it thinks have long term potential. The company highlighted the redevelopment of the Penguins field in its second quarter results presentation this month.
On Friday North Sea heavyweight Harbour Energy underlined how profitable North Sea oil and gas production has been recently, even if prices have fallen from the highs reached after Russia launched its full-scale war on Ukraine.
Harbour said it sold oil and gas for an average $85 per barrel oil equivalent in the six months to June 30. Production costs averaged just $18 per barrel.
Harbour was a vocal critic of the introduction of the windfall tax following which the company cut 350 jobs, the bulk of which were Aberdeen-based.
READ MORE: North Sea oil giant gets bumper tax refund as it cuts jobs
Harbour developed out of the Chrysaor business that acquired big North Sea portfolios from Shell and ConocoPhillips amid the last downturn.
Critics of Labour’s move say that even if firms could afford to pay more tax on their profits cuts in investment allowances will make it uneconomic for them to develop assets that could support energy security and jobs in the UK.
While firms such as Harbour have generated huge profits in the North Sea in recent years, opponents of the windfall tax on producers suggest the traders that sit in the centre of global markets have been the biggest winners.
That argument was strengthened by reports last month that commodities giant Vitol paid senior staff a record $6.4bn last year after making $13bn profit. The payout put 450 partners in line for an average $14m.
Why are you making commenting on The Herald only available to subscribers?
It should have been a safe space for informed debate, somewhere for readers to discuss issues around the biggest stories of the day, but all too often the below the line comments on most websites have become bogged down by off-topic discussions and abuse.
heraldscotland.com is tackling this problem by allowing only subscribers to comment.
We are doing this to improve the experience for our loyal readers and we believe it will reduce the ability of trolls and troublemakers, who occasionally find their way onto our site, to abuse our journalists and readers. We also hope it will help the comments section fulfil its promise as a part of Scotland's conversation with itself.
We are lucky at The Herald. We are read by an informed, educated readership who can add their knowledge and insights to our stories.
That is invaluable.
We are making the subscriber-only change to support our valued readers, who tell us they don't want the site cluttered up with irrelevant comments, untruths and abuse.
In the past, the journalist’s job was to collect and distribute information to the audience. Technology means that readers can shape a discussion. We look forward to hearing from you on heraldscotland.com
Comments & Moderation
Readers’ comments: You are personally liable for the content of any comments you upload to this website, so please act responsibly. We do not pre-moderate or monitor readers’ comments appearing on our websites, but we do post-moderate in response to complaints we receive or otherwise when a potential problem comes to our attention. You can make a complaint by using the ‘report this post’ link . We may then apply our discretion under the user terms to amend or delete comments.
Post moderation is undertaken full-time 9am-6pm on weekdays, and on a part-time basis outwith those hours.
Read the rules here