Smaller North Sea companies face going bust under Labour's plans to strangle oil and gas profits, according to a new report.
Analysis by Wood Mackenzie warns that UK Government plans to increase the windfall tax and cut investment allowances will leave the industry "fatally wounded within five years".
It warns that industry is "hoping for the best, but planning for the worst" and a potential tax scenario which would wipe-out £19billion of investment, halve UK production by 2030, and all but eliminate industry cash flows by the 2030s.
The new government has pledged to change the UK's upstream fiscal system for the fourth time in two years, with new energy profits levy (EPL) terms to be announced in the October budget.
It plans to reduce capital allowances, but has not said by how much, and plans to replace the EPL after 2030, but has not said what with.
The confirmed changes are an increase in the marginal tax rate to 78%, from 75%, from 30 October, the removal of the 29% EPL investment allowance (IA) and an extension of the EPL to 31 March 2030, from 2029.
Planning has become impossible
Wood Mackenzie says for companies trying to allocate capital to the sector "planning against this backdrop is almost impossible".
The report adds: "The retention of the EPL capital allowance (CA) is imperative for investment to continue, as the direct damage done to the industry and the indirect impact on its support services and energy security would quickly become irreversible".
The government believes the current EPL terms – with a 75% tax rate and an effective 91.4% tax relief rate on capital costs (75/91.4) – is too generous to the companies.
Removal of the EPL CA and IA would create a 78/46 system, which would severely squeeze company cash flows and the UK’s ability to attract investment would be shattered. Even a balanced 78/78 outcome is a huge increase in tax from the 40/46 system that preceded the EPL.
Wood Mackenzie adds: "The current uncertainty and frequency of fiscal changes means that operators are prudently testing the potential removal of the EPL CA and indefinite EPL for planning purposes. This scenario would wipe-out £19 billion or 65% of the UK’s remaining development capex, halve UK production by 2030, and all but eliminate industry cash flows by the 2030s.
"The reality could be even worse. Smaller companies would likely fail through lack of cash flow, with implications for JV partners and the UK government in terms of decommissioning liability.
"We do not expect the government to select the worst case outcome, but having stated it believes UK oil and gas must be kept healthy and productive ‘for decades to come’, it is creating an investment environment where the industry is fatally wounded in less than five."
EPL successor 'must be imminent'
The government has stated the EPL will be replaced after 2030, but has not said how. Wood Mackenzie says "prudent investors need to include something for investment decisions and are testing the indefinite continuation of EPL."
It adds: "Government will counter that this is not their plan. But until it reveals what that plan is, the impact on investment will be very significant.
"At this very late stage of maturity, the sector requires careful handling and stability if it is to remain sustainable for the decades the government believes the country will continue to need oil and gas supplies.
The EPL’s successor must be transparent, predictable and investible. But it must also be imminent"