Banks are reducing loans to smaller North Sea oil and gas producers after the UK government raised and extended its windfall tax on fossil fuel companies in November, the energy industry has warned.
Banks are reassessing the amounts they are prepared to lend to UK North Sea producers under credit facilities that are linked to the value of their oil and gas reserves, according to trade bodies.
Brindex, which represents companies such as London-listed groups Harbour Energy and Ithaca Energy, estimates that small and medium-sized oil and gas producers in the UK currently rely on about £14bn of borrowing under so-called reserves-based lending facilities.
“Almost all” companies that rely on reserves-based lending, both for working capital and to fund new investments, were likely to be “very negatively affected” by changes to the UK energy profits levy on oil and gas producers that were outlined in the government’s Autumn Statement, said Brindex chair Robin Allan.
Chancellor Jeremy Hunt provoked uproar among North Sea oil and gas groups after he increased the energy profits levy from 25 per cent to 35 per cent, and also extended it to the end of March 2028. Previously the levy had been due to be withdrawn at the end of 2025. It was originally unveiled in May by Rishi Sunak, while he was chancellor, to target the windfall profits many oil and gas producers were making from the surge in commodity prices following Russia’s invasion of Ukraine. Proceeds from the levy will help fund state support for households and businesses with their energy bills.
Allan said the problem with reserves-based lending facilities had been caused in particular by the “unnecessary” withdrawal by the government of a promise made in May that the levy would be phased out before 2025 if oil and gas prices fell toward “historically more normal levels”. “While normal level was never defined, that wording allowed banks to imagine what a normal level would be,” added Allan.
Deirdre Michie, the outgoing chief executive of OEUK, a trade body for North Sea oil and gas companies, said some groups were facing up to a 50 per cent cut in their reserves-based lending facilities, which are regularly reviewed by banks.
Michie, who departs OEUK at the end of December following eight years at the helm, said the increase in the energy profits levy was a “tax too far” and it had “really undermined investor confidence to a level I haven’t seen during my time here”. Energy groups have been pushing for a fresh commitment from the government to remove the levy — which raised their headline aggregate tax rate from 65 per cent to 75 per cent — if oil and gas prices do fall significantly.
The problem with shrinking bank lending was raised with Hunt during a meeting with oil and gas industry executives in Edinburgh earlier this month, said people briefed on the talks.
The Treasury declined to comment on the issues relating to bank lending. It said the energy profits levy “strikes a balance between funding cost of living support for families and businesses, while encouraging investment to bolster energy security”. It added that it has also introduced a new investment allowance, which would allow companies to reduce their tax bill against the levy if they plough more funds into oil and gas projects in UK waters.
(Financial Times, December 28, 2022)
