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LONDON, Dec 6 (Reuters) – The British government should introduce a pricing framework to reduce the impact of its new windfall tax on North Sea oil and gas producers as some companies struggle with funding cuts, officials and industry sources said.
The crackdown on capital, which could restrict investment in new energy supplies, is at odds with the government’s drive to improve domestic energy security after the Ukraine war highlighted the risk of relying on foreign supplies, officials interviewed by Reuters said.
However, climate campaigners say the best way to avoid dependence on imported fossil fuels and record profits in the hydrocarbon industry this year is through a rapid rollout of renewable energy.
Prime Minister Rishi Sunak’s government last month announced plans to increase the Energy Profit Levy (EPL) on oil and gas companies from 25% to 35%, bringing the total tax on the sector to 75%, one of the highest rates in the world. .
The government said the levy would raise funds to help people struggling with rising living costs, largely after energy prices rose after energy exporter Russia invaded Ukraine in February.
Sources and executives said manufacturers face a hurdle as banks have reduced their credit facilities by about 40% as a result of the tax changes.
Oil and gas producers will meet representatives from the Treasury and the Department for Business, Energy and Industrial Strategy (BEIS) on Friday to discuss the EPL, the sources said.
BEIS declined to comment. The Treasury did not respond to a request for comment.
“(The tax) has created an additional level of uncertainty in the debt financing market,” Ithaca Energy’s ( ITH.L ) Executive Chairman Gilad Myerson told Reuters.
This particularly hits small and medium-sized producers with portfolios focused on the British North Sea, as banks base the credit they offer on the size of their yet-to-be-produced oil and gas reserves and forecasts of future energy prices.
As the tax burden on companies increases, their expected future revenues fall, prompting banks to reduce lending facilities, known as reserve-based lending (RBL), which are reviewed several times a year, executives said. And the bankers said.
Investment plans of small producers are mainly based on RBL.
“This not only affects people’s willingness to invest but their ability to invest,” said an industry source, declining to be named.
price floor
Neither climate campaigners nor industry are happy with the new windfall tax.
Climate activists criticize the EPL for including a mechanism that allows oil and gas producers to reduce their tax bills if they invest in hydrocarbon output.
For producers, one of their concerns is that the EPL does not include a price floor below which the tax would not apply, Ithaca’s Myerson said, a point also raised by TotalEnergies ( TTEF.PA ) and other producers.
“The lack of a definition of ‘normal prices’ created a surprising problem for debt providers for modeling borrowing capacity,” Myerson said.
He said, however, that Ithaca still intends to invest in two of the largest undeveloped fields in the North Sea: the Equinor-operated ( EQNR.OL ) Rosebank project and the Ithaca ( ITH.L ) Cambo project in which it owns a stake.
Ithaca listed on the London Stock Exchange on November 9 and its shares have fallen more than 20% since then, mainly because of the new windfall tax announced on November 18, analysts said.
Benchmark Brent oil prices are trading above $80 a barrel shortly after the Ukraine war began, down from a spike above $100. Natural gas prices remain above their historical averages.
Jacques Tohm, director and founder of Tailwind, a North Sea producer, said he did not mind higher taxes but that the lack of stable regulations created a risk of “investment flight” from the North Sea.
“We are happy to pay more tax, but we need a floor of $75 to $100 per barrel above which a true windfall tax can be applied,” Tohm said.
Companies including Shell ( SHEL.L ) and Equinor have already said they will review their North Sea investments. France’s TotalEnergy said it would cut investment in Britain by a quarter next year.
Serica Energy ( SQZ.L ) CEO Mitch Flagg also called on the government to set a price floor for EPL, without which the basin could see investment decline.
“We are now looking at opportunities in the UK as well as other countries,” Flagg said.
($1 = 0.8210 pounds)
Reporting by Ron Busso and Shadia Nasralla; Editing by Barbara Lewis and Lisa Schumacher
Our Standards: The Thomson Reuters Trust Principles.
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