Banks have slashed the amount of loans to UK oil and gas producers since the introduction of the windfall tax on fossil fuel companies in 2022, according to lenders.
The plummet in borrowing is fuelling worries that Britain’s oil and gas industry could become “impractical” to invest in, threatening its closure before renewable power sources are available to fill the gap.
The industry has been at a standstill this year, with not one well drilled in the UK’s section of the North Sea.
One investment bank said loans available have tumbled by up to half since the introduction of the Energy Profits Levy — an additional tax imposed on the oil and gas groups by the previous Conservative government after the surge in commodity prices in the wake of the full-scale Russian invasion of Ukraine.
“The North Sea oil and gas industry, particularly in Scotland, is being starved of financing,” said Davis Larssen, chief executive of Proserv, an Aberdeen-based provider of subsea control systems.
“This financial strain extends beyond traditional banks because even insurance companies are beginning to withdraw support, which threatens the viability of many businesses,” he added.
Debt available to UK companies under so-called reserve-based lending, a form of asset-backed borrowing secured against future cash flows, has fallen 40-50 per cent since the introduction of the windfall tax, said Norwegian investment bank SpareBank 1 Markets.
Fossil fuel companies often raise finance through reserve-based lending where loans are repaid with the proceeds of the oil produced by the borrowers.
Companies will face a total tax burden of 78 per cent in November after Labour announced plans to increase the EPL, a temporary measure that has been extended until 2030, to 38 per cent.
They also risk losing capital expenditure and investment allowances after ministers said they want to close “unjustifiably generous” tax loopholes.
Independent oil and gas producer Ping Petroleum warned investing in the UK could become “impractical” as a result of rising tax and loss of allowances, while energy consultants Wood Mackenzie said this month it could cause a halving of oil and gas production by 2030.
“We have recently found it very difficult because people who provide capital are very uncertain about whether they are going to get their money back because of changes in policy,” said Robert Fisher, chair of Ping.
As well as tax uncertainty, pressure from environmental campaigners and government to hit emission targets for net zero in the move to renewable power has led to major banks stepping back from financing.
There are now only five banks still lending to UK North Sea oil and gas companies, according to an industry executive.
Alternative sources of finance from bond investors, the oil majors and energy traders have also “gone cold” on funding UK projects, another person said.
In addition, worries about the industry have taken a toll on the shares of the UK groups, which have underperformed their Norwegian peers operating in the North Sea.
Share prices, including reinvested dividends, in the UK’s Ithaca Energy, Serica Energy and EnQuest have all dropped sharply since the end of 2022. Only Harbour Energy, which has cut its UK exposure, has broken the trend with a stable stock price.
In contrast, shares of Norway’s Vår Energi and DNO ASA have performed much better over the same period, although stocks of Equinor, the country and Europe’s biggest natural gas supplier, have fallen.
Some investors say Norwegian producers have benefited from stable policy, which has barely changed in decades, despite similarly high tax levels at 78 per cent.
The Norwegian government has also built in incentives allowing oil and gas groups to deduct capital costs and claim partial refunds when they fall into a loss. This, investors say, explains their share outperformance.
Oslo-based SpareBank 1 Markets adds that UK producers are typically charged up to 1 percentage point more for secured loans than Norwegian groups because of tax uncertainty, while equity research analysts gave UK projects a similar risk profile to those in Kurdistan and West Africa.
“That was definitely not the case if you go back 10 years. That is a quite recent change,” said Jarand Lønne, head of natural resources at the bank. “It is more about stability and being able to plan in the long term rather than the absolute level [of taxation].”
Analysts say the UK’s tax situation has also made it difficult to value companies, making acquisitions harder.
Another sign of the problems in the North Sea is the decision by Neo Energy, Serica and Jersey Oil & Gas to delay exploration in the Buchan Horst field.
“We would love to invest in the UK [and] we’ve got options and things to do, but we can only do that if the tax regime allows us to,” said Martin Copeland, chief financial officer at Serica. “Those [things] we can only do if we get the right outcome on capital allowances.”
Other UK groups were “actively seeking” opportunities in South America, West Africa and Asia, said Nick Dalgarno of investment bank Piper Sandler. One of his clients said they favoured projects in more stable regimes, such as Egypt.
“It’s quite interesting [because] historically if you said that in the UK, people would always claim that we’re a stable environment,” he said.
However, the UK Treasury insisted the government “recognises the need to provide long-term certainty over taxation” and “will work with the oil and gas industry” to develop a successor regime to the EPL levy when it expires to deal with energy shocks.
