Juliet Samuel
Wednesday May 24 2023, 9.00pm BST, The Times
David Duguid well remembers the Burns Night he spent in Baku, Azerbaijan. On the hunt for haggis, he had to criss-cross the city from shop to shop. The marvel, perhaps, is that he was able to find any at all, let alone 13 tins. But, as he says: “You go anywhere in the world in oil and gas and you’ll hear Scottish accents.”
For how much longer will this be true? Duguid is now a Tory MP representing Banff and Buchan, a rural region heavily reliant on North Sea oil and gas. Despite historically high prices, the industry he joined decades ago is under siege and the future of its next generation of workers is in doubt. The downturn is being driven by a rash of taxes and political attacks. Banks have stopped lending. Britain’s oil and gas industry, one of our prime economic assets and an employer of 150,000 people on good salaries, is being systematically strangled.
Climate activists have had the industry in their sights for years and their campaigns have taken a toll. But it is the recent rounds of poorly designed windfall taxes, and warnings by Labour that it will stop all “new investment” in fossil fuels, that have really sent the industry into a tailspin. Nine in ten capital projects in the North Sea are now on hold. The largest of them is the Rosebank field, where work was due to start extracting 300 million barrels of oil. Activity in new fields is at a 40-year low. Investment has cratered to the point where future production will be below even what is required by the Climate Change Committee’s preferred “pathway” to net zero. The North Sea is critical to British energy security. Oil and gas supply more than two thirds of our overall energy. Wind and solar, despite all the hoo-ha, supply less than 10 per cent and cannot be relied upon in the wrong weather. About half our oil and a third of our gas is produced in the North Sea. So running it down simply means the UK will have to import more, which is both riskier and more carbon-intensive.
Despite this, the industry has been recklessly treated as a cash cow for years. A tipping point has now been reached with the latest so-called windfall tax, introduced last autumn in Jeremy Hunt’s frantic post-Truss fix-it job. The government’s first windfall tax had been set to expire in 2025. But in November, apparently without much thought, the tax was raised and extended to 2028. The new timeline means it will now capture almost every new project due to start in the coming years, even if oil and gas prices fall. It is no longer taxing windfalls, but is imposing a punishingly high cost on doing business. The impact is striking. The UK’s biggest producer, Harbour Energy, wound up paying an effective tax rate of 100 per cent last year. Without the extra tax, its profits would have risen eight-fold. As it was, during a bumper year for all its rivals outside the UK, it barely broke even. It soon put all its British projects on ice and started talking about job cuts — precisely what campaigners for the tax told us wouldn’t happen.
Even this isn’t enough for them. Labour has vowed to close down “loopholes”, otherwise known as incentives to invest, if it gets into power. This would be the seventh major change to this tax regime in 20 years, in an industry that thinks in decades. Norway, whose successful windfall tax has been cited so often, has changed its regime just once in that time (to make it more generous during Covid). And Oslo suspends the tax when prices fall below a certain level. As a result, Norway has saved Europe from freezing and is finding ever more supplies. The UK, by contrast, has become an investment pariah. One after another, corporate presentations to shareholders are emphasising a shift away from Britain towards other, more stable political environments, like West Africa.
All of this at a time when Europe’s energy crisis is still very much unsolved. Prices may have fallen for now and yes, we made it through last winter because the weather was average and Chinese demand was still in lockdown. But what about the coming winter, and the one after that? The plan, insofar as there is one, is to rely on more imports from the United States or Middle East, which means being at the mercy of global gas markets — while Britain wrecks its own production prospects and fails to open more storage capacity so we can stockpile.
Nor will the levies bring in much revenue. Investors fear they’ll wipe ten years off the life of the industry and bring forward decommissioning costs, which the government is obliged to help fund. Overall, this will cost the Treasury money.
If all of this were actually good for the planet, one could perhaps make some argument in its favour. But it is likely to cause a significant rise in global carbon emissions. If UK production falls, Britain will be forced to buy more European gas and Europe will in turn burn more coal and import more carbon-intensive gas by ship. If the North Sea infrastructure is dismantled, a key part of Britain’s net-zero plans will become much harder. Carbon capture, the burial of CO2 emissions, will require the North Sea’s gas chambers, its pipelines, rigs, terminals and workforce. Instead of nurturing this supply chain, the people in it and their specialist skills, the government is presiding over a mass exodus of talent. Does any of this sound perverse and shocking? Well, it’s no shock to the government. In private, ministers and their advisers readily admit they acted in haste and messed up the whole thing. They know they could alleviate the damage with relative ease, by applying a price floor to the tax and increasing investment allowances.
HHR Price at posting:
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