How Will UK Windfall Tax Hit Big Oil Cash Flows?

The new UK oil and gas upstream levy will hit Big Oil group cash flows by less than four percent, even at the most exposed end.

That’s what BofA Global Research calculates, according to a new report from the company sent to Rigzone on Friday, which added that enhanced tax deductibility may further narrow the eventual impact.

“After months of speculation and UK opposition parties calling for a windfall tax on upstream oil and gas, we believe … [Thursday’s] government announcement no longer constituted a surprise,” the BofA Global Research report stated.

“In fact, we believe Big Oil’s investment cases will benefit from the removal of uncertainty alongside the crystallization of a relatively minor hit to financials,” the report added.

BofA Global Research’s latest report on the windfall tax outlined that the company believed the UK’s fiscal changes translate into only minor financial hits mainly thanks to Big Oil’s geographical diversification. For the more UK-focused exploration and production companies, BofA Global Research believes the tax’s circumvention of existing tax assets will mean a more meaningful hit for mainly EnQuest and Harbour Energy, the report noted.

BofA Global Research also outlined in the report that it does not expect significant changes to the industry’s capital allocation as a result of the new tax, “with more than 75 percent of Big Oil’s UK capex already going into low-carbon areas including renewable electricity, carbon capture and hydrogen projects as well as the rollout of EV charging networks”.

The report noted, however, that the government’s latest changes to UK North Sea taxation continues a decades-long tradition of fiscal tinkering, “ultimately visible in the UK’s declining oil and gas production profile and underlying increase in capital costs”.

In a separate report sent to Rigzone on Friday, BofA Global Research outlined that it did not rule out a windfall tax extension to electricity generators.

In another report sent to Rigzone on May 20, BofA Global Research noted that bumper first quarter results had reignited calls for UK oil and gas windfall taxes but added that it believed the bark was worse than the bite.

Industry body Offshore Energies UK (OEUK) recently branded the new taxes imposed on the UK’s offshore oil and gas operators as a backward step.

HM Treasury (HMT) announced a new, temporary energy profits levy on oil and gas firms, on May 26, which it said will raise around $6.28 billion (GBP 5 billion) over the next year to help with cost of living. The new levy will be charged on oil and gas company profits at a rate of 25 percent and will be phased out if oil and gas prices return to historically more normal levels, HMT outlined. HMT also announced a new investment allowance to encourage firms to invest in oil and gas extraction in the UK.

To contact the author, email andreas.exarheas@rigzone.com