Labour Party Plans Negative for North Sea Producers, Moody's Analysts Say

In a sector comment sent to Rigzone by the Moody’s team recently, analysts at Moody’s Ratings outlined that the Labour Party’s plans would be “credit negative” for North Sea oil and gas producers.

“On 13 June 2024, the UK opposition Labour Party published its election manifesto containing significant proposals on the fiscal regime for domestic upstream oil and gas activities,” the analysts stated in the comment.

“Labour’s manifesto, published ahead of the 4 July general election, includes changes to tax allowances, an end to new exploration, and an increase and extension to the existing energy profit levy (EPL),” they added, noting that “these would be credit negative for all North Sea oil and gas producers”.

The impact on North Sea oil and gas producers would be greater for local independent producers than the large oil majors, the analysts said in the report.

“The independents’ smaller size, as well as limited diversification beyond exploration and production, leaves them less able to withstand sharp changes in fiscal regimes or fiscal uncertainty,” they added.

“Their financial flexibility was previously reduced by an Energy Profits Levy imposed in May 2022 and by further amendments to it in November 2022,” they stated in the comment.

In the note, the Moody’s Ratings analysts highlighted that Labour’s proposals would be felt in several ways.

“Firstly, the removal of EPL-related investment allowances would increase tax bills and reduce available liquidity and capital for reinvestment,” they said.

“The mature nature of the UK Continental Shelf basin (UKCS) means that producers face steep natural rates of annual production decline. The smaller producers in particular face significant maintenance costs to sustain older oil fields where they tend to operate,” they added.

“A reduction in financial flexibility would threaten the ability to sustain and grow production. It would also reduce earnings and cash flow capacity and their ability to replenish available reserves,” they continued.

The analysts noted in the report that they would expect this to reduce borrowing capacity and access to capital markets. They highlighted that this effect was previously seen following the introduction of the EPL in 2022.

“Secondly, the manifesto announced the intention to end the issuance of new exploration licenses on the UKCS,” the analysts said in the comment.

“In tandem with the elimination of investment allowances, this poses a particular threat to the long-term sustainability of the independents’ business model,” they added.

They focus solely on exploration, development, and production activities and thus need to secure new sources of exploitable resources as existing oil fields reach the end of their economic life-cycle, the analysts stated in the comment.  

“Thirdly, the manifesto announced an increase of three percentage points in the EPL rate as well as the intention to extend the levy’s sunset clause to the end of the next Parliament,” the Moody’s Ratings analysts highlighted.

“On balance, these changes are only marginally detrimental to credit quality given their incremental nature from an already high starting point of 75 percent, as well as the already long-running nature of the levy,” they said.

Rigzone has asked industry body Offshore Energies UK (OEUK) and the Labour Party for comment on the Moody’s note. At the time of writing, OEUK and the Labour Party have not yet responded to Rigzone with a comment.

The Labour Party’s website notes that Labour’s “manifesto for change is a plan to kickstart economic growth by reforming Britain’s economy and bring about a decade of renewal”.

“This manifesto is an ambitious program driven by belief in our country and its potential for the future. It is the change the country needs,” the site adds.

“Our plan for Britain is a fully costed, fully funded, credible plan to turn the country around after 14 years of the Conservatives. It contains a tax lock for working people – a pledge not to raise rates of income tax, national insurance or VAT,” it continues.

“It is proof of a changed Labour Party with Keir Starmer that will change Britain – if people vote for change in the general election on Thursday 4 July,” it goes on to state.

According to a tracker on YouGov’s website, the Labour Party had 36 percent of the voting intention as of June 18. The Conservatives had 20 percent, Reform UK had 18 percent, the Liberal Democrats had 14 percent, the Greens had seven percent, the SNP had three percent, and Plaid Cymru had one percent, as of June 18, the tracker showed.

In a statement posted on its website earlier this month, OEUK said it was urging politicians of all parties to support the principles laid out in its manifesto.

That statement noted that, with supportive government policy, the OEUK manifesto shows the offshore energy industry can create a homegrown energy transition that leaves no-one behind; sustain existing jobs while growing the skilled workforce of the future; deliver GBP 200 billion ($254.46 billion) of private investment over the next decade, spurring economic growth and technological innovation; provide half of the UK’s energy needs by 2030 in an uncertain world; meet the UK’s net-zero commitment before 2050.

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