Moody's Sees Little Relief for UK Oil and Gas Producers

Moody’s Investors Service sees little relief for UK oil and gas producers, Maria Chiara Caviggioli, an Associate Vice President and Analyst at the company, outlined in a statement looking at what the changes in the UK Energy Price Levy might mean for the sector.

“The UK government’s announced introduction of an Energy Price Levy related floor price represents a development that is consistent with what UK oil and gas producers have been demanding since the Energy Price Levy revisions previously announced in mid-November 2022,” Caviggioli said in the statement, which was sent to Rigzone.

“While the set thresholds of $71.4/barrel oil price and GBP 0.54/therm for gas aren’t too far off from current spot prices … the fact that oil and gas prices would both need to trade below these levels for a lengthy period of time, two consecutive quarters, in order to trigger a reduction in the applicable levy, largely defies the advantages associated with the presence of floor prices themselves,” the analyst added.

“Given the highly volatile nature of commodity prices and the general expectation that these will remain above the indicated floor prices, we see little relief for oil and gas producers and no real improvement in terms of visibility - if anything, possibly higher uncertainty - on expected reduction in tax payments, debt capacity, and liquidity being restored to pre-Energy Profits Levy introduction level, and increased support to longer-term investment decisions,” Caviggioli continued.

The Moody’s Investors Service analyst also noted in the statement that the high frequency of changes to the Energy Profits Levy observed so far “further contribute to increasingly uncertain operating conditions on the UK Continental Shelf”.

Also commenting on the latest Energy Profits Levy changes, Christy Wilson, a tax lawyer at Katten UK, told Rigzone that, “arguably, if companies are no longer gaining windfall profits then it seems logical to remove the levy”.

“Importantly, the government does still intend to keep the levy in place but would only remove the levy if there was a sustained decrease in oil and gas prices - the OBR does not expect that this consistent price decrease will be triggered before 2028,” Wilson added.

“Therefore, at the moment, it is reasonable to conclude that the levy will go unchanged,” Wilson went on to state.

In a statement posted on his Twitter page, David Duguid, a Scottish Conservative MP for Banff & Buchan, described the Energy Profits Levy Price floor as “a welcome step in right direction to provide certainty to an industry vital to energy security and energy transition for north-east Scotland and the wider UK”.

He went on to note that the development was “a well-informed decision by HM Treasury, with whom I have remained engaged since Energy Profits Levy was first introduced”.

“[The] Energy Profits Levy must only be a temporary measure and I am grateful to HMT Minister Gareth Davies for coming to Aberdeen to engage directly with industry,” he added in the statement.

The UK government recently announced new oil and gas tax changes, which it said are set to protect energy security and British jobs. 

In a statement posted on its site, the government noted that the Energy Profits Levy, which it highlighted puts a marginal tax rate of 75 percent on North Sea oil and gas production, will remain in place for the next five years while oil and gas prices remain higher than historic norms, but added that the tax rate will fall back to 40 percent “when prices consistently return to normal levels for a sustained period”.

The tax rate for oil and gas companies will only return to 40 percent if both average oil and gas prices fall to, or below, $71.40 per barrel for oil and GBP 0.54 per therm for gas, for two consecutive quarters, the government revealed in the statement. This level is based on 20-year historical averages, according to the government, which noted that, based on the independent Office for Budget Responsibility’s forecast, the mechanism won’t be triggered until before the tax’s planned end date in March 2028.

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