North Sea, a ‘cash machine’ for oil and gas tycoons

This story was originally published by The Guardian and appears here as part of the climatic table collaboration.

Extraordinary payouts to shareholders, soaring profits, booming asset valuations: the oil and gas industry has recovered from the depths of the pandemic with a vengeance.

After a difficult 2020, when falling demand at one point led to negative prices, crude recovered in 2021 and wholesale gas prices have skyrocketed in Europe and the UK. Gas has risen tenfold to new all-time highs due to factors including low storage capacity, strong Chinese demand and low wind generation over the summer.

BP boss Bernard Looney illustrated this bonanza when he said the oil and gas giant it had become an “ATM”. North Sea oil and gas companies are expected to report near-record cash flows of nearly $20 billion for the current fiscal year, according to industry insiders at Wood MacKenzie.

The revival of the industry’s fortunes has spurred calls for a windfall tax on North Sea producers, with the proceeds to be used to subsidize energy bills for households facing a cost of living crisis. Liberal Democrats first made the suggestion last week, and Work took the call over the weekend. Rachel Reeves, Shadow Chancellor of the Exchequer, said: “There is a global petrol price crisis, but 10 years of failed energy policy by the Conservatives and hesitations and delays have created a price crisis that is felt by all. We want to prevent bills from rising.”

Former Conservative energy minister Chris Skidmore has also publicly endorsed the idea, which has been rejected by the government.

Shell, the world’s largest producer and marketer of liquefied natural gas (LNG), said last week that earnings would be higher than expected thanks to high prices. Unlike gas that arrives via pipeline from fields in the North Sea, LNG is shipped across the oceans to the highest bidder, meaning companies like Shell benefit from rising global prices.

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Shell was already planning to give investors a $7bn bonus offering share buybacks, but has now said this will happen “at a pace”.

The biggest explorer in the North Sea is not BP or Shell, but Harbor Energy, created through the merger of Premier Oil and Chrysaor earlier this year. In a recent update, Harbor said it expected “substantially more free cash flow at current commodity prices” and announced a $200 million-a-year dividend for investors.

Many companies drilling for oil and gas in the North Sea are private, unlisted companies, meaning they don’t have to publish accounts as quickly as companies like BP, Shell or Harbour.

But some have provided insight into how high gas prices are working in their favor.

Rising oil prices have been welcome news for chemical group Ineos, which is owned by Monaco-based British billionaire Jim Racliffe and has drilling licenses in fields including Breagh and the West Shetlands area.

Revenue rose 87%, or €2.4 billion, to €5.1 billion in the three-month period ending September 30, 2021. This was “primarily driven by higher prices and higher volumes,” the company said. .

“The increase in sales prices followed the increase in crude oil prices, which increased to an average of $73 [per barrel] compared to $43 in the same period in 2020.”

In a recent update on the trade, Ithaca, owned by Israeli group Delek, said rising prices meant that revenues per barrel of gas from its North Sea assets, which include the Alba and Alder gas fields, were almost they doubled in the third quarter, from $49 last year. at $97.

As it boosted production to meet demand and take advantage of strong prices, gas revenue more than tripled from $59 million to $180 million over the three-month period.

The industry has warned against a windfall tax, pointing out that its own improved fortunes mean a multi-billion pound tax increase.

“[The Treasury] will get an additional £3.5bn in taxes in the two years from last April, making a total of over £5bn,” said Oil & Gas UK spokeswoman Jenny Stanning. “We already pay up to 40 percent of corporate tax, about twice as much as any other sector.”

Graham Kellas, senior vice president of global tax research at Wood Mackenzie, said a windfall tax could backfire. “Higher taxes generally reduce investment and the upstream industry is currently under pressure to reduce activity so this could be exacerbated,” he said. “Some companies may not pay more taxes even if the rate increases.

“If they are investing in new projects or involved in major decommissioning operations, deducting these costs could absorb most of their income. For others, it will reduce your profit margin.

“This may not have an immediate impact on activity, but it will dampen enthusiasm for future investment. Reduced investment will accelerate the decline in North Sea production and will need to be replaced by imports, unless demand for petroleum products declines at a similar rate.”

Malcolm Graham-Wood, founding partner of Hydrocarbon Capital, said: “Those who suggest a windfall tax have a very short memory. Chancellor Osborne not only had to rescind a windfall due to a massive drop in activity in the North Sea, but it was only two years ago that oil was trading in a negative number due to very weak demand.

“The bottom line is that taxing windfall profits from oil companies operating in the North Sea has been shown to be counterproductive.”

Environmental activists have also argued forcefully that the answer to high energy prices is to generate more green energy, and criticized ministers for their lack of action. Tessa Khan, director of Uplift, which campaigns for a fossil-free UK, said The Guardian: “This government has abdicated responsibility for ensuring affordable energy to for-profit oil and gas companies, with disastrous results for households. As long as the government does not plan for and support renewable energy on the scale we need, we will continue to rely on expensive gas imports into this country. Opening new oil and gas fields in the UK will not change energy bills and will only lock us into a long-term dependency on fossil fuels.”

He added: “If you want to know why the government has given control to industry, just look at the generous donations from oil and gas companies that the Conservative Party receives, wave dozens of lords and parliamentarians who are employed or have shares in the industry. But it’s really a lack of vision, planning and investment in the UK’s huge renewable energy potential.”