Market Analysis

The North Sea oil and gas industry is undergoing significant transformation as companies merge and shift operations overseas. This shift comes in response to Britain's windfall tax, which sharply reduces profits, along with threats from the Labour Party to increase taxes further if it wins the next election. This change in strategy could accelerate the decline of domestic production, increasing reliance on imports, raising consumer prices, and potentially leading to job losses.

Major oil companies like Shell, Chevron, and Exxon Mobil have already reduced their presence in the aging North Sea basin, selling assets to smaller producers like Harbour Energy, Ithaca Energy, and Serica Energy. These independent producers are now consolidating and expanding abroad to cut costs and boost revenues.

The UK government imposed a 25% Energy Profit Levy in 2022, extended until 2029 and raised to 35%, effectively resulting in a 75% tax burden, one of the highest globally. The levy exempts reinvested profits in oil and gas production, aiming to encourage investment and economic growth.

Recent mergers and acquisitions reflect this shifting landscape, with companies like Serica Energy acquiring Tailwind Energy and eyeing opportunities in neighboring North Sea countries. Meanwhile, Ithaca Energy is combining operations with Eni's UK assets and exploring expansion into Norway and Denmark.

Harbour Energy's acquisition of Wintershall Dea assets for $11.2 billion is set to significantly reduce its UK dependence. Chevron, after over 55 years in the basin, plans to sell its remaining assets.

As oil and gas prices and profits retreat from 2022 highs, industry voices argue for government support to maximize production from depleted reserves, criticizing policies that deter investment in a mature basin like the UK North Sea.

Amidst these changes, climate activists urge the UK to cease new investments in oil and gas to meet net-zero emissions targets by 2050. The Labour Party, ahead in polls, plans to increase the windfall tax by 3% and eliminate investment allowances to fund its energy transition strategy if elected.

Production in the North Sea has declined sharply, from over 4.5 million barrels of oil equivalent per day in 1999 to around 1.2 million boed currently. Analysts warn that higher taxes and reduced investment could accelerate this decline, potentially halving UK oil and gas output by 2030 and increasing reliance on costly imports.

Consolidation among North Sea producers is seen as a response to tax pressures, aimed at weathering challenging market conditions.

Paraphrasing text from "Reuters" all rights reserved by the original author.