Oil majors little hurt by U.K. windfall tax but energy transition plans at risk

May 28, 2022 8:35 PM ETBP p.l.c. (BP), SHELSQZZF, ENQUF, PMOIF, EQNR, E, TTE, HBRIYBy: Carl Surran, SA News Editor167 Comments

Industrial oil rig offshore platform construction site on the North Sea coast

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Analysts say the U.K.'s new 25% windfall tax on profits from oil and gas production will barely hurt integrated energy majors such as BP (NYSE:BP) and Shell (NYSE:SHEL) but will whack smaller North Sea producers that earn all of their revenue in the U.K.

Harbour Energy (OTCPK:PMOIF), EnQuest (OTCPK:ENQUF) and Serica Energy (OTCPK:SQZZF) all fell more than 10% in London trading since Thursday, while the majors were little changed.

BP is the most exposed through its oil and gas projects in the U.K. North Sea, but the fields account for just 7% of BP's production and 4.3% of total profits, RBC's Biraj Borkhataria estimates, and the percentages are even lower for Shell (SHEL), TotalEnergies (TTE) and Eni (E).

The tax increase, before any investment allowances, is equivalent to 2.8% of 2022-24 cash flows for BP (BP), 2.4% for Total (TTE) and 1.2% for Shell (SHEL), HSBC analysts say, and "the negative effect of the new levy could well be offset to a great extent by capital allowances."

BP (BP) said it will need to examine the impact of the new levy and the tax relief on its investment plans for the North Sea, noting that the tax is not the one-off measure it had expected.

Shell (SHEL) said the levy creates uncertainty about the North Sea investment climate for the coming years and fails to support the government's renewable energy goals.

Despite the warning, some analysts believe the tax scheme could encourage developers to fast-track relatively advanced projects such as Equinor's (EQNR) Rosebank and Shell's Cambo in order to avoid taxes.

If North Sea companies do not invest by the end of 2025 - the year the levy is scheduled to be removed - they would pay significantly more to the Treasury, according to Wood Mackenzie.

The tax marks a sudden U-turn for Prime Minister Boris Johnson, who had criticized the notion of "clobbering the companies that we need to make investments in our domestic energy."

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