British Finance Minister to Meet with Oil and Gas Producers to Discuss Tax Hike

British Finance Minister to Meet with Oil and Gas Producers to Discuss Tax Hike

Finance minister Jeremy Hunt is meeting with oil and gas producers in Britain’s North Sea to discuss the government’s tax increase. Producers argue that the hike will decrease new investments in the sector and have requested for imposing a non-taxable floor to the price of oil.

According to a report by Reuters, UK finance minister Jeremy Hunt will meet with top executives of North Sea oil and gas producers on Friday to discuss the government’s tax hike on fossil-fuel derived energy. Last month, Prime Minister Rishi Sunak’s government announced plans to increase the Energy Profits Levy (EPL) on oil and gas producers by 10% from 25% to 35%. This increase brought the total capital-gains tax on the sector to 75%, which is one of the highest rates in the world.

Producers say that the government’s windfall tax to limit investments in the sector is at odds with the country’s plan to ensure energy security by increasing domestic production and not having to rely on foreign imports. The government argued that the tax levy would help it raise funds for households struggling with higher cost of living, largely driven by the surge in energy prices after Russia’s invasion of Ukraine, who was Britain’s largest energy supplier until the country severed its ties with the Kremlin because of the war.

British Finance Minister to Meet with Oil and Gas Producers to Discuss Tax Hike

The meeting, set to be held in Edinburgh or Aberdeen, will be attended by Jeremy Hunt, representatives of the Treasury and Department of Business, Energy and Industrial Strategy (BEIS), and senior executives from more than a dozen oil and gas companies including BP (British Petroleum) and Shell.

Producers say that they are facing financial hurdles as banks are cutting their credit facilities by around 40% as a direct result of the tax increases, leading to heavy loss of capital investment in the sector and the North Sea.

Executives argue that these hikes hit small and medium sized producers the hardest because their portfolio is largely focused on the British North Sea. Banks approve loans to these companies based on the size of their yet-to-be-produced oil and gas reserves and the estimate of future energy prices. As the tax rates increase, profits made by the companies decrease and their expected future revenue shrinks, which leads to banks cutting their Reserve Based Lending (RBL) for producers.

RBL is a borrowing service offered by banks to companies based on their reserves that is reviewed multiple times a year. Smaller oil and gas producers plan investment strategies depending on their RBLs.

“The tax created a level of additional uncertainty in the debt financing market. This doesn’t just impact people’s willingness to invest but their capacity to invest,” said Gilad Myerson, Executive Chairman of Ithaca Energy, in an interview given to Reuters.

Producers are urging the British government to introduce a floor price to the EPL (Energy Profits Levy) so that taxes will not be applicable when the price of oil drops below that level. Jacques Tohme, Director and founder of North Sea producer Tailwind, said that his company does not object to the tax increase, but warned that a lack of stable rules like floor pricing is creating the risk of “flight of investment” from the region. Tohme suggests that the government set a floor of $75 to $100 per barrel above which a true windfall tax can be applied.

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Oil and gas giants including Shell and Equinor are reconsidering their investments in the North Sea, while TotalEnergies has already announced that they will reduce investments in Britain by a quarter next year. At the time of writing, oil is trading at $78.03 a barrel, up by over 1% in the last 24-hours.

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