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On 2 September 2024, leading trade body, Offshore Energies UK (OEUK), released data modelling the impact of the UK government’s announced changes to the Energy Profits Levy (EPL) on the UK economy.  

The data showed that increasing the headline EPL rate to 78%, extending the timeframe for a year, and removing all allowances associated with EPL compared to the current regime would lead to:

• A reduction in viable capital investment on the UK Continental Shelf (UKCS) from £14bn to £2bn in the period from 2025 to 2029.
• Approximately 35,000 jobs at risk in 2029 alone due to projects not going ahead.
• The sector's total tax yield peaking in 2026 before declining compared to the current scenario, which continues to increase HM Treasury (HMT) receipts over the period. The future proposal could yield a further £2bn in total tax in the short term but at a long-term cost of reduced tax yield from accelerated production decline.

The assessment concludes that most potential investment in the oil and gas sector will be curtailed if all capital allowances are removed, resulting in a rapid cessation of investment and eventual loss of critical infrastructure.

As if to provide immediate validity to the OEUK prediction, within hours of OEUK releasing its data, NEO Energy, which owns half of the Buchan Horst development project 93 miles off Aberdeen, announced, "NEO and its 100% owner HitecVision, have taken the decision to materially slow down investment activities across all development assets in its portfolio”. The Buchan project - a joint venture with Serica Energy and Jersey Oil & Gas - is the third largest pre-development field in the UKCS.

Our dedicated team of energy sector experts work with clients and colleagues in all of the global energy centres. So, while the debate in the UK around the potential impact of government policy has been widely documented, it is important to recognise that the UK does not and cannot operate in isolation in such a global sector. Therefore, it is essential to consider what we see in international markets compared to the UK.  

Energy consumption and demand trends

The above analysis shows that 'Total primary energy consumption' increased by 2% over its 2022 level, 0.6% above its ten-year average and over 5% above its 2019 pre-Covid level. Fossil fuel consumption as a percentage of primary energy dropped 0.4% to 81.5%, with approximately 55% from oil and gas and 26% from coal.

The recently published 'Global Outlook to 2050' report by ExxonMobil predicts that in 2050, fossil fuels will contribute 67% of the global energy consumption mix, of which 54% is from oil and gas and 13% from coal. 

This suggests that oil and gas will go from providing 55% of global energy in 2023 to 54% in 2050: a negligible reduction.  

To put this into context, it is important to acknowledge that petrochemicals are the number one driver of global oil demand growth. Ours is a carbon-based economy, with many everyday items being derived from petrochemicals, such as plastics, fertilisers, solvents, drugs, synthetic fibres, paints, soaps, detergents, and insulating materials.

Therefore, managing global demand for oil is a highly complex process, which the world simply does not have many answers for yet. 

US oil industry boom and market dynamics

Writing in the New York Times on 16 July 2024, Rebecca Elliott discussed “Why Is the [US] Oil Industry Booming?”.

“For all of the focus on an energy transition, the American oil industry is booming, extracting more crude than ever from the shale rock that runs beneath the ground in West Texas.”

“Since 2021, oil and gas wells in the lower 48 states have generated more than $485 billion in free cash flow, the money left over after spending on operations and new projects, according to estimates by Rystad Energy, a research and consulting firm. In the decade prior, the industry spent nearly $140 billion more than it took in.”

“That the price and demand for oil have been so strong suggests that the shift to renewable energy and electric vehicles will take longer and be more bumpy than some climate activists and world leaders once hoped.”

The booming US industry has also seen next-day power and gas prices turn negative several times so far this year, especially in Texas, Arizona and California. Negative prices signal that too much power or gas is being produced in a region. Energy firms can either reduce output, pay someone to take their power or gas, or, if they can get a permit, flare the unwanted gas.

While negative prices usually occur during the US spring and autumn when demand for heating and cooling is low, the US market has recently seen negative prices during a summer heat wave, which forced power generators across the country to burn increased volumes of gas to produce electricity to keep air conditioners running.

Despite arguments that negative gas prices suggest a need to cut production, the abundance of huge volumes of relatively cheap gas in the US does little to incentivise the development of alternative sources of renewable energy. 

Other oil and gas market indicators

In the last 12 months, several of the largest transactions in a decade have been announced during a round of consolidation in the US. These include:

• ExxonMobil Corporation – Pioneer Natural Resources Company - $60bn (May 2024).
• ConocoPhillips – Marathon Oil Corporation - $22bn (May 2024).
• Chevron Corporation – Hess Corporation - $53bn (October 2023).

Additionally, in August 2024, Chevron Corporation announced the relocation of its headquarters to Houston, Texas, after decades based in San Remon, California, in a move seen by many as seeking a more oil and gas-friendly environment in Texas.

Looking beyond the US, Saudi Aramco, the world’s largest oil and gas company, announced $56bn in profits for the first half of 2024 and an expected 'industry leading' total dividends of £124bn in 2024.  

Furthermore, in January 2024, research from the Common Wealth think tank reported that at least 40% of North Sea oil and gas licenses in the UK are owned by foreign investors. Common Wealth found that just 61 companies own North Sea oil and gas licences; most of them are publicly listed, while one-third are privately-owned and therefore less transparent. A handful of owners are state-owned enterprises from China, Russia, Norway, Korea and the United Arab Emirates. 

On the other hand, in May 2024, Harbour Energy plc, the UK’s largest producer, announced significant, continuous progress with its $11bn acquisition of an asset portfolio from Wintershall Dea in Norway, Germany, Denmark, Argentina, Mexico, Egypt, Libya and Algeria, significantly diversifying what was previously a heavily UK-focused portfolio of assets.  

All the above appears to be a clear indication of big bets being placed on future demand for oil and gas remaining strong globally for the foreseeable future, with significant actions being taken to secure supply and investor returns.   

Conclusion

Right now, around 60% of the UK’s gas supply is imported into the country, making it one of the highest proportions in Europe. Estimates suggest that the 40% of domestically produced gas is, on average, almost four times cleaner than importing Liquefied Natural Gas (LNG).

So, while the UK oil and gas industry unilaterally warns of significant disruption to the industry and energy supply, this seems at odds with other global indicators that show the industry is thriving with no signs of abatement in the near future. The data and related warnings provided by OEUK about the impact of an increased EPL, extended over a longer period of time, and reduced investment allowances, are combined with a perceived lack of government engagement with the industry.

Andrew Forsyth, Aberdeen Office Managing Partner, comments: 

“There is a surge in new businesses in Aberdeen supporting the decarbonisation and transition to clean energy. Undoubtedly, businesses and the general public have an appetite for this and recognise the importance and inevitability of this transition, together with the potential impact on our city and the many jobs that support the industry. What is difficult to come to terms with is the unrealistic timescale and related tax burden that is being imposed by the government, particularly those who do not fully understand the importance of an effective transition process. This process must properly manage our energy security and supply while simultaneously protecting the livelihoods of those who have the expertise to facilitate such a transition.”

Given our already high reliance on imported gas in the UK, this further elevates the question of whether the UK will be left out in the cold, both figuratively and literally.   

How we can help your oil and gas business

With extensive experience working with clients in the oil and gas sector across the UK and globally, we are dedicated to supporting businesses in the industry.

Our deep understanding of the oil and gas industry enables our clients to comply with regulations, minimise risks and maximise opportunities to reach their business goals.

For further information and to discuss the impact for your oil and gas business, please contact Grant Morrison.