Harbour Energy: UK windfall tax has unintended consequences
Harbour Energy needs a safe port of its own. The leading UK oil and gas producer has announced cuts in investments and jobs as Jeremy Hunt’s energy tax bites into its returns. The blunt design of this levy will cause more collateral damage.
It is easy to tar Harbour Energy and its North Sea brethren with suspicions of posturing. After all, they have benefited from a boom in commodity prices. Harbour’s free cash flow has trebled to $2.1bn. With such a gush of cash, many may wonder why they begrudge taxpayers a cut of the spoils.
But oil exploration is a long game. And the UK’s energy windfall tax is a roughly hewn instrument that could well weigh on future investments.
One problem is that it is not actually linked to windfall profits. Hunt’s extra 35 percentage-point grab brings the tax rate up to 75 per cent until 2028. And while the tax is a certainty, high oil and gas prices are not. Projects will generally look less attractive and marginal ones may not make the grade if energy prices fall.
That is especially true for investments with shorter lead times. The government has tried to protect new oil and gas projects by allowing explorers to offset capital expenditures from taxable income. But any wells that might be quickly connected to existing production assets are still worse off. The extra tax more than covers any benefits from the investment allowance, says Wood Mackenzie.
Projects with longer lead times to production look more attractive. They would benefit from the investment allowance now without paying extra tax after 2028. But the UK’s loss of reputation for fiscal stability threatens the long-term visibility for these plans.
Harbour Energy — with only a limited number of short term investment opportunities — will be among those hardest hit by the tax. Majors such as TotalEnergies, a large UK North Sea producer, disagree with it too.
Squeals are to be expected over windfall taxes. Howls from other quarters, including consumers, may follow if North Sea energy production subsequently suffers.
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