What is the Treasury’s “normal” oil price?

As the industry grapples with the newly imposed windfall tax, questions persist over the government’s view of a so-called “normal” price for oil and gas.

Chancellor Rishi Sunak last week unveiled a series of ‘temporary’ measures aimed at raising around £5billion in revenue over the next year to mitigate the rising cost of living for consumers, increasing the current global tax rate on oil and gas producers from 40% to 65%.

Along with the tax hike, the Energy Profits Tax includes a near doubling of the Investment Allowance to 80% which, along with other measures, means companies can recoup 91 pence per pound spent for a total relief rate of 91.25%. .

Crucially, government guidelines say the tax will be “removed” when oil and gas prices return to “historically more normal levels”, while a “sunset clause” will ensure the end of the current policy at the end of the day. end of December 2025.

However, the interpretation of what “historically normal” might mean in practice leaves the industry in great uncertainty.

It comes as Brent crude rose above $120 a barrel this week.

Ashley Kelty, senior research analyst at investment bank Panmure Gordon, said: “The ‘normal price’ referred to in the Energy Profits Levy literature is literally the million dollar question.”

“I suspect the UK government has no intention of removing the levy before the sunset clause comes into force at the end of 2025, given the future [price] curves.

“Honestly, I couldn’t say what the level might be, but if you took the five-year average for Brent, it would be around $65/barrel. For gas it would be around 50-60p/th.

Meanwhile, commodity prices continued to rise. Benchmark Brent crude rose again above $120/barrel on Monday – its highest intraday level since late March – while NBP gas prices averaged above 162 pence per therm (p/th) .

© Provided by the University of Aberde
Alex Kemp, professor of petroleum economics at the University of

‘Is there such a thing?’

Alex Kemp, professor of petroleum economics at the University of Aberdeen, was also skeptical of the guidance.

“Are there normal prices? That would be my first question,” he noted.

“If you look at the behavior of oil and gas prices over the last five, 10 or 15 years in the UKCS, there have been huge swings, so it’s not clear at all what normal prices are. “

He said the guidance offered by the Treasury so far “leaves a lot of uncertainty as far as the investment community is concerned”.

A policy that would instead set explicit thresholds for commodity prices would have sent “a clear signal” to investors making decisions about assets that will yield well beyond 2025, Professor Kemp added.

“Oil and gas projects will last much longer than that. If the guidance set certain values, it would have been very meaningful for long-term investors. »

He noted that some countries had already proposed or adopted legislation with clauses specifying a change in tax rates when prices exceed or fall below certain values. A recent US bill, for example, proposed a 50% profit levy while oil prices were above $66/bbl – an average calculation for the years 2015-19.

Asked whether the levy and tax relief measures are likely to accelerate Final Investment Decisions (FIDs) in key projects or push them past the 2025 threshold, Professor Kemp added: “ If you file now, you are fully exposed to the new levy. . If you have accelerated your investments, you will receive relief at a very high rate – the 91.25% relief is remarkably high.

“The question then is: will the companies that will be subject to the tax be able to accelerate their investments? That means getting development permissions on the ground, meeting environmental emission reduction requirements from the North Sea Transition Authority (NSTA) and OPRED – all that sort of thing.

“How many will be able to do it, it’s not very clear.”

Supermajor Shell also said the policy would increase uncertainty, while EnQuest overemphasized stability but said its UK investment plans would remain unchanged.

However, analysts at Wood Mackenzie said the measures could actually ‘accelerate’ major UK oil and gas projects like Cambo and Rosebank, and are ‘unlikely to render new or existing projects unprofitable’. .

A Treasury spokesman said the department had nothing further to add to the Chancellor’s statement.

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