In looking back at 2022, it is hard to overstate some of the significant developments affecting the oil and gas industry.
One of the key themes of course, if not the key theme, has been how to balance energy transition with the need to ensure security and affordability of energy supplies.
On 17 November, the Chancellor delivered his Autumn Statement announcing a 10% increase to the energy profits levy which will apply from 1 January 2023 (and the introduction of a new ‘electricity generator levy’ charging profits of certain electricity generators above a benchmark price of £75 per MWh). It was also announced that the energy profits levy will be extended to apply until March 2028, rather than December 2025.
Taken together with the original energy profits levy announced in May, the effective rate of taxation for UK oil and gas producers has increased by 35%, and now stands at 75% versus the standard rate of corporation tax for other industries which will be at 25% come April 2023.
In light of the hardship felt by millions across the country against the backdrop of soaring global profits for oil and gas producers, the political pressure to introduce a windfall tax in May, and then increasing it further in November, became too great to withstand. In this, the UK Government has its eye on the affordability pillar of the balancing act, or ‘energy trilemma’ as it is often referred to.
However, some industry participants have already raised concerns that the increase in the levy could potentially impact the attractiveness of the UKCS basin, restricting investment at a time when security of domestic supply and the need to invest in greener technologies as part of the energy transition is of vital importance. The likes of Shell and SSE have already indicated that they are reviewing their investment plans and in the context of how they will be impacted by the increased tax.
The North Sea Transition Deal envisaged that a key element of “just transition” is that entities which produce hydrocarbons will reinvest profits to help low carbon energy solutions. The UK oil and gas industry has shown a strong appetite for this with increased activity and diversification, particularly over the last 12-24 months. Although investment in certain “decarbonisation” expenditures qualify for relief, this is limited to investments relating to oil and gas activities and not “new” projects.
Therefore the further increase to the energy profits levy will potentially mean less funds are available to be invested by the industry in other low carbon energy projects in support of the just transition. UK Government must of course strike the fine balance between ensuring affordability of energy for the UK population and the need to support the transition to a net zero economy. This is not an easy task.
On the sustainability side of the balancing act, this year saw the landmark first carbon storage licensing round in the UK, with 26 bids received and licences anticipated to be awarded in early 2023. The NSTA has a stated aim of storing 20-30 million tonnes of CO2 per year by 2030, but of course this needs to be accompanied by the development of infrastructure to transport the CO2, to be stored and therefore more certainty is needed in this area in terms of government policy and incentives.
This year also saw the opening of the 33rd UKCS licensing round and the first new round since 2019, with almost 900 (part) blocks available. The application deadline is 2pm on 12th January 2023. The 33rd round was the first to be sanctioned against the backdrop of the new Climate Compatibility Checkpoint (the “Checkpoint”) published by BEIS, again demonstrating that sustainability is a key aspect of UK energy policy.
However, there have been calls that the Checkpoint did not go far enough as a meaningful check and balance from a sustainability perspective, so we may expect further discussion on this in the coming year.
The last six months of 2022 in particular have given lots of food for thought for the industry. With much still to do done in pursuing climate change action, 2023 is sure to be another year full of developments for the industry!