Upstream oil and gas is the main segment of the UK offshore energy industry likely to be impacted by uncertainty of a general election, top dealmakers have said.
Rhetoric around the energy sector is expected to ramp up amid the fight for Number 10, mooted to start in the second half of 2024, with Labour and the Conservative parties using the sector as platforms to win votes.
Amid a backdrop of Aberdeen job cuts and reduced investment in the sector, last year saw politicking around key issues including the windfall tax, the approval of major oilfields, and whether further North Sea licences should be issued.
However there is a differentiator for offshore renewables, where momentum is expected to continue regardless of a potential change in government.
Steven Wilson, senior associate at London’s Vinson and Elkins, said deals are still getting done in the UK oil and gas space despite harsh tax measures and mixed messaging from political parties.
“We have fairly punitive rates of taxation at the moment, extremely mixed messaging from government, an opposition that’s talking about basically the end of the industry and yet it’s amazing that that we still continue to get investments in the basin.
“I think that’s because a lot of you know the framework and the fundamentals are there.”
© Supplied by Vinson and ElkinsHe added: “The incoming government and the opposition seem to have almost gone out of their way to discourage investment and yet it’s still happening, which is remarkable.”
Mr Wilson pointed to issues from both sides of the chamber, with “mixed signals” from Keir Starmer’s Labour opposition, with announcements over the summer around not granting new exploration and production licences, and “talk around setting up this transition fund to transition workers away from traditional oil and gas to renewables, which is, you know, a little unrealistic, I think”.
Meanwhile the current government’s windfall tax, taking the headline rate to 75%, has caused damage.
He added: “(It’s) not just the political side, but the fiscal uncertainty as well. The so-called windfall tax is still a major challenge to investment, not just to potential investors, but to existing players.
“A windfall tax where there are not necessarily windfall profits to be taxed. So yeah, I mean my view is it’s very much up in the air on the upstream side.”
Despite the turmoil, deals are getting done and the UK remains attractive to certain investors and players said Mr Wilson.
Labour and SNP ‘on the fence’
That view was shared by Alasdair Green, head of ESG and corporate finance partner at accountancy AAB.
“Bizarrely, despite the circumstances of the tax regime, we are definitely still seeing inward investment, new investment, new projects, innovation in the basin leading through the supply chain opportunities,” he said.
Recent awards in 2023’s offshore licensing round is a “good barometer” of that appetite for investment.
Meanwhile, the Offshore Petroleum Licensing Bill – announced last year to allow for annual oil and gas licensing rounds, to the outrage of some groups – is getting its second reading in parliament this week.
The Conservatives, trailing Labour in the polls, are “very clear in their confidence” in that policy, says Green.
© Supplied by Darrell Benns/ DCT“And so that’s the future, which on one hand it’s bizarre because they might not be in government for very much longer and Labour might scrap it, but then Labour and the SNP haven’t actually said what they what they really think.
“They’re definitely undecided, so they’re definitely on the fence. They’re definitely divided within those parties.
“So will it force them to come out and either support it or be against it? I don’t know.”
Mr Green expects conflicts in Ukraine and the Middle East could push energy security high on the agenda of general election debate.
“In a worst case scenario the World Bank stated that it could be like the 1970s oil crisis and we could have. $150.00 oil – absolute worst case scenario.
“And if that happens, that’s going to hike flush right up, the price of food. It’s not just one conflict, it’s one on top of another. There’s a risk on gas supply in the eastern Mediterranean, which is now the one of the key resources that that will take the place of Russian gas.
“That could be an issue, so if all these things happen, ultimately, I think energy security is the number one issue.”
Energy transition projects have brighter outlook ahead of UK election
Though many of the firms in oil and gas are the same ones investing in the energy transition and renewables, Jonathan Roberts, a senior associate at Vinson and Elkins, “would draw a differentiation” in terms of the impact on the energy transition space.
“Realistically, I don’t see momentum changing drastically with the change of government on the on the energy transition side,” he said, but there are asks high on the agenda.
2023 was a big year for Carbon Capture and Storage (CCS) and hydrogen in the UK, which saw a “big jump forward” with the Energy Act at the end of the year to put in place important regulatory frameworks to advance projects.
Last year also saw Track 2 CCUS funding announced, and the first wave of hydrogen subsidies.
In 2024, the “critical” point will be development of CCS business models to unlock investment.
© Supplied by Vinson and Elkins“There’s a lot of a lot of prospect in the North Sea, particularly on on the carbon capture side, but development of models to understand, how the revenue gets there and to really understand the money side of things is going to be critical – unlocking all of this investment – because at the moment there is still a lot of uncertainties as to some of the CCS projects fund themselves, particularly outside of a of a government subsidy model.”
The transport and storage piece – for example, who bears the risk if there’s a huge escape of stored carbon from a reservoir – is among the points requiring clarity.
Hydrogen, meanwhile, has questions over demand.
“Green shoots” are coming through with the UK’s subsidy projects in 2023, and there are discussions of a CfD (contracts for difference) type mechanism for the EU to subsidise projects, but its “still quite unclear” how the demand side will take over from a subsidy model.
Mandated demand, as seen in Korea, could be one option.
“The sustainable aviation fuel mandate over in the EU, potentially creating a sort of mini market for hydrogen, whether that’s then expanded into more of a sort of Korean style power model, which is effectively the Koreans are requiring some power to be produced using hydrogen.
“As far as I’m aware, that’s not on the part of Europe yet or the UK yet, but you know, whether that’s something that people are going to explore in the near future, I don’t know.”
Recommended for you
