A significant North Sea deal has fallen through this morning - with the companies involved blaming "regulatory and fiscal challenges" impacting UK energy firms.
United Oil and Gas told investors today that it has scrapped its agreement with Quattro Energy for the conditional sale of the UK Central North Sea Licence containing the Maria discovery, which has possible reserves of 17.7million barrels of oil and gas.
It appears that Quattro were unable to raise the funds required to complete the transaction, and United now look set to relinquish the licence completely at the end of this month because the Westminster tax regime is "undermining investor confidence".
The collapse of the deal highlights how the Energy Profits Levy (EPL), also known as the windfall tax, is hindering the ability of companies to borrow the money they need to unlock North Sea fields and boost UK energy security.
Lack of confidence
Today, the bulk of both production and investment in the UK’s North Sea does not come from the majors, but from independent energy companies that are focused on unlocking the vital energy sources that the North Sea still offers, many of which are financed from the City of London.
Unlike the majors, these companies don’t have the same level of balance sheet power and rely on external sources of funding that come with more strings attached.
Like any lender, banks require collateral to provide finance. For independents, their borrowing capacity is determined by the value of their reserves, much like a mortgage on the value of a house. Higher taxes erode the value of these reserves, restricting their ability to access investment capital and continue to invest in new projects.
Last year, the UK Government introduced a windfall tax to help fund its scheme to lower gas and electricity bills. The rate was originally set at 25%, but has now been increased to 35%.
Oil and gas firms also pay 30% corporation tax on their profits as well as a supplementary 10% rate. Along with the new windfall tax, that takes their total tax rate to 75%.
What are United saying?
In a market update at 7am today, United said that despite the potential of the field, Quattro have been unable to raise the funds to complete the transaction.
Is said that the collapse of the deal came "against the backdrop of the current regulatory and fiscal challenges impacting the UK North Sea undermining investor confidence in the progression of potential developments in this sector".
The firm added that it will now not be moving forward with the licence beyond the end of November "having exhausted all other available avenues to progress this opportunity".
United chief executive Brian Larkin said: "Since signing this agreement with Quattro, we have sought to support their efforts to raise the funds required to complete this transaction and had regular interaction with the Quattro team and their advisors as they progressed their funding process.
"It is therefore a disappointing outcome for both parties, that due to the challenging regulatory and fiscal backdrop in the North Sea, Quattro were unable to complete their funding process."
Urgent reform required
Ryan Crighton, Policy Director at Aberdeen & Grampian Chamber of Commerce, said that the windfall tax needs urgent reform.
"The Energy Profits Levy (EPL) is now clearly having a detrimental impact on investment in the UKCS and is undermining the UK Government’s stated aim of increasing oil and gas production to enhance our domestic energy security," he said.
"We carry out comprehensive research twice a year to measure energy sector sentiment, and the most recent edition of that survey showed confidence in the UK sector is at a record low, and clearly deviating from other basins.
"It is clear from our members in the energy sector that discretionary capital is moving elsewhere due to the severity and duration of the tax. The experience of operators also suggests that under traditional reserve-based lending mechanisms, the UKCS has become uninvestible for many. This needs to be a wake-up call to the UK Government.
"The introduction of a price floor has made not difference, as the average price has been set far too low at a level which, by the Treasury’s own admission, is unlikely to be triggered.
"We believe the Energy Profits Levy should be scrapped to secure the investment we need in the energy sector to enhance our energy security today, and to help fund the new technologies of tomorrow."