Brexit uncertainty looms larger for North Sea industry

Uncertainty over Brexit and UK politics generally is weighing on the North Sea industry and particularly financing and investment decisions, a senior figure at Lloyds Bank, currently the biggest lender to the North Sea sector, has told S&P Global Platts.

With the oil industry failing to match its improving returns with reinvestment in the sector, the potential for new UK tax hikes was also raised at an industry event in London this week.

Brexit and the possibility of any immediate disruption have been largely played down by the industry. Some companies have benefited from a reduction in the dollar-value of dividend payouts in sterling as the UK currency has depreciated.

But the UK’s departure from the European Union remains a matter of concern for international investors and for the financial and legal services underpinning the industry in the City of London, Lloyds’ director for energy and commodities, large corporates, Maarten van Wesemael said on the sidelines of the London event.

He said the revamp of the regulatory regime under the Oil & Gas Authority had helped the industry, enabling a trend toward hybrid deal making. But he warned politics was becoming a block, and may be hampering asset sales being attempted by US corporations such as ConocoPhillips and Chevron.

“There’s a real concern in the investment community about what’s happening in the UK – I know about internationally operating clients that have a blanket-ban on investing in the UK,” Wesemael said on the sidelines of a Natural Resources Forum event.

“The UK has for a long, long time been seen as a safe haven for all types of investments and now people are saying ‘well we have to wait,'” he said. “We stopped a little bit our investment program, just to wait and see,” he said of Lloyds.

“It has a catalyst effect: once people are not putting equity in there’s no debt required, and then it continues,” he said, highlighting a “brain drain” from the financial and legal community.

RISK AND UNCERTAINTY

Oil & Gas UK said this week it saw a recovery in project activity and exploration, but acknowledged Brexit as an issue. Last year it estimated the sector could face extra costs of around GBP500 million ($660 million) annually if the UK reverts to a World Trade Organization tariff regime.

“Brexit is definitely going to have an effect on this industry… Companies at the moment are doing their best to assess possible risks and continuously plan. Really it just adds more uncertainty to the current environment,” OGUK lead business adviser Sophie Guy-Pearson said Wednesday at an event in London.

Mitch Flegg, chief executive of Serica Energy, which operates the Rhum and Bruce gas fields, said he expected the industry to remain resilient, partly due to its “self-contained” character in Scotland, although there might be issues sourcing supplies such as chemicals, and more indebted companies might struggle.

“Running our assets, we don’t see that Brexit is going to have a day-to-day impact on us doing our business,” Flegg told Platts on Thursday. “In terms of the impact of Brexit on the general business environment, and general investor sentiment, I’ve got no more idea than anyone else — I’m not unduly alarmed… We’ve got to focus on what’s happening in the northeast of Scotland.”

TAX QUESTION MARK

Keith Myers, research president at Westwood Global Energy, highlighted a slump in reinvestment levels and tax payments in the North Sea that is persisting despite a recovery in revenues. He said this was something government finance officials might look askance at, and potentially raised the specter of tax hikes in the event of a change of government.

Myers estimated the North Sea sector is recycling back into the industry just 20% of its cash flows, estimating the norm for the oil and gas majors globally would be 50%. And he estimated that following tax cuts in 2015-16 the average effective tax take had fallen to just 10-11%, due to companies’ ability to offset profits against losses in the downturn.

In the UK North Sea “the recycle ratio is dropping to around 20%, which is too low,” Myers said.

“In 2017-18 we’re generating significant amounts of cash from the basin, but the split, the effective tax rate is around about 10%-11%, so the actual tax take is tiny,” he said, noting the Office for Budget Responsibility has forecast receipts from the North Sea of around GBP1 billion-2 billion annually to 2023-24.

Against such perennial fears of tax instability, Lloyds Bank’s Wesemael said the UK Treasury was conscious of its own liability for decommissioning aging North Sea facilities if the industry were forced into another downturn.

Also offering reassurance was Matthew Redrup, head of investor finance at regulator the OGA.

“If we stick to the current government, there will be no changes,” Redrup said. “They understand what stability means for the industry,” Redrup added, pointing to recent reforms intended to facilitate asset deals.

So-called “transferable tax history” reforms “show the commitment of central government to this sector,” Redrup said.
Source: Platts