The UK oil and gas market has become extremely fragmented.
That’s what BofA Global Research stated in a new report sent to Rigzone, adding that the top five operators account for 35 percent of total output, compared to more than 65 percent in Norway.
“Capital concentration is even more stark,” BofA Global Research said in the report.
“The average UK operator is smaller in scale and with lower lending capacity; the latest Energy Profits Levy will exaggerate this picture further in our view. Consequently, we see future investment activity at risk in the UK – especially given inflationary pressures,” BofA Global Research added.
In the report, BofA Global Research noted that two iterations of the UK’s EPL has seen UK independent E&P’s shed circa 50 percent of their equity value from their 2022 peaks.
“Cash flows have naturally been cut and we think costs of capital also substantially raised. We see circa 20 percent discount rates priced into UK equities, or closer to 30 percent for Harbour Energy (Buy rated) versus Norwegian E&P’s pricing 7-8 percent – the latter territory being synonymous for fiscal stability,” BofA Global Research stated in the report.
“In this historical context, the UK’s EPL is perhaps not completely surprising; the headline oil and gas tax rate has now changed seven times since 2000, mirroring commodity moves,” the report added.
“That said, the UK’s latest move does feel more damaging than before. The scale of essentially doubling the tax rate is unique as is the commitment to keep it in place until 2028, regardless of commodity price levels. Our view is that 75 percent is likely the new permanent UK tax rate,” the report continued.
BofA Global Research stated in the report that it expects operators will plan for this scenario when assessing investment decisions, “at the very least”.
“Fiscal stability also is still not assured beyond doubt given opposition political parties continue to call for even further measures,” BofA Global Research added in the report.
“We think the industry’s license to operate is likely to feature prominently at future elections,” the report went on to note.
In November 2022, the UK government announced a flurry of changes to the EPL, which was first introduced on May 26. The changes included a 10 percentage point increase in the rate of the EPL, to 35 percent, from January 1 this year, as well as a decision to no longer consider phasing out the EPL ahead of its end date of March 2028, a government fact sheet released last November outlined.
In a separate BofA Global Research note sent to Rigzone following the government’s EPL changes in November last year, the company outlined that the 10 percentage point increase in UK windfall taxes from January 1 is equivalent to less than one percent of big oil cash flow from operations in 2023. BofA Global Research highlighted in that report, however, that UK based E&P’s were “once again hit hardest financially”.
In a fact sheet released last summer focusing on the EPL, the UK government described the mechanism as “a new 25 percent surcharge on the extraordinary profits the oil and gas sector is making”.
“Following record high oil and gas prices over the past year due to global circumstances, and to help fund more cost-of-living support for UK families, the government is introducing the Energy Profits Levy,” the fact sheet stated.