Entrepreneur buys gas storage assets amid slowdown offshore

This is expected to culminate in a General Election in the second half of the year.

“I’m seeing people trying to walk away from deals and certainly no-one’s making final investment decisions [to sanction developments] because they don’t know the regime they might find themselves in,” complained Mr Austin.

“That’s not just down to the Government that’s down to the not knowing who’s going to be the next Government.”

Noting that firms have faced multiple tax changes in recent years, Mr Austin said the Kistos Holdings business he runs will not commit to field developments and the like until the picture is clearer.

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“To commit fresh capital to developing things in the North Sea that is definitely off the table until we have certainty as to the Government and the Government’s position,” said Mr Austin.

“We pulled out of a deal in the middle of last year just because we had no certainty,” he added.

The former investment banker has had to curb his deal-making instincts recently after using acquisitions to allow RockRose to grow very quickly.

Mr Austin has followed a similar approach at the Kistos Holdings business he founded in 2020 after selling RockRose to Viaro Energy in a deal that valued it at £247m.

Kitsos became a significant West of Shetland player by acquiring stakes in production and exploration assets from TotalEnergies for an initial $125m (£100m) in 2022.

Mr Austin is concerned that the industry is vulnerable at a time when both main parties are chasing votes.

They may see political mileage in raising the rate of the windfall tax, which was introduced in May 2022 as the surge in oil and gas prices fuelled by Russia’s war on Ukraine left consumers facing sharp increases in energy bills.

“Part of the problem is both parties are rightly trying to chase the 18 to 24 year old vote and in their minds climate change and oil and gas companies are the devil incarnate, therefore taxing them is effectively a victimless crime; that’s what’s driving it on both sides of the house,” noted Mr Austin.

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He is adamant that there are victims of the windfall tax but not those intended.

“We all sat around saying the oil and gas companies are profiting but actually it wasn’t them it was the traders,” said Mr Austin.

Andrew Austin (Image: Kistos Holdings)

Commodity traders such as Vitol have made billions from buying and selling oil in deals that allow them to capitalise on market trends.

The Government compounded the problem by imposing a tax in the form of the Energy Profits Levy that penalises firms that have been helping to make the most of the North Sea’s potential.

“Everyone thinks the victim of this is BP and Shell and it’s not,” said Mr Austin. “The victims are the small independents who effectively have become the mantle-holders for the North Sea as the majors and super-majors have exited.

“You’ve seen it with Harbour, with Ithaca with Serica and us. These are the guys that are getting hurt.”

Industry leaders say the tax is especially unfair as prices have fallen well below the highs reached in 2022.

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The impact on oil and gas firms was offset by the introduction of a generous investment allowance but the rate of the tax was increased to 35% in November that year. That left firms paying a total tax rate of 75%, including the standard 40%.

“The price of gas now in the UK is lower than before Russia invaded Ukraine. People aren’t paying more for their utilities yet our
tax rate has gone from 40% to 75%,” said Mr Austin.

The concern is that either Labour or the Conservatives could make things worse amid uncertainty about what exactly they plan to do.

Mr Austin seems to have been rattled by Keir Starmer’s announcement Labour would increase the tax rate to 78%, and indications it could scrap the investment allowance.

“We were probably getting quite comfortable with where [Shadow Chancellor] Rachel Reeves was and we didn’t think things would get any worse, then we had this we’re going from 75% to 78% and we still have no clarity on whether or not the investment allowance will remain.”

Kistos may move into new jurisdictions. Mr Austin confirmed the company is eyeing targets but declined to elaborate.

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Last year Kistos entered Norway through the acquisition of Mime Petroleum, which has stakes in big developments. While the tax rate in Norway is 78%, Mr Austin is irked by suggestions firms couldn’t complain if the UK rate is raised to the same level.

Norwegian firms benefit from tax credits that allow them to recoup a significant share of their costs in cash.

“The Government keeps saying that it’s the same but Norway is a hard tax credit that comes straight back to you. In the UK you don’t get it back unless you’re making money. In Norway you get it back even if you’re not making money.”

The Government in power in Westminster after the next election must offer firms security if it wants them to invest in the North Sea.
That could mean leaving current arrangements in place so long as ministers provide assurance they won’t be “fiddled” with. They could enact legislation that would say rates and allowances will remain in place for five years or so.

All the same, Kistos would still consider increasing its exposure to the UK through the acquisition of assets that are already in production.

“Acquisitions we can still look at because if it’s a currently producing asset you can model that,” observed Mr Austin, who reckons the UK will need oil and gas for years.

It makes more sense for the country to produce its own resources rather than rely on imports both on energy security and emissions grounds.

In February Kistos moved to capitalise on the UK’s reliance on gas by acquiring storage assets that could be adapted in support of the energy transition.

The company bought salt caverns in Cheshire from EDF in a £25m deal, as the French giant focuses on nuclear.

“We agreed to buy the gas storage asset because we know it’s a strategic asset for the UK but also its outside the [oil and gas production] ring fence,” said Mr Austin. “The profits on it get taxed at 25%, not 75% to 78%.

“As a gas producer having access to storage means that when prices are low we can fill up our own store and then we can sell it out at a later stage.”

Mr Austin cut the deal on attractive-looking terms. Kistos is paying £25m for assets that generated £32m profits in 2022.

READ MORE: Kistos returns to acquisition trail with Cheshire gas storage deal

The caverns could be repurposed to store hydrogen or compressed air.

That would allow Kistos to support the drive to develop low carbon energy sources. It is unlikely to invest in wind farms because the cost of capital of oil and gas firms is much higher than wind-focused players.

Speaking on the day the Scottish Government scrapped emissions reductions targets that experts said were undeliverable, Mr Austin had no comment to make on the administration’s policies.

However, he noted: “It’s interesting that they’ve now come out against changes in the windfall tax.”

On Tuesday shares in North Sea-focused Deltic Energy plunged around 40% after the company said it was struggling to secure backing for work on a big find it made with Shell.

The company said: "The feedback from Deltic's Pensacola farm-out process has indicated that the continual tinkering with the Energy Profits Levy and resultant fiscal uncertainty created by the current government, along with recent rhetoric emanating from the Labour Party, have had a severely negative effect on the ability of UK Exploration and Production companies to commit to long term investments in the North Sea."

It added: "Against this hostile political environment … Deltic have not yet been able to secure a farm-out partner for Pensacola."

Deltic warned that if it does not secure the backing required by the end of this month it may have to withdraw from the licence concerned.