IT is unlikely to be well received by green campaigners. But recently announced tax breaks look to have ensured that investment in North Sea oil and gas extraction continues to be attractive for energy companies – despite the introduction of a windfall tax on the extraordinary profits they have been making on the back of surging commodity prices.

North Sea heavyweights such as Shell and BP have routinely warned that a windfall tax would harm investment in the area and increase the UK’s reliance on expensive imports of oil and gas, ever since the idea was first suggested several months ago as a means to fund support for households faced with massive increases in energy bills.

For a long time, the UK Government shared the view of the big oil and gas companies, and not least because the Labour Party had been leading the windfall tax calls. But, faced with mounting pressure to help struggling households as inflation soars – annual UK consumer prices index inflation increased to nine per cent in April and is forecast to rise to 10% by the end of the year – the Government changed course at the end of May.

To spare its blushes, the Government has not used the term windfall tax. However its Energy Profits Levy, which adds a 25 per cent tax to the extraordinary profits companies are making thanks to rampant oil and gas prices, amounts to the same thing.

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The Government said the levy, which will be charged on top of the 40% headline rate of tax, will raise more than £5 billion over the next year and contribute to the cost-of-living support measures announced by Chancellor Rishi Sunak. It will apply to profits made by companies after May 26, though will be phased out “if oil and gas prices return to historically more normal levels”. The legislation includes a sunset clause, fixing the lifespan of the levy until the end of December 2025.

Shell reacted to the windfall tax by stating the measure “creates uncertainty about the investment climate for North Sea oil and gas in the coming years”, while fellow oil major BP declared that it would review its investments in the area in response to the move.

But the policy change may not be so bad for the industry, and it is chiefly because of new investment allowances that were brought in at the same time as the levy. That point was emphasised by North Sea player Serica Energy when it updated the City on Monday.

Serica, one of the biggest players in the area, said that “fiscal instability is unwelcome in an industry with long lead times for capital expenditure”. However, it underlined the benefits it stands to realise because of the incentives that the Treasury brought in alongside the windfall tax to help ensure companies reinvest profits in the North Sea.

Serica declared the tax incentives will allow it to offset a “large element” of the new levy that would otherwise be payable on profits this year. It explained that for every £1 it invests, it will make an overall tax saving of 91.25p.

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The company plans to invest £60 million in its North Sea operations this year, including activity on its Bruce and North Eigg interests, and held out the prospect of more given the benefits brought by the new tax incentive.

Serica saw its share price rebound sharply on Monday. This came after it had tumbled on speculation a windfall tax would be introduced and then immediately after the announcement of the Energy Profits Levy in late May.

The company said: “Our planned 2022 expenditure on the North Eigg well and the LWIV (light well intervention) campaign is around £60 million which we expect to be eligible towards this tax saving. This will offset a large element of the Energy Profits Levy that would otherwise be payable on Serica’s profits this year.

“Moreover, we are evaluating additional candidate projects designed to increase the productivity of the Bruce hub.”

The update from Serica came as a report in The Guardian quoted analysts as suggesting the tax incentive could prove to be the catalyst for £8 billion of North Sea projects currently waiting on financial investment decisions to get under way.

These include Equinor’s Rosebank field, which is estimated to hold more than 300 million barrels of recoverable oil and cost £4.5bn to develop.

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Graham Kellas, senior vice president of global fiscal research at analyst Wood Mackenzie, said: “This new Energy Profits Levy – effectively a windfall tax – means that if an operator is not investing in new projects between now and the end of 2025, they’ll pay significantly more to the Treasury.

“Operators developing new fields or improving existing facilities will however be able to claim huge additional reliefs against the new tax. During the EPL’s imposition, investors can save 91.25p on every £1 they spend on developing untapped resources.

“The timeframe could be enough for some discoveries, currently awaiting a final investment decision, to be developed with the bulk of costs receiving this tax relief. And if the field comes onstream after 2025 – and the Government sticks to its plan and removes the EPL – they’re back to paying tax at 40% on the field’s profits.”

Given the huge concerns over energy security sparked by Russia’s war in Ukraine, and the massive fuel bills UK households are currently facing, the prospect of an upturn in domestic production of oil and gas will be appealing to many people who are concerned about the cost of living.

But on the flip side the ramping up of oil and gas extraction will be a cause of major concern to environmental campaigners who will argue such moves will severely undermine efforts to tackle the climate emergency.

The outlook for the North Sea, which remains such an important provider of jobs in Scotland, had been looking bleak at the end of last year, when Glasgow hosted COP26 and efforts to cut global carbon emissions topped the political agenda.

Controversially, Scotland’s First Minister Nicola Sturgeon declared that she would not have approved the Cambo development off Shetland (though power for approving UK Government licences is reserved to Westminster) in a move that was interpreted by some as a move to keep the SNP’s Green coalition partners on side.

Ithaca Energy acquired the company leading work on the Cambo project, Siccar Point, in a deal worth up to $1.5 billion in April. That followed a controversial few months during which Shell, a 30% stake holder in Cambo, initially cooled on the project, citing concerns it would not be economical, before it was announced in March that the licence had been extended.

Concerns over climate change should not be dismissed, but a boost to domestic energy production at a time of geopolitical crisis would go some way to easing the UK’s energy worries in the short term.