UK's Truss pledges support for North Sea oil and gas, rejects windfall taxes

New UK Prime Minister Liz Truss on Sept. 7 pledged to support new development in the North Sea and reiterated her tax-cutting ambitions, saying she aimed to foster long-term security of supply and did not support further windfall taxes on industry.

In her first comments to parliament since taking office, Truss promised to present measures on Sept. 8 aimed at supporting consumers through the energy crisis -- thought likely to include an across-the-board freeze on household tariffs with the cost to be borne by government -- while underscoring the need to foster investment.

"The way we will grow our economy is by attracting investment...I am against a windfall tax. I believe it is the wrong thing to be putting companies off investing in the UK just when we need to be growing the economy," Truss said when asked if companies' "excess profits" should be tapped to fund the tariff freeze.

"We can't just deal with today's problem...What we need to do is increase our energy supplies long term. That is why we will open up more supply in the North Sea...That is why we will build more nuclear power stations...That is why we will get on with delivering the supply as well as helping people through the winter."

It comes after the previous government of Boris Johnson, in which Truss was foreign minister, imposed an "energy profits levy" on upstream production revenues, which raised the headline rate of tax from 40% to 65% and was dubbed a windfall tax by the industry.

The levy remains in place, but came with a "sunset clause" pledging its cancellation by the end of 2025, and did not include energy utilities.

Industry group Offshore Energies UK reiterated the need for tax stability in a report published Sept. 7, saying it was aware of North Sea projects under consideration that could yield 4 billion barrels of oil equivalent to 2030, entailing investment of GBP26 billion ($30 billion).

It warned, however, that less than a third of that spending had been committed in the form of final investment decisions and the government needed to work to restore the industry's trust. While some projects are progressing and there are tie-in projects that could come online quite quickly, output could fall by as much as 15%/year in a no-further-investment scenario, it said.

Just five UK exploration wells were drilled in 2021 — a record low — with a similar number expected this year, OEUK added.

"Over the past 50 years, there have been several changes to the tax system, almost all of which have led to less investment. Every time the UK government has had to backtrack in some way as it recognizes the importance of upstream production," OEUK said.

"Commitment is needed to end the windfall tax [energy profits levy] by 2025 at the latest, and to work with the sector to rebuild investor trust," OEUK acting CEO Michael Tholen added.

Output stabilizing

North Sea oil output plunged by 17% in 2021 to under 900,000 b/d, but has somewhat stabilized in 2022, while gas output was up 26% year on year in the first half of 2022 thanks partly to new projects coming on stream and reduced levels of maintenance activity. The country met 38% of its gas needs from domestic sources in 2021 and the equivalent of 82% of its oil needs.

The Johnson government suspended the regular process of issuing new North Sea licenses in 2020 as part of preparations for COP26 climate talks. However, Truss is expected to follow through on pledges to resume licensing.

During the leadership battle in the ruling Conservative Party she pledged to lift a moratorium on fracking, enabling the nascent UK shale industry to move forward.

Truss is thought to be less enthusiastic on energy transition projects and has talked of removing a "green levy" on household energy bills.

As for the UK's long-discussed shale prospects, newly appointed Chancellor of the Exchequer Kwasi Kwarteng was skeptical in his previous role as business secretary, but has softened his position, ordering a review on the possibility of lifting a moratorium on fracking from the independent British Geological Survey earlier this year.

Leading geologists remain doubtful, with research from Nottingham University in 2019 suggesting economically recoverable reserves of Bowland shale gas could be less than 10 years' of current UK consumption, implying a ceiling of 800 Bcm.

The Dated Brent benchmark, assessed by Platts, part of S&P Global Commodity Insights, and derived partly from crude produced offshore the UK, fell $2.62/b Sept. 6 to $92.165/b.