Oberon Houston, Director at Alvarez & Marsal

Last year I wrote a piece on the Energy Profits Levy and why it will drive down upstream investment in the UK. Unfortunately these concerns have been realised with upstream players rapidly reducing activity and looking for opportunities to diversify away from the UK where fiscal mayhem rages around an industry that makes investment decisions on assets that often last decades.

Unlike the UK, Norway activity is surging ahead. Woodmac expects around $8 billion of capital spend in the UK this year, but 25% of that will be on decommissioning with 24 fields expected to cease production shortly. Production is broadly flat, with decline in the UK offset by production build in Norway.

Both politically and regulatory, the outlook is concerning. The Conservatives are pushing legislation through parliament to mandate annual licensing rounds, but given the deteriorating investment climate, this looks like a red herring. Expect further costs to also build from emission reduction targets and restrictions on activities like flaring or the need for electrification.

Given there is likely to be a general election in the autumn, one eye needs to be kept on Labour energy policy, especially given they are twenty points ahead in the polls. Details are still hazy, but they have said that they want to accelerate the transition, making Britain a ‘clean energy superpower’ with £28 billion earmarked for investment. However, clean energy projects, which are notoriously capital intensive and difficult to finance, face high cost inflation, destroying returns and stalling installations.

The other monster hiding in a bush is that Labour have repeatedly said they will remove the investment allowance for oil & gas developments. This has had a chilling impact on an already freezing upstream investment landscape with uncertainty as to whether projects can rely on it or not.

Labour have also targeted UK financial markets with increased regulatory enforcement planned on funds to ensure investments are aligned to net zero pathways meeting the Paris Agreement. London equity markets are already in trouble as company IPO’s have favored the United States and Europe over London for listings in recent years, pointing to less regulation and larger markets for raising capital. The Chancellor has reacted to this with the ‘Edinburgh Reforms’, but many commentators have criticized this, with even the Treasury Select Committee described them as a ‘damp squib’.

On the EPL, a price floor was retroactively set, which only helped eased RBL capacity for some UKCS E&P players with little prospect that it will actually be triggered. There was a small win recently, when inflation was included in the calculation, but again, this will only impact RBL facilities, and then only in a relatively minor way.

The ramifications of Europe (mainly industrial Germany) losing access to Russian gas has eased, but the shockwave it sent through energy markets, even those relatively unconnected to Russian gas, such as the UK, resulted in billions of pounds of support for consumers, which in turn led to the UK Government taxing energy providers more to pay for it. The full implications of this are becoming clearer.

Whilst the outlook in Norway looks bright, the UK is a very different story. Expect accelerated decline and decommissioning to continue. It’s not just upstream being affected here either, the future of Grangemouth looks increasingly uncertain. Labour’s plan is to accelerate green job creation, especially where communities currently rely heavily on oil & gas, but the economics of wind are very different compared to just a couple of years ago. The net result of all this is simply higher consumer energy costs coming down the road.

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