The North Sea could be finished under Labour

David Latin is losing his patience. The chairman of Serica Energy has worked in the oil and gas industry for more than 30 years. He once ran a company that drilled in a war zone.

That experience aside, he can think of no other environment in which it has been more challenging to make investment decisions than the UK today.

“We had no idea what was going to happen during the civil war in Libya but we did at least know that when the war ended, whoever was victorious was going to want the oil,” says Mr Latin.

“In the UK there’s this cloud hanging over the industry that no one wants us anymore.”

Serica, an Aim-listed group that is responsible for producing about 5pc of the UK’s natural gas, benefited from a spike in energy prices in the wake of Russia’s invasion of Ukraine.

But in common with other energy companies it has also had to struggle through massive slumps in the recent past.

Wholesale natural gas prices were as low as 10p a therm in May 2020 when most of the world was in lockdown because of the pandemic. They spiked above 700p in August 2022 and have since settled back down to around 80p.

Good luck making long-term investment decisions without throwing up on that rollercoaster ride.

Rather than trying to smooth out the bumps for this important sector, the UK government appears determined to make the ride as jolty as possible.

Gordon Brown and George Osborne both introduced supplementary taxes for North Sea oil and gas producers. As chancellor, Rishi Sunak introduced a 25pc windfall levy in 2022 to help households with soaring domestic energy bills.

The structure of the tax took many in the industry by surprise. They were braced for a one-off hit. Instead, Sunak said the “energy profits levy” would remain in place until the end of 2025.

It was then increased to 35pc (meaning the overall rate is now at 75pc) and extended to 2028 unless oil and gas prices returned to “historically more normal levels”. They have. And yet the levy is still in place.

Serica says it feels like it’s being punished for committing money to the North Sea when commodity prices were in the basement. It has largely grown from buying “unloved assets” that were abandoned when the big boys decided they were no longer commercially viable.

By doing so Serica has created well-paid jobs, contributed about £500m to the Treasury’s coffers since 2020 and bolstered the UK’s energy security.

And yet the hits just keep on coming. Labour has put a great deal of effort into reassuring UK plc that it wants to usurp the Tories as “the real party of business”. However, the oil and gas industry sees Ed Miliband sitting on the shadow front bench and is more than a little unconvinced.

Labour has said its green prosperity plan, which will cost £23.7bn over the course of the next parliament, will in large part be funded by “a proper windfall tax on oil and gas giants”.

Its manifesto pledged to extend the “temporary” tax until the end of the next parliament and increase the rate by another three percentage points – taking the overall rate to 78pc.

Serica, with a market capitalisation of £535m (compared to BP’s £79bn and Shell’s £178bn), can hardly be described as “giant”.

It’s now even smaller: on the day Labour’s manifesto was released its share price fell 10.9pc. Other independent oil and gas companies also got clobbered with EnQuest falling 11.4pc and Deltic Energy slumping by 19pc. The share prices of Shell and BP, by contrast, fell by just 1pc and 1.1pc respectively.

In the past energy companies have been able to use investment allowances to lower their tax bills.

Sunak included a new “super deduction”-style relief in the levy: those companies willing to reinvest profits in North Sea oil and gas production would gain a 91p tax saving for every £1 they invested.

But the Labour manifesto commits to removing “the unjustifiably generous investment allowances”. The industry and its investors are currently completely in the dark as to what this might mean.

One thing is clear however: reducing tax relief for capital expenditure below the rate at which tax is payable would make investment in the vast majority of UK North Sea projects unprofitable and therefore untenable.

All of this raises some interesting questions for the Labour Party.

Few would disagree that the UK should position itself to take advantage of emerging clean energy technologies. But most experts agree hydrocarbons will play a huge role in the economy for decades to come even in the most ambitious net zero scenarios.

Is Labour unaware that oil and gas accounts for nearly three-quarters of UK primary energy consumption today or does it just want to wish away this fact?

Do Keir Starmer and Rachel Reeves not realise that we use almost twice as much oil and gas as we produce and this disparity is likely to worsen if companies like Serica are forced to invest further afield?

Importing more oil and gas will worsen the UK’s national balance of payments while ensuring jobs are created and taxes are paid elsewhere. The production of oil and gas in the North Sea tends to have a smaller carbon footprint than that produced elsewhere. It is of course even smaller once transportation is taken into account.

High taxes are not – repeat not – the issue. Norway taxes its oil and gas companies at 78pc but it also offsets exploration costs at the same rate. More importantly Norwegian politicians haven’t endlessly fiddled with the rates. Companies know where they stand.

Even more importantly the Norwegian government, which has a climate action plan, understands and supports its oil and gas industry. Little surprise therefore that Serica is planning to make its next investment on that side of the North Sea.

Our loss will be Norway’s gain.