In the U.S., when it comes to energy policy, we’ve become
acclimated to bad government on a national level over the last three years. We
don’t like it, but we’re acclimated to it. Nonetheless, it’s still quite
jarring to see the same bad brand of government being practiced in another
country, particularly a close ally of the U.S.
Such is the case in the UK, where common sense seems to
have gone out the window, as regards energy policy in the Sunak administration.
How else to explain Chancellor of the Exchequer Jeremy Hunt’s (Fig. 1) announcement
on March 6 that he would extend by one year the windfall levy on North Sea oil
and gas firms’ profits.
Defining the UK’s EPL. For
those of you not fully acquainted with this British situation, the windfall
tax, officially known as the Energy Profit Levy (EPL), was introduced on May
26, 2022, after a big jump in oil and gas prices following Russia’s February
2022 invasion of Ukraine. Let us not forget that current Prime Minister Rishi
Sunak (Fig. 2) imposed the EPL at that time while serving as Chancellor
of the Exchequer under then-Prime Minister Boris Johnson. The Conservative
administration’s reasoning at the time was that operators were benefitting from
something that they were not responsible for; in other words, a “windfall.” Indeed,
operator profits had jumped higher because of rising demand when Covid
restrictions were lifted and then rose further when Russia’s invasion of
Ukraine pushed prices even higher.
Accordingly, the EPL was legislated in July 2022 and was
set at 25%. Officials at the time called it a “temporary” measure. Mind you,
this extra 25% came on top of the traditional taxes already paid by operators, including
a 25% or 30% corporation tax (depending on profit level) and a 10% supplementary
rate. Thus, operators already were paying 35% to 40% in taxes on profits before
the EPL. Its introduction raised those rates to 60% to 65%. But like all big
governments, this soon proved to not be enough to suit the thirst of UK
officials. In January 2023, Hunt announced that the EPL was being raised to 35%
and that the expiration of this “temporary” levy would be extended from Dec.
31, 2025, to March 31, 2028. So, the total tax imposed on North Sea producers would
be 70% to 75% of profits. The
government also confirmed that it would no longer consider phasing out the
“temporary” levy before the end date.
It is true that producers have been able to reduce
the amount of tax they pay by factoring in losses or spending on things like
decommissioning North Sea platforms or investing in development projects. For
every £100 ($126.5) these firms invest, they can claim back £91.40 ($115.62) in
tax relief. And for every £100 ($126.5) they spend to lower the carbon level in
their production of oil and gas, they can claim up to £109.25 ($138.22) in tax
benefits. However, the ability of companies to take advantage of these tax
breaks varies considerably.
Nevertheless,
the Sunak administration, seeming to look for an easy way to reduce the deficit
in its overall 2024 budget, announced through Hunt on March 6, 2024, that it
would extend the “temporary” EPL a full year to March 31, 2029. The rationale,
he said, was that the continuing war in Ukraine would extend windfall profits
for North Sea companies. Methinks the good Mr. Hunt is being rather
disingenuous. Considering that oil and gas prices are still relatively lower
than they were in 2022, this can only come across as a good old-fashioned case
of money-grubbing.
Effects
on the UK industry. Meanwhile, given the EPL extension, no
one in the Sunak regime seems to give a damn about the health of the British
oil and gas industry. One might expect this type of behavior from a Labour
administration (or a Democrat administration in the U.S.), but to have a
Conservative regime act this way is quite extraordinary.
Offshore
Energies UK Chief Executive David Whitehouse reacted swiftly and vociferously
to the EPL extension. The announcement by Hunt “is a disappointing blow to the industry,
which risks jobs, investment and economic growth,” said Whitehouse. "The
industry is being taxed on windfall profits which no longer exist and, facing a
fourth round of fiscal change and turmoil in less than two years, making it
impossible to plan investment for the energy transition and the path to net
zero."
As
I alluded to a few paragraphs ago, OEUK again pointed out that “the price of natural
gas in the UK is almost 10 times lower than the peaks seen when the tax was
introduced, and the price of oil has returned to the level before the Ukraine
invasion.” Furthermore, the Chancellor’s plan to continue the tax
undermines OEUK’s manifesto proposals (published recently) for a homegrown energy transition that would
boost domestic energy investment and drive the shift to greater production of
wind and hydrogen energy, alongside the introduction of large-scale UK CCS
facilities.
With
that in mind, Whitehouse expressed his displeasure further. “We are extremely
disappointed that the government continues to ignore clear evidence that we
need investment in offshore energy production to grow the economy and achieve
net zero,” he stated. “We have identified £200 billion ($252.9 billion) of
investment in oil and gas and the UK’s wider energy transition awaiting the
green light, which will not happen with such globally uncompetitive taxation in
place. Thousands of jobs and billions of pounds in national revenue are at
risk because of the destabilising impact of these tax decisions. A
homegrown energy transition will simply not move forward unless business
confidence for long-term investment in the UK is restored.”
Concerns over industry stability and the
ability to plan projects were also expressed by KPMG’s partner and head of Energy
Tax in the UK, Claire Angell. “The extension to the Energy Profits
Levy is the latest in a series of changes to the oil and gas windfall tax since
it was introduced in May 2022,” analyzed Angell. “For an industry which
rightfully seeks fiscal stability, given the long-term nature of their
investments, this makes the UK a more challenging place in which to invest.”
She also pointed out the budgetary motivation that I
mentioned earlier. “Whilst the political pressure to balance the books in this
Budget was clear, this may have unintended consequences and a potential cost to
the taxpayer in the medium-to-long term,” declared Angell. “Postponing or
shelving new development projects and the early cessation of production will
reduce future tax revenues. In addition, where decommissioning starts earlier
than planned, the government’s liability of up to 75% of those costs will be
accelerated. This also has a potential impact on jobs, for a workforce whose
skills will be key to the energy transition.”
We,
the industry, can only hope that Sunak and his crew at some point will regain
their energy economics sanity and take a more traditional Conservative approach
to the situation. But don’t count on it by any means. The next UK general
election must be held by Jan. 28, 2025, and the desire to pander to a variety
of voting blocks will be irresistible. Yes, to ensure their political survival,
the Sunak Conservatives will be looking to show that they are just as capable
of sticking it to those nasty oil and gas companies as are the Labour MPs.
Lesson
learned in Denmark? While we’re examining less-than-astute
comments and actions by national governments, I cannot let the situation regarding
E&P offshore Denmark go unnoticed. It’s no secret that Danish officials
have been pushing a renewables agenda for a number of years. And, until
recently, there seemed to be no room in that agenda for hydrocarbons.
Indeed,
back in 2021, when World Oil contacted the Danish government for some
statistical data for our February drilling forecast, we were told that maybe we
shouldn’t send our request to them any longer in future forecasting rounds. After
all, they said, drilling offshore Denmark was coming to an end, and they
expected that there would no longer be any drilling activity, period.
Well,
fast-forward a year later, and Russia invades Ukraine in February 2022. The
energy supply and security picture for many European countries was suddenly
upside down, and Russian gas was no longer a sure thing or politically
appropriate. Alternate gas supplies had to be arranged, including volumes from
the U.S., which stepped up to the situation with great efficiency. Also, in a
less-publicized manner, a number of European countries suddenly embraced
further development of whatever gas and oil resources they might have
themselves. Such is the case in Denmark, where, after no drilling in 2021 and
2022, at least one well was drilled last year, and several more may be drilled
this year.
In addition, TotalEnergies on March 22
announced that it had restarted gas production at the Tyra offshore hub (Fig. 3) after a
major redevelopment. At plateau, said the company, the Tyra hub will produce 5.7 MMcmd
of gas (201.3 MMcfd) and 22,000 bcpd, once again making Denmark self-sufficient
and a net exporter of natural gas. TotalEnergies operates Tyra field on behalf
of Danish Underground Consortium, a partnership between TotalEnergies (43.2%),
BlueNord (36.8%) and Nordsøfonden (20%).
Discovered in 1968 by
Maersk Oil, Tyra is 225 km (140 mi) west of the coast of Esbjerg. In September
2019, gas production was suspended to enable the redevelopment of Tyra.
Following the decommissioning of the previous Tyra facilities, 8 new platform
topsides, 2 jackets and 6 bridges were installed. As part of this redevelopment
project, 98.5% of the materials recovered from the retired installations have
been reused or recycled.
WEA lauds stay of SEC
Climate Rule by 5th Circuit. On March 18, Denver-based Western Energy Alliance (WEA) applauded member company
Liberty Energy and co-plaintiff Nomad Proppant Services LLC for winning a
preliminary injunction from the 5th U.S. Circuit Court of Appeals halting the
Securities and Exchange Commission’s (SEC) climate change disclosure rule.
“Chris Wright, CEO of Liberty
Energy, has once again shown that he is a true leader in the oil and natural
gas industry,” said WEA President Kathleen Sgamma (Fig. 4). “While many
companies lay low and even are co-opted to advance policies that aren’t in
their interests, Chris was willing to immediately stand up and say this rule is
wrong and was rewarded for his action. Liberty’s ‘Bettering Human Lives’ initiative shows how the company is
among the most credible in arguing against the SEC’s overreaching rule.”
The significance of this
court action cannot be overestimated, and it is a major win for the oil and gas
industry. It reins in the Biden administration’s adventurous rulemaking, at
least temporarily. “The SEC climate change disclosure rule goes beyond the
authority granted by Congress, and the court’s quick action signals a dim fate
for the expansive rule,” added Sgamma. “It runs afoul of the major questions
doctrine affirmed by the Supreme Court when preventing the Environmental
Protection Agency (EPA) from closing power plants in the name of climate
change. The commission seeks to reorient the entire financial system and drive
climate change policy rather than promote fair financial returns for workers,
retirees, and investors.”
Sgamma noted that despite the
SEC’s stated intentions, the rule would flood investors with inconsistent,
confusing information about ill-defined climate change risk and greenhouse gas
data that conflicts with more technically sound inventories from EPA. “Even
with the withdrawal of Scope 3 emissions, the rule lacks statutory authority
and elevates speculative climate change risk above material financial
information of true value to investors,” she concluded.
The oil field legacy of
the late Toby Keith. When
country singer Toby Keith passed away on Feb. 6, 2024, from stomach cancer,
most people were probably familiar with his music career. As of April 2023, which
is the last good accounting of Keith’s accomplishments, he had sold 40 million
records/CDs globally, including 30 million in the U.S. In all, Keith released 21 studio albums, 54 music
videos, 69 singles, and seven compilation albums.
But what you may not have known is that Keith spent time
working in the oil fields of Oklahoma before he achieved success in country
music. Born in Clinton, Okla., Keith graduated from Moore High School in Moore,
Okla., in 1979. Following graduation, he went to work in the oil fields of
Oklahoma as a derrick hand at age 18. He worked in the fields long enough to
become an operations manager, only to see the industry experience the first of
several activity collapses in 1982, putting him out of work and with no money
saved. He went on to play semi-pro football for a while before focusing solely
on his musical career.
“The money to be made was unbelievable,” Keith told the
Associated Press in 1996, which was republished by the Daily Mail. “I came out
of high school, and they gave me this job, December of 1979, $50,000 a year. I
was 18 years old.” The industry downturn taught him the value of money. “It
about broke us,” he said. “So, I just learned. I’ve taken care of my money this
time.”
Toby Keith was 62 years old at the time of his death.
Veteran World Oil
Contributing Editor passes away.
We are saddened to report that our Contributing Editor for Drilling, Jim
Redden, passed away on March 9, 2024, after a valiant battle with a two-month
illness. For more on Jim’s substantial life and career, please turn to the
Drilling Advances column in this issue. WO
IN THIS ISSUE
Special focus: Sustainability. We are blessed
with an abundance of material this month, including a look at coiled tubing
drilling’s role in the Energy Transition from AnTech, as well as a Baker Hughes
author discussing the de-risking of carbon sequestration projects
with comprehensive reservoir monitoring. In addition, an ABS executive outlines
how FPSO electrification can advance offshore decarbonization, and an author
from Envorem describes an innovative solution that addresses challenges faced by
landfarming of oil sludge. Finally, an author from Water Evaporation
Systems, LLC, explains how operators can implement effective treatment
and reuse techniques to minimize the environmental impact of produced water.
Digital transformation: Interview with Baker Hughes’ chief digital officer and a look at data-driven strategies for late-life optimization. In this month’s primary sub-theme, Baker Hughes Chief Digital Officer Jim Brady discusses how the digital transformation continues to impact various drilling and production functions in many positive ways, and thus its usage and spending for it will expand further. And in a second article, an Imrandd author explains the strategy of harnessing data-driven strategies for late-life optimization of offshore assets.
Shale technology: Bayesian variable pressure decline-curve analysis for shale gas wells. Authors from multiple entities within The
University of Texas at Austin and Penn State University discuss how a new
workflow generates probabilistic history-matches and production forecasts for
any decline-curve model while incorporating variable BHP conditions. It
provides fast history matches and forecasts of shale gas wells more accurately
than traditional DCA while quantifying model uncertainty.