Serica seeks to quell investor concerns over UK windfall tax
UK gas producer Serica Energy on June 6 sought to downplay the impact of the government's recently-announced windfall tax on the North Sea oil industry, noting that it can exploit "significant" investment incentives built into the levy.
UK chancellor Rishi Sunak announced on May 26 that a 25% windfall tax would be imposed on the profits of oil and gas producers in order to alleviate household energy bills. The levy is on top of the 40% headline tax rate that the industry already pays on its income, which has surged to record levels on the back of soaring oil and gas prices. But the government has also provided an Investment Allowance, which enables businesses to save £0.91 in tax for every £1 they invest in new projects.
The government's announcement nevertheless triggered a slump in stock prices among oil and gas companies working off the UK coast. Serica, which accounts for 5% of UK gas supply, saw its share price drop by 14% on May 26 on the news.
Noting the "significant fall" in its share price, Serica said that “although fiscal instability is unwelcome in an industry with long lead times for capital expenditure, this new levy is part of a package that includes significant investment incentives designed to encourage companies like Serica to continue to reinvest profits."
The company's current $75mn investment programme includes a light well intervention campaign at the Bruce M1 well, aimed at adding new resources to its books and extending production from several subsea wells. It also intends to spud the North Eigg exploration well in the third quarter of this year that will target 60mn barrels of oil equivalent in P50 unrisked recoverable prospective resources. Results from the well are due in October.
Serica is considering "additional candidate projects" for investment in order to boost production at its flagship Bruce hub, which comprises the Bruce, Keith and Rhum fields, it said.
CEO Mitch Flegg said the company was well-placed to exploit the investment incentives offered by the government, supported by its cash position and balance sheet. Serica had £246mn ($308mn) in total cash and deposits as of May, with a further £246mn lodged as security. It has no debt and has limited decommissioning liabilities, it said.
“Although Serica has financial strength, our industry operates within unusually long investment horizons against a backdrop of often highly volatile commodity markets and business cycles,” Flegg said. “We therefore encourage policymakers to consider the importance of fiscal stability in enabling government and industry to meet the mutually set objectives of sustaining investment in the UK Continental Shelf at a level capable of ensuring security of oil and gas supply in volatile markets and delivering energy transition targets.”