All eyes in the UK oil and gas industry are on a disgruntled Linda Cook who, as chief executive of the country’s largest producer Harbour Energy, is reconfiguring the company’s growth plan due to the negative impacts of the UK Energy Profit Levy.
Cook presented Harbour’s 2022 financial results last week with all guns blazing about her company’s annual profits being “wiped out” by the UK levy, and the negative side-effects for the UK oil and gas sector which is so essential to the country’s energy security.
People say ‘well, Norway's tax rate is higher’. Yes. But the thing about Norway is it's stable, and you can rely on it for years to come.
Linda Cook
Harbour recognised a $1.5 billion one-off non-cash deferred tax charge which consigned the company to an annual profit after tax of just $8 million, compared to $101 million in 2021.
“It's just a little bit ironic that we, as the UK’s largest oil and gas producer, in a year of record production and high oil and gas prices, are delivering zero profit,” said Cook, a former high-flying Shell executive.
Cook and other oil and gas company bosses are fuming about the 75% levy, which in its current form will run until 2028.
The uncertainty created by the tax has forced Harbour to cut UK staff and investments and withdraw from the country's most recent licensing round.
Norway is stable, UK is not
“People say ‘well, Norway's tax rate is higher’. Yes. But the thing about Norway is, it's stable, and you can rely on it for years to come. I think what we've had here in the UK — it's not just the fact that we now have had this windfall profit tax. It's the fact that there's a lot of uncertainty associated with that going forward. It says it's going to last until 2028. No one's certain. That's really the case,” she said.
“Does the tax rate stay but the investment allowance goes away? What happens if Labour comes into power here in the UK? And so, given all that uncertainty, it's just hard to think about new exploration licences, major new developments and spending a lot of money pre-FID on those over the coming two or three years when you don't know what the future is going to bring fiscally in the country.”
In terms of solutions to the windfall tax problem, Cook said companies are targeting various levels of government directly and through UK industry associations in an effort to lobby and engage with the government on several points.
One of those is a firm commitment that the tax will be removed “when we no longer have windfall profits being realised because prices are normal again”.
Another point of discussion takes contractual terms into consideration, arguing “that even though market prices might be high, if somebody is hedged and we're not realising extraordinary oil and gas prices, then why should we be taxed at 75%?” Cook said.
A Harbour spokesperson told Upstream the company has called for UK Chancellor Jeremy Hunt to introduce a floor price mechanism in the energy profit levy "in order to restore investor confidence in investing in the UK and to protect the country’s energy security".
What now for Harbour?
Harbour still plans to allocate 85% of its 2023 total capital expenditure of $1.1 billion to the UK, with 15% split across its international portfolio.
But the company’s ambition to diversify and grow internationally has been reinforced by the UK uncertainty. This means some judicious overseas exploration and production investment in countries like Indonesia, Mexico, Norway and Vietnam.
Cook has said there is scope for the company to become an LNG producer if its upcoming exploration and appraisal programme in Indonesia’s Andaman Sea is a commercial success.
Harbour’s recent Timpan discovery in the Andaman Sea “is in a region of strong growing natural gas demand, options we could consider in terms of markets, including both pipeline gas and possibly LNG, but it is too early to say”.
Harbour, founded in 2014 by the private equity firm EIG Global Energy Partners with a strategy to grow through acquisitions, is very much hunting for new producing assets.
Cook said: “Our criteria for M&A remain unchanged — accretive to reserves life, cash flow, credit metrics, and supportive of our net zero goals, with a focus outside the UK. And the objective remains to diversify and continue building a portfolio that can sustain and grow shareholder distributions over time.”
Harbour’s proven plus probable reserves life is “a bit lower than where we’d like it to be”, she said.
“We would like to add some reserves that are a bit less mature than on average than what we have today.”
Harbour has pointed to opportunities in Norway, the US Gulf of Mexico and Southeast Asia.
The company’s majority shareholder EIG is extremely supportive of Harbour’s growth plans, Cook noted.
Harbour chairman Blair Thomas is the chief executive of EIG Global Energy Partners, while the former chief executive of Apache Corporation, Steven Farris, is on Harbour’s board as an EIG appointee.
Cook was named chief executive of Harbour Energy on 1 April 2021 following seven years as chairman of Chrysaor Holdings, which became Harbour in 2021, and as a member of the investment and executive committees of EIG.
She had a 29-year career with Shell, during which time she held various executive positions. She has a petroleum engineer degree from the University of Kansas.
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