Bumper earnings for Shell have supported the popular assumption that oil companies in Britain’s North Sea have made huge profits on sky-high gas prices, which has led to renewed calls from the Labor Party for a one-off tax to offset consumers’ energy costs.
The energy major, headquartered in London, on Thursday reported annual earnings of more than 19 billion. USD driven by what a bank described as “monsters” profits from its integrated gas division.
Shell produces natural gas worldwide. It is also still a significant producer in the North Sea. But it is by no means the greatest.
French supermajor TotalEnergies was the largest gas producer in British waters last year, pumping 5.6 billion cubic meters, more than three times as much as Shell, according to data from consulting firm Rystad Energy. London-listed Harbor Energy and Spirit Energy, controlled by the British Centrica, were the second largest and third largest producers, followed by BP and private equity-backed Neo Energy.
With Total and BP reporting earnings next week, calls for an unexpected tax are only expected to get higher.
“It is clearer than ever that North Sea oil and gas producers who have made a fortune recently should be asked to contribute,” said Ed Miliband, shadow foreign and climate shadow minister, on Thursday.
Greenpeace UK tweeted: “An unexpected tax on mega-profits from fossil fuel giants could raise £ 4 billion and be used to protect people from rising prices. This is the fairest solution to the energy crisis.”
Although they are profiting, North Sea oil and gas producers are not to blame for the record high wholesale prices, which have bankrupted almost 30 UK energy suppliers and forced UK regulator Ofgem to raise its ceiling on retail prices by 54 per cent.
A combination of renewed demand as the coronavirus pandemic subsided, increased competition for gas from Asia and limited supply to Western Europe from Russia, has driven the wild rally. At some point in December, prices in the UK rose by 800 per cent in 2021 before ending the year about three times higher than where they started.
The extreme fluctuations in prices have at times revealed the manufacturers. In October, Shell told investors that supply problems at some of its liquefied natural gas plants had forced it to buy from the spot market to meet long-term contracts, just as prices rose.
Nathan Piper, an analyst at Investec, said UK manufacturers with high debt levels tended to hedge much of their output to limit their exposure to price fluctuations as part of their agreements with lenders.
Harbor has hedged 65 percent of its gas production for 2022 at a price of 49p per term, well below current spot prices. In contrast, Serica Energy, the UK’s 10th largest gas producer, said last year that 80 per cent of its expected oil and gas production volumes were uncovered, allowing the company to keep “material up” from rising prices.
Ben van Beurden, Shell’s CEO, said he was concerned about the rising cost to households, but argued that the extreme price volatility was the result of a supply crunch that an unexpected tax would not solve.
“I understand the concerns, and I also understand the need for politicians to respond… But I will say, let’s take a very close look at what caused these problems,” he said this week after reporting on a quadrupling the company’s annual earnings.
Shell withdrew from a controversial British oil project last year that had become a focus of environmental opposition. But Van Beurden said Shell was still eager to invest in UK gas production that would “help alleviate [supply] pressure “as long as fiscal policy remained” favorable “.
An “additional tax” on British oil and gas producers’ earnings, currently 10 per cent, already exists and can easily be increased. But so far, the government appears to be inclined to support Shell’s position.
“The obvious result of an unexpected tax would be to deter investment, and right now I want to see more investment in the North Sea, no less,” British Chancellor Rishi Sunak said in the House of Commons on Thursday.
Britain was energy dependent in the heyday of the North Sea, but now imports more than half of its gas via pipelines from Norway and the EU and LNG shipments from countries such as Qatar.
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Higher taxation would deter investment and increase this dependence on imports, the industry says.
“Part of the reason we’re in the position we’re in with gas prices at the level they are is because there’s been a lack of investment,” said Andrew Austin, a North Sea veteran whose latest company Kistos recently bought a minority stake in four UK fields operated by Total, FT reported this week.
Total said it was “proud of its operations” in the North Sea, which provided reliable supplies of gas to Britain and tax revenues to the British government. BP, Eni, Harbor, Spirit and Neo Energy all declined to comment.
Piper at Investec noted that exploration drilling in the North Sea was already at a record low level, arguing that the economic hit from an unexpected tax would cut it further.
But with 22 million households facing a 54 percent increase in their domestic energy bills, it would be harder to push back toward higher tax rates, he said.
“Matches up [of] record-breaking cash flows for oil and gas companies with people suffering from very, very high fuel bills are difficult. “