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North Sea oil and gas companies have agreed to a series of mergers that will allow them to offset their billions of pounds of tax liabilities against future profits.
In three transactions over the past six months, companies with significant tax losses have merged with profitable assets and rivals.
Ithaca, which suffered a tax loss of $4.5 billion at the end of 2023, merged its assets with Italian company ENI in October. Equiner, carrying around $7.6 billion in tax losses in the North Sea, has merged its portfolio with Shell UK and last month, Neo, which reported a tax loss position of $3.7 billion at the end of 2022, announced a merger with Repsol’s North Sea business.
The transaction was driven by strategic reasons such as building large and flexible companies to reduce oil and gas basins, but many investment bankers, lawyers and accountants cited the potential for tax declines as an important attraction.
“If you’re Group A and you have a lot of tax losses and some oil fields at the end of your life and you’re not making a lot of money, then Group B can have a lot of oil online, move assets and offset Group A’s losses on Group A’s profits, subject to various prevention rules.”
“There are mechanisms that have been tried and tested, and most people understand how the rules work,” they added.
The oil industry has repeatedly complained about the highly and unstable tax on North Sea production. Currently, companies face a headline tax rate on profits of 78%, consisting of corporate tax, supplementary tax and energy profit tax, which is the windfall tax that came after a sharp rise in energy prices at the start of the Ukrainian war.
Oil prices plummeted to a four-year low of under $60 per barrel, but North Sea producers remain liable for the EPL as they are well above the 59p-a-Serm threshold for the current tax year.
Nick Davis, energy partner at law firm Haynes Boone, said: “These (trades) give you a scale that is probably protected against it, but I don’t think you’ll get tax comfort.”
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He added that merger activity could also be on the rise as many companies feel they are at the bottom of the market.
Tax revenue from the North Sea is declining. Last month, the UK for Budget Responsibility projected a 22% decline in tax revenue for 2024/25 compared to £5 billion the previous year as oil prices fell. By 2029/30, OBR’s forecast tax revenue had dropped to £2.3 billion due to declining resources in the North Sea.
Gale Anderson, research director at Energy Consulting Wood Mackenzie, said he hopes for more M&A activities in the North Sea in the coming months. “There are still great risks in the industry and companies are trying to figure out how to mitigate those risks,” she said. “I think we’re likely to see more deals before the year comes out.”
