North Sea oil offers permit corporations to offset billions in tax liabilities | USAEMALL.com

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North Sea oil and gas companies have agreed a series of mergers that will allow them to offset billions of pounds of tax liabilities against future profits.

In three deals in the past six months, companies with significant tax losses have merged with rivals with profitable assets.

Ithaca, which had $4.5bn of tax losses at the end of 2023, merged its assets with Italian company Eni in October. Equinor, which was carrying approximately $7.6bn of tax losses in the North Sea, is merging its portfolio with Shell UK, and last month, Neo, which reported a tax loss position of $3.7bn at the end of 2022, announced a merger with Repsol’s North Sea business.

While the deals were driven by strategic reasons including building larger and more flexible companies in a declining oil and gas basin, a number of investment bankers, lawyers and accountants cited the potential for lower taxes as a significant attraction.

“If you are Group A and you have lots of tax losses and some oilfields at the end of their life and not making much money and Group B has lots of oil coming online, by moving the assets around, and subject to various anti-avoidance rules, you can offset Group A’s losses against Group B’s profits,” said a senior North Sea tax adviser at a big four accounting firm.

“There are tried and tested mechanisms and most people understand how the rules work,” they added.

The oil industry has complained repeatedly about high and volatile taxes on North Sea production. Companies currently face a headline tax rate on their profits of 78 per cent, made up of corporation tax, supplementary tax and the Energy Profits Levy, a windfall tax brought in after the sharp rise in energy prices at the start of the Ukraine war.

Although the price of oil has slumped to a four-year low of under $60 a barrel, producers in the North Sea are still liable for the EPL because gas prices remain well above the 59p-a-therm threshold for the current tax year. 

“I have clients who feel more secure in the tax regime of sub-Saharan Africa than they do in the UK, which is frankly astonishing,” said Nick Davis, an energy partner at law firm Haynes Boone. “These [deals] give scale, which possibly guards against it, but I don’t think you can get any comfort on the tax regime.”

He added that merger activity may also be increasing because many companies feel they are at the bottom of the market — the current government has banned new exploration licenses — and that the outlook for North Sea production can only improve.

Tax revenues from the North Sea are in decline. Last month, the UK’s Office for Budget Responsibility forecast a 22 per cent drop in tax receipts for the 2024/25 year, compared with £5bn in the year before, as oil prices have fallen. By 2029/30, the OBR forecasts tax revenues will have dropped to £2.3bn because of dwindling North Sea resources.

Gail Anderson, research director at energy consultancy Wood Mackenzie, said she expected more M&A activity in the North Sea in the months ahead. “There are still big risks in the industry and companies are trying to think about how they mitigate those risks,” she said. “I think its probably more likely than not that we will see more deals before the year is out.”