Neo Energy, a North Sea oil producer, announced significant cuts to its investments in the United Kingdom. The company cited "fiscal and regulatory uncertainty" as the primary reason. The development of the Buchan-Horst oil field, located about 115 kilometers northeast of the Aberdeenshire coast, is particularly affected. The project, which has an estimated investment volume of £1 billion, was originally expected to deliver its first oil production by the end of 2027. These plans are now postponed as Neo Energy awaits clarity regarding the UK's tax policy in the upcoming October budget.
Neo Energy, which is owned by the Norwegian private equity group HitecVision, is not the only company reconsidering its investment plans in light of the uncertainties. The recent announcement by the British government to increase the Energy Profits Levy (EPL) by three percentage points has significant implications for the entire industry. The EPL, an additional tax on the profits of the UK energy industry, was introduced in 2022 following the Russian invasion of Ukraine, when energy prices surged. With the recent increase, the cumulative tax burden for the industry is now at 78 percent.
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"Even more serious for companies are the planned changes to investment and capital depreciation.
The uncertainty is already affecting the valuation of oil and gas companies in the region. For example, Serica Energy, which holds a 30% stake in Buchan Horst, is now valued at only 3.5 times its expected earnings. London-listed EnQuest is traded at even 1.2 times its expected earnings.
The British North Sea sector is considered a mature production region in urgent need of investment to slow the natural decline in production. While some companies benefit from recent drilling campaigns, and cash flows may remain stable in the coming years, layoffs in exploration departments are imminent.
Many companies are now looking for ways to expand outside of the United Kingdom – a challenging endeavor. Last year, two merger proposals from Capricorn Energy faced shareholder resistance. Some companies might opt for consolidation. One thing is certain: Operators in the North Sea urgently need a convincing strategy to reassure their investors and avert the looming threat.
