tumsasedgars/iStock via Getty Images

tumsasedgars/iStock via Getty Images

Boris Johnson's Chancellor of the Exchequer proposed a 25% windfall tax on the oil and gas industry Thursday; however, details of the final legislation remain vague. There will be a sunset clause; however, the clause will be price dependent, with no specified date. There will be an investment tax incentive; however, the incentive appears lower than existing incentives. And there may or may not be a "baseline" profitability measure which determines the quantum of the "windfall" profits. Furthermore, investors are left guessing at exactly who will pay the tax.

The UK has a somewhat complicated tax and royalty regime for North Sea producers. All UK resident companies pay corporate income tax on worldwide pre-tax profits. If BP (BP) earns a profit refining oil in Whiting Indiana, it will pay tax on those profits to the UK treasury. However, the UK also charges North Sea producers a "ring fence" corporate tax, a "supplementary charge", a "petroleum revenue tax" and a "value added tax." Deloitte estimates the effective "government take" on pre-tax profits for UK North Sea producers at between 62% and 81%.

And although the Chancellor did not specify who will pay the incremental 25% tax, it's likely to be imposed on UK producers, rather than UK-domiciled entities alone. That is to say, BP (BP) is unlikely to be charged a windfall tax on profits earned in Indiana; however, Total (TTE) will bear the higher rates on UK North Sea production.

Harbour Energy (OTCPK:PMOIF) is the largest producer of North Sea oil and gas. Total (TTE) is the second largest producer; however, its ~146kboe/d of UK North Sea production accounts for only ~5% of Total's (TTE) global output. Thereafter, BP (BP) and Shell (SHEL) produced 131kboe/d each. Privately owned Neo Energy takes the fifth spot, while Delek Group (OTCPK:DGRLY) and Spirit Energy represent the sixth and seventh largest producers. It remains unclear how Vermilion's (VET) Corrib assets will be impacted by the tax.

Production has been volatile throughout the pandemic; however, in 2019 the country produced ~1mboe/d. Assuming the anticipated 2022 tax receipts prove accurate ($6.3B), the tax would cost producers over $17 per barrel. A $17/boe change in government take could be seen as material for prospective investors. The North Sea's Rosebank field has traded hands several times. In the past, owned by OMV (OTCPK:OMVKY), Chevron (CVX), Suncor (SU) and Siccar Point. Suncor (SU) has already announced plans to divest its share in the project, and the current operator, Equinor (EQNR), pushed back final investment decision in April of this year.

The Rosebank project is expected to cost over $5.0B to develop. Shell (SHEL) elected not to exit the Cambo field in 2021, a field discovered by Hess (HES) in 2002 and expected to cost ~$4.0B to develop. Clair South, an expansion of the $10.0B Clair Ridge project, has been put on hold by BP (BP). Whether the $6.3B of windfall tax proceeds end up chasing investment dollars out of the UK remains to be seen; however, the market is sure to remain focused on the topic through Q2 results season.