North Sea Mergers: Strategic Moves Amid High Tax Liabilities
In a significant shift within the North Sea oil and gas sector, several companies have initiated mergers that enable them to manage substantial tax liabilities by leveraging their respective financial positions. This trend has emerged over the last six months, with key agreements designed to marry tax losses with profitable operations.
Recent Merger Activity
The mergers involve companies with notable tax losses joining forces with those possessing productive assets:
- Ithaca Energy: At the end of 2023, Ithaca reported $4.5 billion in tax losses and subsequently merged its operations with the Italian company Eni in October.
- Equinor: Holding approximately $7.6 billion in tax losses, Equinor is set to merge its North Sea assets with Shell UK.
- Neo: Following a tax loss position of $3.7 billion at the close of 2022, Neo announced a merger with Repsol’s North Sea business last month.
While the primary driving force behind these mergers includes the need to consolidate operations in response to a declining oil and gas basin, industry experts highlight tax alleviation as an attractive incentive.
Tax Strategies and Financial Incentives
A senior tax advisor from one of the major accounting firms explained, “If you are Group A, with substantial tax losses, and Group B, which has thriving oilfields, merging the two allows Group A’s losses to be set off against Group B’s profits, adhering to specific anti-avoidance rules.”
The oil sector has raised concerns regarding high and fluctuating tax rates on North Sea production, which currently stand at a staggering 78%. This figure comprises corporation tax, supplementary tax, and the Energy Profits Levy (EPL), introduced following a rise in energy prices triggered by geopolitical tensions from the Ukraine conflict.
Current Market Challenges
Despite a drop in oil prices to below $60 a barrel, North Sea producers remain burdened by the EPL due to sustained natural gas prices exceeding the set threshold. Nick Davis, an energy partner at Haynes Boone, voiced concern over the stability of the UK’s tax regime, remarking, “I have clients who feel more secure in the tax regime of sub-Saharan Africa than they do in the UK.”
Future Outlook for M&A Activity
Merger activities are predicted to rise as companies strive for resilience amid shifting market dynamics. Many firms believe the current administration’s exploration license bans place them at a pivotal moment for strategic growth and consolidation. With the UK’s Office for Budget Responsibility anticipating a sharp decline in North Sea tax revenues—a forecasted drop from £5 billion to £2.3 billion by the year 2029/30—companies are exploring all avenues to mitigate risks.
Gail Anderson, research director at Wood Mackenzie, expressed optimism about the likelihood of additional mergers and acquisitions in the near term, stating, “I think it’s probably more likely than not that we will see more deals before the year is out.”
