A pledge to end oil and gas drilling in the UK’s North Sea should not make it any easier to turn on the taps. Ironically, this is likely to be the immediate outcome of Labor leader Sir Keir Starmer’s major energy policy speech on Monday.
The work plans to cease publication new oil and gas extraction licenses if he gains power. However, it will not cancel any permits issued before the next general election. Such a move would cause a legal headache for the newly elected government.
The clarity should give oil explorers the confidence to move forward with major new projects in advanced planning in the coming months. Including Rosebank oil 300 million barrels project west of the Shetland Islands, led by Norway’s Equinor. But in the long run, Labour’s proposal for a ban offers yet another reason oil and gas investors to do some research of their own – outside the UK.
Shares in British oil and gas producers such as Harbor Energy, Serica and Ithaca have fallen dramatically in the 13 months since the UK windfall tax was introduced. Valuations are well behind multi-year averages. Shares of Serica Energy are trading at half their already cheap five-year moving average of 5 times.
The surprise tax, first introduced in May 2022, raised the overall tax rate for UK manufacturers from 40 to 75 percent. Introduction of this month a complex floor for the draft hardly improved the mood. US Apache halts British North Sea drilling despite recent additions. Job losses could follow in Aberdeen. Harbour, Britain’s biggest oil and gas producer, was already looking abroad for investment opportunities.
It is true that more companies pulling out of the UK could create opportunity for those left behind. Asset valuation is cheap compared to oil and gas stocks. They can stay that way. Labor has previously talked about backdating the levy to the start of 2022, although there was no such mention on Monday.
Many UK-focused companies are counting on squeezing more barrels from existing fields. They often do this by drilling new wells near the property. This kind of brownfield projects could be affected by the new license ban.
Labour’s stance only increases uncertainty and the chance that oil company cash flows will leave the UK altogether, rather than into the cleaner energy sources the party would prefer.