Although news that the fall in the price of wholesale gas – and the eventual feed-through to lower household energy bills (some time in July) – is welcome, gas bills will remain much higher than before the War in Ukraine saw gas prices escalate early last year.
The trend was already edging upwards by late 2021 with the energy cap – at the time GBP1,138 a year – remaining much higher than this level even after prices fall in the summer with the average bill being in the region of GBP2,200 according to energy consultancy, Cornwall Insight.
The need to ensure supply and energy independence has been high on the agenda. In Britain this has sparked an interest in securing new supplies, with the government casting its eye towards the North Sea and recently opening a new round of bids – the 33rd so far – for offshore exploration licences in the region. The regulator, the North Sea Transition Authority (NSTA) has received 115 expressions of interest. The government believes that there are 898 North Sea blocks that could be exploited and that it could issue up to 100 new exploration licences.
However, with one hand the government doth giveth; and with the other the government doth take away, and the windfall tax imposed by Chancellor of the Exchequer, Jeremy Hunt in his post-Truss Autumn budget saw the government raise the windfall tax from 25% to 35% of profits. Under the existing rules oil and gas firms are subject to a corporation tax of 30%, and a supplementary tax of 10%. When this is added to the windfall tax, which will run from 1st January 2023 to end-March 2028 and raise around GBP14bn for the Exchequer, the overall tax oil and gas companies will pay on profits will be 75%. This 75% rate, say the energy companies, is a disincentive to invest.
The sector will still have an investment allowance on expenditure, but this will be reduced from 80% to 29%, but will remain at 80% for upstream decarbonisation; a tax loophole that has been criticised by environmentalists and political opponents to the government. The 80% allowance meant that oil and gas companies were getting a 91p tax saving for every GBP1 they invested, which meant the more energy companies invested, the less tax they paid. Although this allowance has been reduced, the 29% rate is still a strong inducement to remain in the market.
Despite the positive reception of the 33rd round of licence bidding, many oil and gas companies have been voting with their feet and walking away from the North Sea. In fact, many have been shrinking their headcount and investments at a time when both need to increase if the government is going to achieve UK energy independence.
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North Sea review
One company that has followed this trend has been FTSE 250-listed Harbour Energy [LON:HBR] that was already grumbling about a 25% windfall tax last year, and did not participate in the 33rd round. Harbour’s share price has been on the decline for a while, peaking at 647.2p in September 2021 and opening today at 322.99p and is highly leveraged so has been paying increasing amounts to the banks as interest rates have risen. It has threatened to cut hundreds of jobs in the North Sea – something it blames on the windfall tax. Incidentally, the company did report a twelvefold rise in profits to GBP1.3bn in August 2022, increasing pay-outs to shareholders by USD200m though an additional USD100m dividend and increase in its share buy-back scheme from USD200m to USD300m.
Total Energies [LON:TTE] and Shell [LON:SHEL] were two other majors who said that they were reviewing their plans for North Sea investment. The North Sea does have a viable future, with some 20 to 30 million barrels of oil yet untapped and the ability to fuel the UK for at least another 30 years.
However, the search for hydrocarbons has also intensified on land, and although fracking is publicly unpopular, and has been called unviable by some industry commentators, there is estimated to be between 90 and 330 billion cubic metres of natural gas that can be extracted from shale fracking in the UK up to 2050. This figure from the trade body, the United Kingdom Onshore Oil and Gas Association has been rounded on by opponents of fracking, and even UKOOG admits uncertainty around the numbers.
In the twilight of Liz Truss’ (albeit very short) administration, the government lifted its ban on onshore fracking. The problems that Cuadrilla Resources has had in bringing fracking to commercial production have been well-documented. Even Chris Cornelius, the geologist who founded Cuadrilla has said that fracking in the UK was unlikely to work on a commercial scale, as the geology doesn’t support fracking operations (he resigned from the company in 2014).
But that has not dissuaded iGas [LON:IGAS] the AIM-listed, Lincoln-headquartered onshore oil and gas exploration and production company from trying to find the goose that could lay the golden egg. The company currently produces around 2,000 barrels of oil equivalent per day from some 100 sites across the UK, with, the company says: “significant potential yet to be delivered from our assets”. The company has also branched out into renewable energy, having acquired geothermal energy producer, GT Energy in 2020.
The company’s shares have been over the longer term disappointing, however the Truss government’s announcement last year did give the share price a shot in the arm, with prices in September peaking at 106.5p. However, soon after, Truss’s successor, Rishi Sunak reimposed the UK-wide ban on fracking in October and the iGas share price fell back once again. Since the turn of the year there has been some life in the stock, with the company offering a year-to-date return of 37.2%, which, given it is production, complements the one year return of 56.7%. The company has had a volatile year, with shares ranging from 13p to 112p over a 52-week period.
The company is focused on onshore wells in the East Midlands and the Weald Basin in the south of England. The company, as well as looking at geothermal production, is also exploring opportunities to reform its existing gas production into hydrogen partnered with Bayotech, a leading technologies business in hydrogen generation systems.
Geothermal & hydrogen
Although the UK is moving to net zero by 2050, up until that point there will be a need for oil and gas, as recent global events have demonstrated. The two-pronged diversification strategy, focuses on building up geothermal through its subsidiary GT Energy, also places iGas in a good position for being part of the New Green Economy. Its work with Bayotech, to reform its gas to hydrogen though miniaturised Steam Methane Reformation is also positioning the company for the future.
In its last results for 1H22, iGas reported a strong operating cashflow of GBP16.4m before working capital and realised hedges, up from GBP6.4m in 1H21. The company declared revenues of GBP30.5m, up from GBP16.6m in 1H21 and had reduced its net debt to GBP9.7m from GBP12.2m at 31st December 2021, with significant headroom remaining under its RBL facility. Like most of the industry, profit was up, with a big swing to GBP6.2m profit from a GBP14.2m loss the year previously. However, net production fell to 1,865 barrels of oil equivalent per day from 2,005 a year ago. iGas blamed this on equipment failure caused by supply chain issues.
Industry attention remains focused on the North Sea – which is undoubtedly vast – and onshore is often given scant attention. Although the moratorium on fracking was a blow for onshore producers, the potential of hydrogen conversion and geothermal bodes well for iGas, making it a small stock to watch.