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North Sea operator Serica Energy outlines plan to offset new windfall tax

Serica Energy CEO Mitch Flegg.
Serica Energy CEO Mitch Flegg.

One of the UK’s biggest gas producers has said it will be able to offset a “large element” of the new windfall tax on North Sea energy firms.

Serica Energy said today it planned to spend around £60 million on two projects in 2022, which will help it save on its tax bill.

The UK Government said last month it would add an extra 25% tax to what is already paid by oil and gas producers in the North Sea.

Unsurprisingly, this hit the share price of some companies, including London-based Serica, which produces around 5% of the UK’s gas annually.

The value of the firm’s shares dropped by more than one-fifth in the days following the news.

But ministers also left a door open, allowing companies like Serica to reduce their tax bill by 91.25p for every £1 they invest in the UK.

Serica expects its £60m investment “to be eligible towards this tax saving”.

Shares in the company lifted nearly 5% to £2.64 following its trading update today.

The “temporary measures” announced by the government on May 26 increased the current headline rate of tax on oil and gas firms from 40% to 65%.

Reports last week citing sources in the City of London suggested Serica may face an extra bill of £51m this year and £79m in 2023.

But the new levy applies only to profits on or after May 26, and Serica stressed earnings before then were “unaffected”.

Fiscal instability is “unwelcome in an industry with long lead times for capital expenditure,” the company said in its latest update.

It added the investment incentives were designed to encourage companies like it to continue to reinvest their profits.

£60m plan unveiled

The company’s £60m investment programme includes a light well intervention campaign at the Bruce M1 well – aimed at adding reserves and prolonging production from several subsea wells – and the drilling of the North Eigg exploration well in Q3 2022.

Wholly operated by Serica, North Eigg will target more than 60 million barrels of oil equivalent (boe) of “P50” unrisked recoverable prospective resources, with results expected in early October.

Serica will also be “evaluating additional candidate projects” designed to increase productivity at the Bruce hub.

Chief executive Mitch Flegg said the group was “well-placed” to take advantage of the new investment incentives, while its cash position and balance sheet offered the “leverage and resources” to do so.

‘Financial strength’

Mr Flegg added: “Although Serica has financial strength, our industry operates within unusually long investment horizons against a backdrop of often highly volatile commodity markets and business cycles.

“We, therefore, encourage policymakers to consider the importance of fiscal stability in enabling government and industry to meet the mutually set objectives of sustaining investment in the UKCS (UK continental shelf) at a level capable of ensuring security of oil and gas supply in volatile markets and delivering energy transition targets.

“Serica will maintain its focus on delivering vital hydrocarbons to the UK and doing so in an environmentally sensitive manner, whilst continuing to build value for stakeholders.”

Net production for the company averaged above 28,000 boe per day in May.

Serica plans to hold its next annual general meeting on June 30.

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