Energy Update 26 March 2014
Welcome to this month's edition of Fieldfisher's Energy Update. In this issue we look at the recent UK Budget announcement of North Sea tax breaks for ultra-high pressure, high temperature fields (u-HPHT) fields and the curtailment of relief for certain renewables. We examine the impact of the crisis between Russia and Ukraine on the European gas markets. Recent estimates show that there may be more shale gas in the UK than previously thought. The European Council considers measures in relation to energy prices and costs in Europe. Finally, there is news that Scotland has approved the construction of what will be the world's third largest offshore wind farm in the outer Moray Firth.
We hope you find this to be of interest.
UK Budget: oil groups given tax break for North Sea fields & venture capital relief curtailed for certain renewables
In the UK's annual budget speech on 19 March 2014, the Chancellor announced that the government will consult on the introduction of a new North Sea tax allowance. Its aim would be to encourage billions of pounds of extra investment in the UK’s maturing oil & gas industry. The proposed incentive relates to the development of ultra-high pressure, high temperature fields (u-HPHT) that typically demand higher spending to exploit because of the technical difficulties of bringing hydrocarbons to shore.
The Ultra-High Pressure, High-Temperature Cluster Allowance would exempt a portion of a company's profits from the Supplementary Charge (which is currently 32%). The amount of profit exempt will equal at least 62.5% of a company's qualifying capital on u-HPHT projects. It is expected HM Treasury will launch a consultation in relation to the Ultra-High Pressure, High-Temperature Cluster Allowance over the summer of 2014, and that the allowance will be included in Finance Bill 2015. This allowance will be similar in structure to the onshore allowance announced in the Autumn Statement (and reconfirmed in this year's Budget) that we reported previously here.
Maersk Oil and BG Group have announced that the new u-HPHT allowance will help enable the development of two new projects, which will lead to investment of £6 billion across new fields. They estimate that these two big projects will create more than 700 new jobs and close to 8,000 more jobs will be supported along the supply chain. These jobs will be spread across the country, with about half likely to be in Scotland.
The Chancellor also said the government would take forward all the recommendations of Sir Ian Wood's recent report and that the government would review the tax regime for the entire oil & gas sector to make sure it is fit for purpose having regard to the maturing nature of the asset.
Aside from his measures affecting the oil and gas industries, the Chancellor also announced that investment in companies benefiting from Renewables Obligation Certificates and/or the Renewable Heat Incentive scheme with effect from Royal Assent of Finance Bill 2014 will not be eligible for EIS (enterprise investment scheme) or SEIS (seed enterprise investment scheme) relief, or for VCT (venture capital trust) relief. The renewables sector, particularly solar and wind projects, has in recent times benefited from substantial venture capital investment and this change, which is understandable in terms of the policy of the reliefs (which are aimed at investing in risk opportunities, rather than those backed by government subsidies producing a reliable income stream), may have a marked effect on access to and the nature of funding in this area.
Click here for a link to the UK Budget Speech
The Russia and Ukraine Crisis: effect on European gas markets
Commentators have discussed what effect the recent political events in Ukraine and the Crimea may have on the gas markets.
The Oxford Institute for Energy Studies notes in a recent paper that Russia supplies about 30% of Europe’s gas and more than half of these volumes are still transported via Ukraine. It is understood from a speech made by Russia’s prime minister Dmitry Medvedev on 21 March 2014 that Ukraine may owe Russia some $16 billion in unpaid debt. Of this sum, the Institute notes that Ukraine's Naftogaz was in arrears to Russia's Gazprom by a sum of about $2 billion, and it is this debt which the Institute concludes is the most likely source of supply disruption (assuming a military conflict is unlikely) because such a build-up of debt has in the past led to Gazprom cutting off deliveries to Ukrainian customers and this has seen the diversion of transit gas bound for Europe to consumption in Ukraine.
If these gas deliveries are halted (as they were in January 2009) the Institute says that the impact would be less serious because the Nord Stream pipeline, which transports Russian gas to Germany under the Baltic Sea without crossing Ukraine or Belarus, has been completed, other interconnections have improved the situation in eastern Europe and the South Stream pipeline, a project backed by Gazprom, Eni of Italy, EDF of France and BASF of Germany, is also being planned. It was recently announced that South Stream had signed a contract worth about €2 billion with Saipem of Italy to build the offshore stretch of the route under the Black Sea from Russia to Bulgaria. These measures may enable the transit of Russian gas through Ukraine to be suspended completely by 2020.
For more information click here
Shale gas estimates in the UK may be much more than previously thought
Cuadrilla is a privately-owned unconventional gas exploration company based in Staffordshire, UK. Estimates of its shale gas resource in the North West of England and, by extension, the total shale gas estimates in the region may have to be increased significantly upwards after recent remarks by one of its team. A geologist with the company said there may be 330 trillion cubic feet (tcf) of gas in place in its licence area, 50% more than previous estimates.
Speaking at the two-day Shale UK conference in London in March 2014, Huw Clarke, a geologist with the company said that their original estimate was 200 tcf but that was based on data from just one well, which had been ratified by the British Geological Survey (BGS). Since then, two extra wells had been drilled and he believed there was closer to 330 tcf in place just within Cuadrilla's licence area alone.
For more information click here
European Council energy ministers debate rising energy prices and costs
On 4 March 2014 energy ministers meeting in the European Council held a policy debate on the European Commission's recent communication on energy prices and costs in Europe. Their discussions focused on three areas:
• how to more closely align wholesale and retail prices;
• the high variation across member states in the different elements that make up prices;
• actions proposed by the Commission to reduce energy costs.
Discussions highlighted the need to complete the internal energy market by 2014 and to develop new energy infrastructure to ensure secure uninterrupted supply. Ministers underlined the need to create a level-playing field on the world energy market and to lessen the gap in energy prices with competitors from outside the EU.
Ministers also held a policy debate on the Commission's '2030 framework' for climate and energy policy, which includes a reduction target of 40% below 1990 levels for greenhouse gas emissions and a renewable energy target of at least 27% of energy consumption.
For more information click here
World's third largest offshore wind farm approved by Scottish Government
On 19 March 2014, Scottish Energy Minister, Fergus Ewing, announced the formal consent to two adjacent offshore wind farm applications in the outer Moray Firth - Moray Offshore Renewables Limited (MORL) and the Beatrice Offshore Windfarm Limited (BOWL). The developments, sited off the Caithness coast, will be capable of generating up to 1,866 MW of electricity, enough to power over one million homes.
When constructed, MORL and BOWL will together be the world’s third largest offshore wind farm, with up to 326 wind turbines after the planned South Korea Electric Power scheme off the south-west coast of the Korean peninsula and the Blekinge project in the Baltic Sea off Sweden.
These Moray Firth projects are expected to generate gross value worth up to £2.5bn over their lifetime and create up to 4,600 jobs during peak construction and up to 580 once in operation the Scottish Government said. The consents are subject to strict conditions, which include the need to monitor for impact on wildlife and comply with a number of plans such as the Environmental Management Plan and the Operation and Maintenance Programme to ensure effective mitigation takes place.
For the announcement click here.