North Sea Oil Deals Allow Companies to Offset Billions in Tax Liabilities

The oil and gas industry in the North Sea has witnessed a series of strategic mergers, allowing companies to offset billions in taxes owed by integrating profitable assets with those suffering significant tax losses. Over the past six months, three key deals have taken place, reshaping the landscape for companies operating in the region.

Tax Losses and Mergers: A Strategic Move

In the last six months, companies suffering from substantial tax losses have merged with more profitable counterparts in the North Sea. Ithaca, which reported a $4.5 billion tax loss at the end of 2023, merged its assets with Italy’s Eni in October. Equinor, facing a $7.6 billion tax loss in the region, has merged its portfolio with Shell UK, while Neo, which posted a $3.7 billion tax loss at the end of 2022, recently announced its merger with Repsol’s North Sea business.

These deals are primarily driven by strategic reasons, such as building larger and more flexible companies in an aging oil basin. However, tax relief from these mergers has proven to be a major attractive factor for many involved parties.

How Tax Relief Works

A senior tax advisor at one of the Big Four accounting firms in the North Sea explained how these mergers allow companies to offset tax losses: “If you are Group A with significant tax losses and some oil fields nearing the end of their lifecycle, while Group B has more productive assets, by moving assets and adhering to various anti-avoidance rules, you can offset Group A’s losses against Group B’s profits.”

These mechanisms have been tried and tested, with many in the industry understanding how they work to optimize tax obligations.

High Tax Rates in the North Sea

The North Sea oil industry has repeatedly complained about high and volatile tax rates. Currently, companies are facing a headline tax rate of 78%, which includes corporate tax, an additional tax, and the Energy Profit Levy (EPL), a surprise tax imposed after energy prices surged at the start of the Ukraine conflict.

Although oil prices have fallen to their lowest levels in four years—below $60 per barrel—North Sea producers are still subject to the EPL due to high gas prices, which remain well above the £0.59 per barrel threshold for the current tax year.

The Attraction of Lower Tax Jurisdictions

Nick Davis, an energy partner at Haynes Boone law firm, noted that some clients are feeling more secure in tax regimes in sub-Saharan Africa than in the UK. “These deals create scale that could protect against that, but I don’t think you can feel comfortable with the tax regime here,” he said.

He added that mergers may increase as companies believe they are at the bottom of the market—especially as the current government has banned new exploration licenses—and the outlook for production in the North Sea is only expected to improve.

Declining Tax Revenue from the North Sea

Revenue from the North Sea is on the decline. Last month, the UK’s Office for Budget Responsibility (OBR) forecasted a 22% drop in tax revenue for 2024/25, compared to £5 billion the previous year, due to falling oil prices. By 2029/30, the OBR anticipates a further decline, with tax revenue expected to fall to £2.3 billion as North Sea resources dwindle.

Increased M&A Activity Expected

Gail Anderson, research director at energy consultancy Wood Mackenzie, predicted further mergers and acquisitions in the North Sea in the coming months. “The industry still faces significant risks, and companies are trying to figure out how to mitigate those risks,” she said. “I think the likelihood of more deals is higher before the end of this year.”

Conclusion

While tax relief is a driving force behind these recent mergers in the North Sea, they also signal a shift in the industry toward larger, more resilient companies. With revenue from the region on the decline, it remains to be seen whether these strategic moves can help companies navigate the uncertain future of North Sea oil production.

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