The following opinion piece is written by Brian Gilvary, Chairman of INEOS Energy, as INEOS announced the acquisition of the Gulf of Mexico business held by CNOOC Energy Holdings U.S.A. Inc.
INEOS Energy has just completed a deal in the USA which we would never have looked at in the UK - buying two offshore oil-producing platforms in the Gulf of Mexico.
This builds on our acquisition last year of 2,300 onshore wells in South Texas and an LNG export contract from the Gulf of Mexico, bringing our total investments in the US to over $3bn.
Again, none of these earlier deals would have been economically attractive in the UK. Its current tax regime, its over-regulation and the negative political attitude towards oil and gas are barriers that would deter any investor at the moment.
The US, by contrast, has long been an attractive market for energy investment – with a stable fiscal regime, supported by governments that understand the importance of affordable energy security.
Crucially, the US taxes the oil and gas industry at 21pc - the same corporate rate as other industries, with a total effective tax take of around 40%.
That compares to the 78pc rate now applied to oil and gas profits in the UK. Under the last two administrations, US oil and gas production has grown to new highs, providing the country with one of the lowest costs of energy in the world, supported by low natural gas prices.
This gives the USA a manufacturing base that can compete with China - something the UK, with energy costs roughly four times higher, can only dream of.
For the USA this is a good place to start an energy transition, with natural gas as a transition fuel to replace coal, and a healthy economy that can support investments in carbon capture and renewables.
In contrast, China, while rapidly growing renewable sources of ‘clean’ energy, continues to invest heavily in new coal-fired power generation to ensure security of supply, with over 1,150 operational plants.
According to the IEA, global coal output grew to a record 8.9bnn tonnes in 2023, driven primarily by Asia demand. The irony of using coal, which makes up 53pc of China’s energy generation, to fuel one of the fastest growing EV markets in the world should not be lost on policy makers as they drive their economies to net zero emissions.
The rapidly-growing Asian economies are focused on low-cost energy to fuel jobs and growth.
The European approach is to focus on ‘Net Zero’, however, there is a limit to the pace at which this can be achieved, without it becoming uneconomic or inflationary. And we have hit that limit.
Germany’s recent crises show how badly energy policy can go wrong, by driving a multi decadal green agenda without understanding security of supply and baseload energy.
Having shut down most of its nuclear supply after Fukushima in 2011, Germany switched to reliance on coal imports to supplement gas from Russia. But now the war in Ukraine has forced Germany to ramp up coal and expensive LNG imports, with a major impact on CO2 emissions.
A recent report on Germany by the Baker Institute, a US think-tank, gives a damning summary of its current state, ‘As energy is central to a country’s prosperity, the implications of a misguided energy policy have been far-reaching, with Germany now being one of the world’s worst economic performers among major developed economies.’
In the UK the creation of ‘Great British Energy’ is a bold step by the new government, which has the potential to provide long term energy security, affordability and stability for the country.
However, like the USA and China, it will need to embrace all available energy sources - including natural gas from its own resources, meaning the North Sea.
Sir Jim Ratcliffe, Ineos Group Chairman and chief executive, is very clear on this too. He says: “The key point is that a balanced energy strategy needs to run at the same pace as the energy transition. This helps industry remain competitive, avoids increasing energy costs and provides a stable flow of tax for the exchequer.”
But in the UK right now the opposite is happening - investment in UK North Sea oil and gas is in terminal decline. The industry has been severely undermined over decades as successive governments change tax rules - creating an unstable fiscal regime that raises lending rates and so generates ever-greater risk and uncertainty for investors like us.
The most recent imposition of windfall taxes (the energy profits levy), first to 75pc and then to 78pc, was driven by a short-term post-covid surge in oil prices to $120 per barrel, generating large but equally short-term increase in profits for the global energy giants.
That short-term surge has vanished and prices have dropped by nearly half, yet the windfall gains have remained. And that is driving investors out of UK waters.
Now we are seeing the UK tax take in rapid decline as both prices and volumes decrease.
Since the windfall tax was introduced the total tax take from the North Sea has declined by a third by £2.9bn and is projected by the Office for Budget Responsibility to decline by a further £1.6bn in 2024/25.
As previous governments should have learned, companies react to the signals they get. Excessive taxes mean less investment and inevitably ends in lower overall tax revenues over the medium to longer term.
Population growth, economic growth and energy demand are inextricably linked. The world’s population is now over 8.1bn people and growing at the size of Germany every year.
Separately, data centres are proliferating around the world as AI becomes a reality - and energy is at the centre of that growth.
For the UK, without reliable, affordable baseload energy, the current stance on not issuing new offshore licences is like tying your legs together at the start of a race.
The need for reliable sources of energy is something that the world’s two biggest economies, China and the US, both understand. That understanding drives both countries' energy policies and growth.
To that end, INEOS Energy will be importing LNG produced in America into the UK and Europe for use in industry and wider energy supplies. All of the taxes associated with producing that gas will be paid in the United States.
The UK is, and will remain, very reliant on gas for years to come. The nation has 25m homes whose heating and hot water rely on gas-fired boilers. It also has 30-odd gas fired power stations that supply 30-40pc of its electricity.
British politicians have placed their faith in global markets, declaring that oil and gas trade on international markets and so imports will always be available from somewhere.
However, as the treasury is now discovering, the taxes from those gas molecules will no longer be arriving in the Exchequer - and an increasing proportion of the billions of pounds paid out by UK consumers in annual energy bills will be flowing out of the country to support rival economies.
ENDS.