Nexen platforms in the North Sea
A surprise new oil windfall tax in Britain has damaged the prospects for several Canadian producers and raised concerns over possible copycat measures by other governments.
In a populist move meant to shift the pain of triple-digit crude prices, the British government said Wednesday it would levy a new tax on oil companies' profits worth £2-billion ($3.2-billion). In exchange, it pledged to lower the country's gas tax by a penny a litre. George Osborne, the finance minister, said the change would "put fuel into the tank of the British economy" at a time of continued economic struggle.
But that fuel is being drawn directly from the bottom line of oil companies operating in the country's prolific North Sea, which will see their tax on production grow from 50 per cent to 62. For some, the impact is dramatic. Calgary-based Nexen Inc., which draws roughly half of its total production and nearly three-quarters of cash flow from the region, saw its stock tumble nearly 8 per cent.
And the change is sparking new worries that other jurisdictions will follow suit, as high oil prices exacerbate economic woes in many parts of the world. Crude profits have become a potentially appealing source of new revenue for political leaders.
The British example, however, shows how broadly-felt such actions can be.
Shares in other Canadian companies with North Sea interests also fell, although none as severely, since Nexen is uniquely dependent on British oil production. Suncor Energy Inc. , Talisman Energy Inc. and Canadian Natural Resources Ltd. draw 10, 18 and 5 per cent of their output, respectively, from the area. Each saw their shares down Wednesday as analysts conducted worst-case scenarios on how severely their market valuation could be hurt.
Calculations by Genuity Capital Markets show that Nexen shares could fall by up to $3, or 10 per cent. Others could see smaller decreases, amounting to 3 per cent for Talisman, 1.5 per cent for Suncor and 1 per cent for CNRL.
The British move, which comes as European-priced Brent crude holds at around $115 (U.S.) a barrel, has also stirred new concern about copycat measures around the world, as political leaders seek to dip into the high prices.
"We could definitely see it in other regions," Kam Sandhar, an analyst with Calgary's Peters & Co.
"We saw it in Alberta" - which instituted royalty hikes amid strong pricing in 2008 - "and I don't think it's any different in any other country."
Although the tax on oil profits was raised by 10 percentage points in 2005, Britain has more recently resisted calls for a windfall tax. In 2008, when crude prices hit nearly $150 (U.S.) a barrel, some labour unions and left-leaning political leaders demanded a hike in oil taxes that could be used to fund new wind farms.
Now, however, companies with British assets have been blindsided by the unexpected tax hike.
The pain is particularly acute given that many had seen the North Sea as especially promising, since prices there have been driven higher by turmoil in North Africa and the Middle East. As a result, the price of British Brent crude has been $10 to $15 a barrel stronger than the comparable West Texas intermediate in North America.
Nexen, for example, planned to spend $750-million in the North Sea in 2011, substantially more than any other part of its portfolio and up from its 2010 spending. The North Sea has been an especially promising exploration area for the company, which since 2004 has more than doubled reserves to 255 million barrels of oil equivalent.
The tax change is raising new questions over its plans to develop Golden Eagle, a major new North Sea discovery that Nexen intends to sanction this year.
Analysts, however, said that even with higher taxes, projects like Golden Eagle remain immensely profitable, able to break even with crude prices at $60. That's up from the low $50s before the higher tax rates, but even at the higher rate, "there's still very robust economics in the current price environment," said Peters & Co.'s Mr. Sandhar.
Other companies may be more eager to divert spending elsewhere, especially since the North Sea is generally considered a mature basin with dwindling prospects for major new finds.
"Talisman already did that - they have built up other plays outside of the North Sea. And Suncor has sold some of their U.K. assets off," said Genuity Capital analyst Phil Skolnick.
But, he added, even if companies pull back on British investment, it's unlikely they will immediately speed up projects elsewhere, such as in Canada's oil sands.
"The North Sea is a lot easier to turn on and turn off," he said. "Oil sands is not."
Nathan VanderKlippe