Shielding the North Sea

The UK’s policy of managing one of our most critical resources — the hydrocarbons produced by the North Sea – is in shambles, Donald Trump was right to point out during his one-and-a-quarter man show with Keir Starmer on Monday.

The future of Britain’s North Sea resources has never been so precarious. The North Sea Transition Authority (NSTA) forecasts production will fall by one third from the one million barrels of oil and gas equivalent (boe) produced in 2024 over the next five years. At those levels, production will be just 660,000 boe in 2030 — down more than one million boe from the level produced as recently as 2018. 

The cost to Britain is significant — the Office of Budgetary Responsibility (OBR) forecasts the Treasury’s receipts from hydrocarbons to fall 63 per cent, from £4.5 billion to £2.0 billion, over the next five years.

That is despite the fact that the rate of tax on hydrocarbon production profits in the UK can be as high as 78 per cent, one of the highest rates in the world. Trump specifically lambasted these taxes — which were raised by both the last Conservative government as well as Starmer’s Labour – on social media, claiming they were disincentivizing production. 

Trump’s call for lower taxes, however, is unlikely to be a panacea. The North Sea’s oil is naturally declining, with aging fields and little in the way of new discoveries. Starmer’s government is in need of more cash, not less, given the jitters in bond markets, and the UK’s long-term borrowing costs have already risen substantially beyond their high-water mark at the nadir of Liz Truss’s brief premiership. Even proposing deceasing North Sea taxation could cause another tremor.

Both Labour and the Conservatives have proven incompetent at doing so. Starmer had a manifesto commitment of not approving any new licenses for oil and gas, and has retained this with one exception. He has signalled that he will approve the Jackdaw and Rosebank’s fields, the largest remaining to be tapped. The investment plans — led by Britain’s own Shell and Norway’s Equinor — were previously approved by Boris Johnson and Rishi Sunak, but a judge ruled in January ruled that they had bungled the process, requiring that it be redone.

Under pressure from environmental groups on the left, Starmer has been wary about drawing too much attention to the issue, even as he acknowledged that oil and gas would have to remain a key part of the UK’s energy mix going forward in his meeting with Trump.

But the sorry mismanagement continues. Starmer’s timidity means that he has not sought to extract any concessions from Shell or Equinor in exchange for backing Rosebank and Jackdaw, or sought to gain any political points from pointing out the Conservatives’ embarrassment of errors in reviewing the applications.

Yet Starmer does in fact have the tools to do so, thanks to new regulatory powers that the Tories enacted in the 2023 Energy Act.

The bill amended the process for approving petroleum licenses for the North Sea, requiring transactions in which the operator changes hands to receive government approval before they go through. Previously, the NSTA could only review them after the fact.

The NSTA’s new powers presently face their first test, Shell’s planned sale of 11 North Sea fields by Shell to Viaro Energy. If completed, the transaction would see Viaro, and its subsidiary RockRose, become one of the largest operators in the North Sea.

But with the NSTA’s expanded powers, there is real reason to look at the firm’s investments more critically. Britain must take a more assertive role in managing investment into its oil sector. The government has already launched an investigation into the July bankruptcy declared by the Prax Group just four years after it acquired the Lindsey refinery from oil major Total. The firm reportedly owes HMRC £250 million and the government is facing a bill potentially four times as high if no buyer can be found.

Viaro purchased RockRose in 2020. RockRose was theretofore a British-run independent player. But the pandemic and a major spat between Russia and Saudi Arabia drove oil prices to record lows, straining RockRose’s balance sheet. It was effectively a fire sale, with a sticker price of £248 million.

When Viaro’s initial takeover of RockRose was being reviewed, Mazzagatti claimed he had received a £250 million loan from Emirati royal Sheikh Zayed bin Mohammed al Nahyan to demonstrate the firm’s finances were in order. In January Sheikh Zayed, a member of Abu Dhabi’s royal family, denied that he had ever even met Mazzagatti, let alone offered such a loan. The claims have become the latest part of a messy feud, which saw Emirati state oil firm ADNOC sue Viaro over a failed joint venture — with the company presently seeking to appeal a ruling in Viaro’s favour.

Mazzagatti’s investments have attracted additional controversies. His former employer, Alliance Petrochemical Investment, claims he embezzled funds to help fund his burgeoning North Sea empire. The spat related to funds connected with an earlier investment they made, for a controlling stake in an Iranian refinery. That refinery was subsequently sanctioned by the US Treasury for its alleged role in evading sanctions and helping to fund the Iranian regime. According to Bloomberg, Mazzagatti later divested his final shares to a friend, for no consideration.

Starmer could not only block Viaro’s further expansion, but he could even condition approval of Shell’s new Jackdaw and Rosebank venture on maintaining production at the fields. The fate of the Lindsey Refinery provides a stark warning of what happens when larger players with stronger balance sheets are allowed to sell off such vital assets to smaller players.

Starmer … should incentivise more North Sea exploration and ensure Britain’s existing resources remain in allied hands

The last three years have underlined the importance of energy security. Russia weaponised its gas supplies intensely alongside its invasion of Ukraine in 2022, leaving Britain to rely on gas imports from as far away as Australia. Britain rightfully banned Russian oil and gas imports in response to the Kremlin’s aggression, but risks to global energy security have only continued to grow with conflicts breaking out in the Middle East on a seemingly weekly basis.

UK dependency on foreign oil rose to 40 per cent last year, according to industry group Offshore Energy UK, which warned it could fall to 80 per cent in the next five years. But it has not sounded all doom and gloom, the industry’s own forecasts estimate that the North Sea could still produce 7.5 billion boe, double what the government expects, and half of Britain’s predicted needs over the next 25 years. Starmer may not be willing or able to lower taxes, but he should incentivise more North Sea exploration and ensure Britain’s existing resources remain in allied hands.

Viaro and Francesco Mazzagatti deny all of the allegations against them.