Stormy Waters in the North Sea: North Sea Oil and its Implications for China

Image Source: Greenpeace Unearthed

A lot has been going on in the North Sea in recent weeks. For one, the fairly new UK Labour government has made its intention to move away from oil and gas and prioritise the development of renewable power clear. One of the ways in which this policy will be implemented is through tax increases for oil and gas companies. This was bound to spark reactions from large corporations that are preparing for the transition, in light of the upcoming government Budget expected at the end of the next month. Considering this uncertainty, Neo Energy, a UK-based energy company put a halt on planned investments in the North Sea, despite previous talks with Repsol to merge UK North Sea operations. The company's decision was a reflection of the lack of clarity regarding the impact of potential windfall taxes and increased environmental regulation in the sector. The new government also warned that investment and capital allowances, which previously 'protected' production investments even in the event of increased taxes, will also be changing in due course. Such measures included massive tax reliefs, which are now being called into question. One report estimates that North Sea outputs could "halve by 2030 under Labour tax proposals."

I found these news very interesting just on their own. However, I recently also came across a story regarding Sinopec and Repsol S.A.. Sinopec is a Chinese state-owned oil and gas company based in Beijing. Repsol is a Spanish petrochemical company. The two launched a joint venture called Repsol Sinopec Resources UK in 2015 (when Repsol acquired Talisman Energy's share of the company). It operated in the North Sea, and was headquartered in the UK. However, the collaboration ended in "an eight-year dispute between Sinopec and Repsol S.A. over North Sea oil and gas assets," which was settled in April 2023. Following lengthy arbitration hearings and a court case heard in the Singapore International Commercial Court, the dispute was settled with Repsol's acquisition of Sinopec's 49% share of the joint venture.

The two news stories outlined above sparked some thoughts on my part. Firstly, I am wondering what the UK's anticipated fiscal changes would mean for China. China's presence in the North Sea is anchored by the China National Offshore Oil Corporation (CNOOC). This is one of China's largest oil companies, and it is classified as a state-owned enterprise. It operates in the North Sea, likely in pursuit of an attempt to diversify energy sources and reduce reliance on oil from the Middle East. In the past, China continued to invest in oil extraction in the North Sea, despite it being considered "undesirable for companies." Due to high state involvement in Chinese investments, state owned companies have a track record of prioritising 'patient capital.' This means that whilst other private companies emphasise shareholder value maximisation and often stray away from projects that would not guarantee short-term profits, their Chinese counterparts are frequently not restricted by such issues. They may prioritise long-term strategic interests, even if immediate financial gains are uncertain. Would this mean that whilst other companies are reluctant to invest in North Sea oil given the UK governments's anticipated policy, Chinese companies like CNOOC will remain in (and perhaps dominate) the market? Would this be particularly likely given the sale of their share of Repsol Sinopec Resources UK in 2023?

How would this fit in with China's national environmental protection regulations and targets? China has set ambitious targets to peak CO2 emissions by 2030 and achieve carbon neutrality by 2060. China's offshore wind power construction also saw significant progress in 2023, suggesting a focus on offshore renewable energy investments.

In light of these commitments, I am interested in seeing how Chinese companies will respond to the changes anticipated in the fiscal and regulatory frameworks of business operations in the North Sea. We will need to wait for the UK government's Budget announcement on October 30 to observe how Chinese companies respond.