The straightforward piece of news from the energy sector on Thursday was that Ben van Beurden departed Shell at the end of last year with his pockets full. The chief executive’s pay packet for 2022 rose 53% to a whisker under £10m, the most he’s scooped since his bumper £17.8m in 2018.
As then, the biggest boost to his winnings came via his long-term incentive scheme (LTIP), which in large part is a function of the share price, which itself is heavily influenced by the wholesale prices of oil and gas. Energy prices were already rising thanks to the industry’s underproduction during the pandemic, and then surged after Russia’s invasion of Ukraine. Result: already well-paid executives got even more than they could reasonably have expected.
It is not a fresh revelation that share-based schemes often produce arbitrary and undeserved outcomes (as BP will also demonstrate when its annual report lands on Friday) but the LTIP system is mad. One of van Beurden’s own predecessors, Jeroen van der Veer, put it best when – after he’d left, naturally – he said: “If I had been paid 50% more, I would not have done it [the job] better. If I had been paid 50% less then I would not have done it worse.” That was 14 years ago. Do not expect reform soon.
The other oily story is more complicated. Harbour Energy, the UK’s largest producer in the North Sea, is screaming blue murder over the windfall tax. “It has all but wiped out our profit for the year,” said its chief executive, Linda Cook. “This has driven us to reduce our UK investment and staffing levels.”
The “wipe out” claim is not as it seems because Harbour is taking a $1.5bn charge to cover expected future payments under the windfall tax, or energy profits levy, out to 2028. It will have to pay the cash but hasn’t done so yet. Them’s the accounting rules but they give a misleading impression of Harbour’s results for 2022. Free cashflow still trebled to $2.1bn and the company is splashing out $200m on a share buyback on top of an annual dividend of the same size. It’s not broke.
Yet the fall in UK investment – and jobs – is definitely real. Harbour is redirecting its investment budget to Indonesia, Vietnam and the Gulf of Mexico and there is no reason to doubt its assertion that the windfall tax is the direct reason. It is paying an effective tax rate of 75% in the UK and the arithmetic is simply more attractive elsewhere.
Unlike global titans like Shell, Harbour has to hedge the price of most of its output in advance. Its realised oil price for 2022, for example, was $78 a barrel, which was well below the market price. It was also unlucky in the timing of when its Tolmount gas project in the North Sea came on stream. Last April was just in time to catch the windfall levy but too late to recoup meaningful sums for Tolmount under the “investment allowance” provisions that Rishi Sunak and Jeremy Hunt inserted to try to incentivise future North Sea production.
None of which is to say that windfall tax was the wrong approach by the Treasury. There was an overwhelming case in favour because unearned windfall profits were (and still are) real. But the rigid design of the levy seems to have benefited oil majors with big balance sheets that can shoulder long-term risks and disadvantaged independents that tend to duck and weave and play a shorter-term game. Since the latter have been the swing investors in the North Sea in recent years, there is a question mark over investment appetites. Many will cheer that outcome, of course. The point is that it is not the outcome intended by Sunak and Hunt.
Harbour’s bosses also tend to pay themselves nicely (Cook landed a £4.6m “golden hello” as part of her £6m pay package last year), so few will shed tears. But share prices since the windfall tax was extended last November tell the story. BP and Shell have continued to climb higher; Harbour has halved from its peak. That outcome also feels arbitrary.
