Varcoe: Europe’s ‘windfall tax’ hits Calgary O&G producer

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If proponents of a windfall tax on oil patches want a peek at what it will generate, aside from increased government revenue, Calgary-based Vermilion Energy offers a glimpse of the uncertainty. I will give it to you.

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As the global energy crisis unfolds today, reverberations are being felt for Vermillion, a medium-sized oil producer operating in Canada, the United States, Australia, and several European countries.

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On Thursday, Vermilion reported a third-quarter net profit of $271 million, up from a loss of $147 million in the same period last year, during a period of high energy prices.

The company also could pay an estimated $250 million to $350 million in 2022 from a new temporary “windfall tax” imposed on oil and gas producers by European Union (EU) countries. declared to have sex.

In a news release, Vermilion said: “We do not believe a windfall tax is an appropriate solution. “It could lead to an increase,” he said.

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Uncertainty surrounding the new tax prompted Canadian companies to suspend their share buyback program in the fourth quarter to allow them to fully assess the impact of the tax on their debt targets.

“European policy has been an interesting time. It’s in the midst of this energy crisis, with debates ranging from price caps to crash taxes on oil and gas companies,” Vermilion president Dion Hatcher said on a conference call. Told.

“When we think about European policy, what we want is that we really want stable and predictable policy.”

In September, the EU approved a temporary windfall tax for fossil fuel companies in the region as energy prices soared after Russia invaded Ukraine in February.

Vermilion says some details have yet to be worked out by countries and whether the tax will apply retroactively to 2022, retroactively to 2023, or both years. is unknown.

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Over the two years, the potential cumulative costs are estimated at $650 million to $750 million based on current commodity price projections.

Vermilion shares fell nearly 8% on Thursday, closing at $27.25 on the Toronto Stock Exchange, while the broader S&P/TSX Capped Energy Index rose 2.5%.

“It’s all about the EU windfall tax,” said Phil Skolnick, an analyst at Eight Capital. “It was just a knee-jerk reaction that they said they were suspending (buybacks) and caught some people off guard.”

Vermilion has a diverse international footprint that includes France, the country’s top oil producer, in addition to Ireland, Germany and the Netherlands.

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About a third of its 84,000 barrels of oil equivalent (boe) production per day came from outside North America, but as the company received premium prices for natural gas and oil in Europe, it contributed significant free cash flow. contributed.

Continental gas prices hit an all-time high of over $120 per million British Thermal Units (mmBTU) on the European benchmark futures market in late August. Vermilion estimates that the realized price for all gas production this year will average $22 per mmBTU, compared to $5 for gas in Alberta.

Calls for a windfall tax have increased in recent months as consumer gasoline and energy prices soar while producers around the world report record profits.

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Ahead of the US midterm elections, President Joe Biden last week warned of similar windfall taxes on US sectors, saying it was time for oil companies to “stop profiting from war.”

In Canada, the federal government has opted not to introduce a windfall tax, but has announced plans to introduce a new tax on publicly traded companies that buy back their own shares from 2024.

“This is a time of unprecedented profit in the oil and gas sector. Now that money has almost entirely returned to shareholders,” said Keith of Greenpeace Canada, who is seeking a windfall tax. Mr Stewart said.

Ben Brunnen, founder of Verum Consulting, says the tax on share buybacks in companies that have grown in popularity across the sector over the past year amounts to another form of windfall tax on the sector.

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The Canadian government is already collecting more royalties and taxes in connection with rising oil and gas prices, he noted.

Brunnen, former vice president for fiscal and economic policy at the Canadian Petroleum Producers Association, says if policy makers want to make more money, they should promote industry growth instead of creating new taxes. says Mr.

“Investors have been patient with the oil and gas industry for the past decade or so and have struggled to get good returns. ” he said.

“It’s a short-sighted economic policy.”

In Vermilion, the company will release its 2023 capital budget in January. This is similar to his $550 million program this year. Hatcher said more money could be allocated to increase gas production in Europe.

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“We have the ability and desire to drill more wells in Europe and, if our ongoing discussions with regulators are productive, we will consider allocating additional capital to the region in 2023. I will,” he said.

Hatcher also hopes government policy will recognize the industry’s contribution to energy security and eliminate the need to import supplies.

“Dating back to 1997, we have been risking meaningful capital to provide safe energy in Europe … without a guaranteed return,” he said.

“Our business is cyclical, there are times when prices are low and times when prices are high. And we need periods of high prices to offset the lows.”

Chris Varcoe is a columnist for the Calgary Herald.

cvarcoe@postmedia.com