Varcoe: ‘Windfall tax’ in Europe hits home for Calgary O&G producer

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If those who back a windfall tax on the oil spill want a glimpse of what it creates — aside from more revenue for governments — Calgary-based Vermilion Energy offers a glimpse: uncertainty.

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With a global energy crisis unfolding today, the repercussions have reached Vermilion, a mid-sized petroleum producer active in Canada, the United States, Australia and several European countries.

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Vermilion on Thursday reported third-quarter net earnings of $271 million in a period of high energy prices, versus a loss of $147 million a year earlier.

The company also announced that it could pay an estimated $250 million to $350 million for 2022 as a result of the new temporary “windfall tax” imposed by European Union (EU) countries on profits by oil and gas producers.

In a news release, Vermilion said he did not believe a windfall tax was an appropriate solution, as it would not spur new domestic supply, nor reduce consumption, and could ultimately lead to higher natural gas prices in Europe.

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Uncertainty surrounding the new tax has led the Canadian company to pause its share buyback program in the fourth quarter so that it can fully assess the effect of the levy on its debt targets.

“It was an interesting time with politics in Europe. It’s during this energy crisis, it’s discussions of price caps to windfall taxes on oil and gas companies,” Vermilion’s president, Dion Hatcher, said at a conference.

“Our question, as we think about the policies in Europe, is really we want stable and predictable policies.”

With energy prices soaring after Russia’s invasion of Ukraine in February, the EU approved a temporary windfall tax in September aimed at fossil fuel companies in the region.

Some details have yet to be ironed out by individual countries and it is unclear whether the tax will apply retroactively to 2022, prospectively to 2023, or for both years, according to Vermilion.

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If it hits both years, the potential cumulative cost is estimated at $650 million to $750 million, based on the current commodity price outlook.

Vermilion’s shares fell nearly eight percent to $27.25 on the Toronto Stock Exchange on Thursday, while the overall S&P/TSX Capped Energy Index climbed 2.5 percent.

“It’s all about the EU windfall tax,” said analyst Phil Skolnick of Eight Capital. “It’s just a knee-jerk reaction that they say they’re stopping the (buybacks) and it caught some people off guard.”

Vermilion has a diverse base of international operations, including in France – where it is the No. 1 domestic oil producer – along with Ireland, Germany and the Netherlands.

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

Continental gas prices hit highs of more than $120 per million British thermal units (mmBTU) at Europe’s benchmark futures market in late August. Vermilion estimates that the realized price for all its gas production this year will average $22 per mmBTU, compared to $5 for gas in Alberta.

Calls for a windfall tax have gained steam in recent months as gasoline prices and energy bills for consumers soared, while producers around the world reported record profits.

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In the run-up to the US mid-term elections, President Joe Biden warned last week of a similar windfall tax on the US sector, while saying it was time for oil companies to stop the war profiteering.

In Canada, the federal government opted not to introduce a windfall tax, but announced plans to introduce a new levy on public companies buying back their own shares, starting in 2024.

“This is a time of unprecedented profits in the oil and gas sector. Right now, that money is almost entirely returned to shareholders,” said Keith Stewart of Greenpeace Canada, which calls for a windfall tax.

The levy on corporate share buybacks, which has grown in popularity across the sector in recent years, amounts to another form of windfall tax on the sector, said Ben Brunnen, founder of Verum Consulting.

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Governments in Canada are already collecting more royalties and taxes tied to higher oil and gas prices, he noted.

If policymakers want to see more benefits, they should encourage industry growth rather than create new taxes, said Brunnen, former vice-president of fiscal and economic policy at the Canadian Association of Petroleum Producers.

“Investors have been patient with the oil and gas industry for the past decade or so and have struggled to get good returns. And when those returns finally come, they are penalized,” he said.

“This is short-sighted economic policy.”

Vermilion expects to introduce its 2023 capital budget in January, which is similar to this year’s $550 million program. Hatcher said there is potential for more money to be allocated to increase European gas production.

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

Hatcher would also like to see government policies recognize the industry’s contribution to energy security, displacing the need to import supplies.

“Going back to ’97, we put significant capital at risk to provide secure energy in Europe. . . without the guarantees of return,” he said.

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

Chris Varcoe is a Calgary Herald columnist.

cvarcoe@postmedia.com