Ahead of the two-year anniversary of the implementation of the United Kingdom’s windfall tax, Energy in Depth examines its continued negative impact on the North Sea oil and gas sector.
As EID has previously discussed, the windfall tax (formally known as the Energy Profits Levy) was introduced in May 2022 and increased from its initial 25 percent to 35 percent in November 2022. In March 2024, the tax was extended by another year to end in 2029. With the inclusion of the EPL, oil and gas profits in the United Kingdom are now taxed at 75 percent.
The tax has hit the industry hard, leading to several oil and natural gas producers vocally announcing they will seek opportunities outside of the UK. Harbour Energy, the North Sea’s biggest operator, has revealed that it expects to pay another £800 million (over $1.18 billion) in tax in 2024. While 94 percent of the company’s production is currently in the North Sea, the firm is looking at international diversification.
Serica Energy, another North Sea producer, has also stated its intentions to look elsewhere. The company’s Chair, David Latin, said:
“We’re more interested in doing something that diversifies us outside of the UK right now, because that’s probably our biggest risk. Any ‘windfall’ due to high commodity prices has long gone and the high tax situation is ill-suited to a mature oil and gas basin such as the UK North Sea.”
Other North firms have echoed similar sentiment with the executive chairman of Ithaca Energy, another large North Sea producer, saying:
“Unfortunately, the UK government has turned the UK North Sea into a very harsh business environment.”
Meanwhile, energy consultancy Wood Mackenzie has said that buyers show “little appetite” to expand in or enter the UK North Sea and that billions of potential investments could be lost due to uncertainty about tax policy.
The impact of the tax is being felt throughout the industry. According to trade body Offshore Energies UK, oil and gas production in the UK was just over 1.2mn barrels a day equivalent last year, its lowest since 1977. The trade body estimates that a further loss of investment in the sector could cost 40,000 jobs by the end of 2030.
Investment bank Stifel recently released analysis of an “accelerated decline scenario” which could lead £20bn ($25.4 bn) lower capital investment in the North Sea by 2035 and £30bn ($38bn) reduction in spending out to 2050. Furthermore, the report estimates the sector could lose around 100,000 jobs by 2029.
It was recently announced that the UK will be holding a general election at the beginning of July. However, with both the Conservative and Labour parties focused on keeping the tax (and the Labour Party proposing to increase it), it seems likely that the industry will continue to feel this heavy burden.
Bottom line: The continued tax burden that the United Kingdom is placing on its North Sea oil and gas sector threatens continued investment and job security – ultimately causing harm to the communities that are supported by the industry.
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