Last month, the UK’s Labour government delivered its pre-election pledge to lift the windfall tax (formally known as the Energy Profits Levy) on oil and gas companies operating in the North Sea by three percent – with the total tax now reaching 78 percent.
As Energy in Depth discussed, the announcement sparked outcry from stakeholders across the industry who warned that the increase would lead companies to abandon projects and make staff redundant. Those stakeholders have continued to be vocal about how painful this tax rise could be for industry, as it faces being “taxed into uncompetiveness.”
The industry is already facing a significant decrease in production, which fell to 1.27mn barrels of oil equivalent a day in 2023 down from 4.33mn barrels in 1998, according to the North Sea Transition Authority. The regulator estimates production will slump to just 730,000 barrels of oil equivalent by 2030.
David Whitehouse, chief executive of industry group Offshore Energies UK (OEUK) said:
“This year we are at historical lows for wells drilled in the North Sea and that fundamentally means we are not seeing the investment that the sector needs”.
OEUK recently published an open letter by 42 companies, warning that the tax increase threatens £200 billion of investment in all forms of domestic energy including renewables. In the letter, firms expressed concern the impact would be felt throughout the supply chain “through jobs, and the communities this industry supports, both directly and indirectly.” According to OEUK, more than 55,000 jobs supported by the North Sea industry have been lost in the past five years.
The majorities of signatories on the letter were small producers who have emphasised how significant a risk the tax increase is to their business. As the chair of Ping Petroleum, Robert Fishes, told the Financial Times:
“[Policy uncertainty] reduces our willingness to spend money to do things quickly because if we spend and the policy changes, then we have to start all over again. People are walking away from fields with significant reserves.”
Estimates published by the Office of Budget Responsibility (before the government’s announcement) showed tax receipts from the UK oil and gas industry would collapse to £2.2bn by 2029 from £9.8bn in 2023. Some experts say that the tax increase won’t even meet its intended goal. Chris Wheaton, analyst at investment bank Stifel, said Labour’s changes to windfall taxes would raise around £4bn more for the Treasury — less than the £6bn targeted to help fund GB Energy, the new state-owned company that will invest in renewable energy. According to Wheaton, the government would then lose about £11bn in tax revenue over five years.
Wheaton emphasised the threat to industry from the tax increase saying:
“If the government implements the kind of windfall taxes they are talking about, then you end up with a cliff edge in UK energy production because the industry will be taxed into uncompetitiveness. That is going to cause a very dramatic decline in investment and therefore production and jobs, and a big hit to energy security.”
Bottom line: Ongoing policy upheaval in the UK continues to fuel an uncertain climate for investment in the North Sea. With the latest tax increase, companies operating in the area may be forced to abandon their plans – leaving the communities that rely on these jobs in a perilous position.
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