This July, the new UK Labour Government came into office promising to ‘take the brakes off Britain’ and unlock a new era of economic prosperity.
Yet, as Energy in Depth has previously explained, under current UK government plans the oil and gas industry is set to be burdened with another tax increase, which industry groups have warned will risk tens of thousands of jobs and billions of pounds worth of investment.
In what has been described by the former energy minister, Andrew Bowie, as an “utterly dreadful” decision, the UK Government will increase the windfall tax by a further three percent, bringing the headline tax rate to 78 percent under the autumn budget. A recent report from Offshore Energies UK (OEUK) has warned that the tax will result in an overall loss in economic value of around £13 billion (~$17.25 billion USD), with additional 35,000 jobs at risk.
David Whitehouse, OEUK’s chief executive, said the government’s proposals would:
“Trigger an accelerated decline of domestic production, and a corresponding reduction in taxes paid, jobs supported and wider economic value generated This is a government that has made economic growth its main priority, and yet our analysis shows that its policy will ultimately reduce this sector’s contribution to the UK economy.”
The current fiscal environment is leaving the sector at a standstill with not one well being drilled in the UK’s section of the North Sea this year. There are rising concerns that the sector has become “impractical” to invest in with reports that banks have slashed the amount of loans to UK oil and gas producers since the introduction of the windfall tax in 2022.
David Larssen, chief executive of subsea control systems provider Proserv, said:
“The North Sea oil and gas industry, particularly in Scotland, is being starved of financing. This financial strain extends beyond traditional banks because even insurance companies are beginning to withdraw support, which threatens the viability of many businesses.”
Industry Flight
Despite the tax increase not coming into effect until November 2024, the windfall tax has already had huge implications on the socio-economic fabric of communities across the United Kingdom. As the unstable political and regulatory environment imposes barriers for companies to attract investment, oil and gas companies are deciding to move their operations and jobs elsewhere.
The latest company to row back their investment and cut operational activity across their North Sea portfolio is NEO Energy, who have cited the prospect of higher taxes and tougher environmental rules as the reasoning behind their decision. NEO Energy’s projects include Buchan Horst, which was projected to bring substantial economic and employment benefits to Aberdeen with its estimated production cost of between £850 and £950 million (~$1.1 billion–$1.3 billion USD).
Linda Cook, CEO of Harbour Energy, emphasized in her conversation with the Financial Times:
“’The hurdle to attract investment in the UK’ is now going to be higher, and ‘the fiscal regime in a lot of the other countries … in which we will have a presence will be more attractive’ than the company’s home market.”
However, it is important to remember that whilst the bigger energy corporations can move their operations elsewhere, the smaller North Sea companies might not have the same options and are facing massive headwinds.
Speaking about the funding challenges, Robert Fisher, CEO of Ping Petroleum, said:
“We have recently found it very difficult because people who provide capital are very uncertain about whether they are going to get their money back because of changes in policy.”
Analysis by Wood Mackenzie has shown that oil and gas production in the North Sea could halve by 2030. Its report stated that:
“This scenario would wipe out £19 billion, or 65 percent, of the UK’s remaining development capital expenditure, halve UK production by 2030, and all but eliminate industry cash flows by the 2030s.”
Energy Security
It is widely accepted from industry experts and even Government officials themselves that the UK is reliant on oil and gas for its future energy security. Ed Milliband, the UK’s Secretary of State for Energy Security and Net Zero, recently said the UK will continue to rely on existing fields “for decades to come”.
Yet, despite the recognition from Government officials that oil and gas will be needed to meet increasing demand, the Government intends on pressing ahead with its proposed plans. As Linda Cook explained:
“Everyone understands that the UK will need oil and gas for many years to come, so why don’t we seem to want to use our own? It is better for investment, for energy security, for tax revenues, balance of trade and emissions.” (emphasis added)
Other experts, including Robin Allan, Chair of the Association of British Independent Exploration Companies, have highlighted that the Government has been misled by environmental campaigners:
“A government that wishes to grow the economy should listen with interest to industry leaders and should not allow itself to be led by ideologues down the old path of economic stagnation.”
Bottom line: In order to safeguard the UK’s energy security, economy and jobs, the UK Government must revise its windfall tax plans, which is set to decimate an industry vital to the UK’s social and economic prosperity.
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