On Wednesday, the Chancellor of the Exchequer of the United Kingdom, Rachel Reeves, delivered the Labour party’s first Budget since taking office, laying out her plans to “rebuild Britain” and “make every part of the country better off”.
Yet, in a counterintuitive move, Reeves confirmed that the government will raise the Energy Profits Levy (windfall tax) to 38 percent, bringing the total tax burden on oil and gas companies to 78 percent. Reeves also confirmed the removal of the associated investment allowance, a key incentivization mechanism for investment in the UK’s oil and gas industry.
As Energy in Depth has previously explained, these policies will only continue to damage the UK’s energy security and economic future. Just last week, it was reported that Harbour Energy is looking to sell its stake in several North Sea assets because of the constantly changing tax regime in the UK.
Now, as the government has cemented its windfall tax and investment allowance plans, concerns around the UK’s investment landscape and broader socio-economic health have been amplified. Companies like Shell for instance, are now calling for “certainty” in the North Sea’s future.
Similarly, Francesco Mazzagatti, Viaro Energy’s CEO, recently said the government’s plans will:
“Inevitably lead to earlier cessation of production dates and a reduction in investments, which will in turn lead to missing income from oil and gas taxes amounting to hundreds of millions of pounds in upcoming years.”
The University of Aberdeen Centre for Energy Transition director Professor John Underhill said:
“A rise in the EPL and loss of investment and capital allowances may have the unintended effect of accelerating decommissioning and decelerating the energy transition as companies face an additional cost burden.”
This viewpoint has been echoed by Chris Wheaton, an analyst at Stifel, who estimated before the budget announcement that the windfall tax could cause the UK to lose around £20 billion of tax payments over the remaining life of its North Sea.
Damaging the supply chain
Industry representatives have warned of the implications of the windfall tax on the UK’s supply chain businesses and local economies.
The UK energy supply chain creates one in every 55 jobs and currently there is no viable alternatives from the oil and gas sector for supply chain businesses to maintain their income. As Kevin Keable, chairman of the East of England Energy Group notes:
“A diminished profit landscape in the oil and gas sector may result in cost-cutting measures, often translating into reduced contracts for supply chain companies, particularly those based locally… Given that many firms in the East of England provide specialized support to the offshore sector, there could be direct repercussions on regional employment, skill retention, and, ultimately, the area’s economic growth.”
Importing oil and gas
Experts have continued to question the logic behind disincentivizing further oil and gas production given the UK’s reliance on the sector for its domestic energy security.
The UK imports over 800,000 barrels per day of crude oil, meaning the UK pays US$1.8 billion to other oil producers for their crude oil every month, representing 15 percent of its total trade deficit. This reliance leaves the UK vulnerable to price volatility and supply chain disruptions, which is only set to increase as oil and gas operators leave the UK.
As Grant Morrison, Head of Oil and Gas at RSM, comments:
“’There is significant concern across the oil and gas sector that current fiscal policy will lead to a black hole’ in the UK’s ability to meet its energy requirements.”
Bottom Line: The UK government needs to provide more stability to a sector which it heavily relies on for energy security, jobs, and overall economic health. Increasing the windfall tax and removing the investment allowance only serves to damage the UK’s socio-economic prospects amid an already challenging economic backdrop and will have significant consequences for the communities that rely on the North Sea.
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