On the third anniversary of the implementation of the UK’s windfall tax, formerly known as the Energy Profits Levy (EPL), Energy in Depth examines the mounting challenges faced by the North Sea oil and gas sector as the tax burden continues to rise.
First introduced in May 2022 at 25 percent, the levy has since been toughened, with an initial increase to 35 percent under the previous Conservative government in November 2022. It has now been increased even further under the new Labour government.
In November 2024, Chancellor Rachel Reeves raised the tax to a staggering 38 percent, bringing the total tax burden on North Sea oil and gas profits to 78 percent. The UK’s headline tax rate is now among the highest in the world, leaving the British market profoundly uncompetitive.
Industry leaders warn that this escalating fiscal pressure is driving investment away. Shell estimates that recent changes to the levy will cost them an additional £382 million (~$515.02 million USD).
David Whitehouse, chief executive of Offshore Energies (OEUK), said:
“This level of tax discourages investment and undermines our companies, our jobs and our communities.”
Recent Developments
The UK Government is currently consulting on the future of the North Sea, including on what should replace the windfall tax after 2030.
However, the North Sea Transition Taskforce has said ministers have chosen to “wait too long” with their decision to replace the “flawed” energy profits levy in 2030.
Philip Rycroft, Chair of the Taskforce said:
“There is no time to hang around. Speed is of the essence here – good businesses are already voting with their feet.”
Now, three years on from that tax’s implementation, the UK risks cementing the North Sea’s terminal decline.
Analysts at Stifel recently declared that the levy has not only fallen short of its initial revenue targets, but it has undermined the UK’s energy security and deterred future investment.
Stifel projects that the Office for Budget Responsibility has overestimated tax receipts through 2030 by £10 billion (~$13.48 billion USD), as declining production and reduced investment continue to erode the tax base.
Reflecting the continued alarm from industry, an open letter signed by more than 2500 energy workers, business leaders, supply chain employees and community representatives was delivered to the Prime Minister on May 21 calling for an immediate end to the windfall tax and warning that its economic costs outweigh any potential benefits.
Industry Decline and Economic Fallout
Challenging market conditions, rising compliance costs, and heavy taxation are forcing producers of all sizes to scale back investments and operations in the North Sea. Several companies have announced plans to exit the basin, citing the “onerous” tax regime and “uneconomic” operations as key factors.
Major operators like Harbour Energy have recently announced significant job cuts, with 250 positions cut in Aberdeen alone.
Scott Barr, Managing Director of the firm’s UK business said:
“The cuts necessary to align staffing levels with lower levels of investment, due mainly to the Government’s ongoing punitive fiscal position and a challenging regulatory environment”.
Business sentiment across the basin remains fragile with companies operating in the North Sea having reported a negative rate of return for the year to June 2024. This downturn is fueling inflationary pressures across the region, as 89 percent of North-East firms surveyed by the Aberdeen & Grampian Chamber of Commerce reported raising prices due to growing labor costs.
The interconnected nature of the North-East economy means that when exploration and production slow, related sectors such as manufacturing, hospitality, transport, and professional services also suffer.
Only 16 percent of businesses in the region reported growth in domestic sales and almost one in four reduced headcounts, marking the lowest levels of business activity since early 2021.
The cascading economic impact from the windfall tax threatens the long-term health of regional economies and the viability of local businesses that depend on a thriving offshore sector at serious risk.
National Challenges
At a national level, the consequences of North Sea decline are equally harrowing.
With oil output at a 48-year low, many companies are redirecting funds to regions with higher potential returns. Offshore Energies UK warns that billions of barrels of reserves may remain undeveloped due to declining investment, threatening up to £150 billion (~$200 billion USD) in potential economic value.
Currently, the North Sea supplies around half of the UK’s energy needs, but as production drops and project activity slows, the domestic supply chain is coming under increasing strain. This raises the UK’s reliance on more expensive and less secure energy imports, undermining the resilience of the nation’s energy system.
Conflicting Priorities
Disrupting the domestic supply chain threatens to erode the UK’s capacity to deliver both current energy needs and the build-out of future clean technologies, such as offshore wind, carbon capture, and hydrogen.
Conflicting Government priorities and unproductive policies have left the North Sea energy sector in limbo, caught between ambitious net zero targets and the practical necessity of maintaining reliable energy supplies and safeguarding jobs.
Energy Secretary Ed Miliband has acknowledged the ongoing importance of oil and gas, stating that “oil and gas production will continue to play an important role as the world embraces the drive to clean energy”.
Yet, the Labour Government’s pledge to issue no new oil and gas licenses sends mixed signals to investors and operators, creating uncertainty about the sector’s long-term direction.
Former Prime Minister Tony Blair has also weighed in, criticizing strict fossil fuel consumption limits as “doomed to fail,” and instead advocating for a pragmatic transition that incorporates carbon capture.
This policy ambiguity fuels the trend of declining investment and shrinking output, threatening the UK’s energy security, industrial base and its ability to deliver a just and effective energy transition.
Bottom Line: Three years of windfall taxation has shattered investment confidence, accelerated production decline, and destabilized the North Sea’s vital supply chain. Without a consistent and pragmatic framework that reconciles the UK’s decarbonization ambitions with its energy security and industrial needs, the fallout will become even more for the Northeast region and the country as a whole.
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