Rachel Reeves’ expanded tax raid on oil and gas companies could mark the end of the North Sea industry, risking jobs and investment, warn industry leaders.
On Monday, the Chancellor followed through on Labour’s election pledge to impose harsher taxes on oil companies by increasing the energy profits levy. The levy, initially introduced by the Conservatives, will now extend for an additional two years, expiring at the end of March 2030.
Increased Energy Profits Levy
Reeves announced that the headline rate of the energy profits levy, initially set by the Conservatives, will now rise from 75 per cent to 78 per cent. This levy will also be extended for an additional two years, expiring at the end of March 2030. This abrupt change has shocked many stakeholders in the oil and gas sector.
An ‘unjustifiably generous’ allowance that permitted companies to deduct a portion of their investments in new oil and gas fields from their tax obligations will also cease on November 1. Investments made prior to this date will remain unaffected, but new investments will not benefit from these deductions.
A separate allowance for investment in green energy projects will continue to be deductible from the tax, providing some relief for companies looking to pivot to more sustainable energy solutions amid the tax changes.
Industry Backlash
The Chancellor’s decision has been met with strong criticism from oil and gas companies, branding it as ‘reckless, wrong, and economically ruinous for the North Sea.’ This sentiment is echoed by many industry leaders and advocates.
Russell Borthwick, chief executive of the Aberdeen & Grampian Chamber of Commerce, representing a significant portion of the industry, commented, ‘The new government is pushing the North Sea dangerously close to ‘game over’ territory, jeopardising our energy transition.’ His warnings highlight the broader economic and environmental risks.
Borthwick added, ‘This decision will result in £20 billion lost in Treasury revenues, increased reliance on imported oil and gas—which is worse for the planet and the economy—and the potential loss of tens of thousands of jobs.’ The implications are stark and far-reaching.
Potential Revenue vs. Risks
Prior to Labour’s election victory earlier this month, Reeves had estimated that the expansion of the windfall tax would generate an additional £10.8bn in revenue. However, analysts have warned of ‘unintended consequences’ that could accelerate the decline of the North Sea industry.
Wood Mackenzie’s analysis previously cautioned that the new tax could prompt oil and gas companies to ‘freeze investment’ until the tax expires. Some companies might conclude production on older fields prematurely, withdraw supporting infrastructure, and reduce investments in green technologies like offshore wind and carbon capture and storage.
Graham Kellas of Wood Mackenzie added that while the new headline tax rate matches that of Norway, the removal of capital allowances and the UK’s frequent rate changes have made the UK appear like a ‘fiscal wild west,’ deterring investors.
Long-term Economic Impact
The energy sector has long been a critical component of the UK’s economy, particularly in terms of employment and regional stability. The North Sea oil and gas industry alone supports thousands of jobs and contributes significantly to public finances.
Sector representatives argue that the increased tax burden could cripple the industry, leading to long-term negative effects on the UK’s economic health. The reduction in investment could result in decreased production, thereby weakening the country’s energy security.
Environmental Considerations
While the increased levy might generate immediate revenue for the government, it comes at a time when the energy sector is already grappling with transitioning to more sustainable practices. The removal of tax allowances for new oil and gas investments may hamper this transition.
The ongoing allowance for green energy projects provides some balance, but industry experts argue that a more nuanced approach is needed to ensure that the environmental goals are met without completely undermining the oil and gas sector.
Job Market Concerns
Tens of thousands of jobs in the North Sea oil and gas industry are potentially at risk due to the new tax laws. This could have a ripple effect on related sectors, including local economies dependent on these jobs.
The potential job losses draw attention to the need for a comprehensive strategy that includes workforce retraining and support for communities that will be most affected.
Future Outlook
The future of the North Sea oil and gas industry remains uncertain as stakeholders await further clarifications and potential policy adjustments. Industry leaders are calling for a more balanced approach that takes into account the economic, environmental, and social impacts of such significant tax changes.
The expanded tax raid on North Sea oil and gas companies by Rachel Reeves has provoked a strong reaction from industry leaders and analysts. While the government aims to raise additional revenue, the potential risks to investment, jobs, and the environment cannot be ignored.
Immediate policy adjustments and a balanced approach are critical to ensure that the sector can navigate these challenging times without severe long-term repercussions.
