In the early 2000s, the North Sea oil and gas industry, centered around Aberdeen, reached its pinnacle, producing over 2.7 million barrels of oil each day, which accounted for 3.6% of global production. Additionally, North Sea gas fields contributed the equivalent of another 1.8 million barrels.
Though production has significantly decreased since then, with daily crude output now below one million barrels, the UK’s oil and gas sector still supports around 25,000 jobs in the Aberdeen area and approximately 200,000 throughout the UK.
Crucially, with millions of petrol and diesel vehicles on the roads and about 85% of households depending on gas for heating, oil and gas continue to supply nearly three-quarters of the UK’s total energy demand.
It is more advantageous to produce our own hydrocarbons instead of depending on imports in a progressively unpredictable global landscape.
Undoubtedly, renewables play a significant role – accounting for 36% of the UK’s electricity generation in the previous year, a considerable increase from 11% a decade earlier.
However, oil continues to be crucial for transportation and various industrial processes. Moreover, gas-fired turbines contributed to 40% of the electricity consumed in the UK last year, an increase from 30% in 2012.
Even the government-established advisory body, the Climate Change Committee, recognizes that oil and gas will still represent half of the UK’s energy consumption by the late 2030s. In an era where energy security is vital, it is economically and strategically wise to optimize the use of our domestic resources.
Additionally, utilizing North Sea energy results in significantly lower carbon emissions compared to the UK’s rapidly increasing dependence on gas extracted from the US and Qatar.
This gas is liquefied, transferred to massive diesel-powered vessels, and then “regasified” after travelling thousands of miles to UK ports – a highly energy-intensive sequence of operations.
Environmental activists often overlook such facts when they obstruct roads and disrupt high-profile sporting events, demanding an immediate halt to North Sea production.
Considering all these factors, the government’s windfall tax on UK oil and gas producers is highly counterproductive. Just over a year ago, while other UK businesses paid 19% corporation tax, North Sea producers faced a 30% charge with an additional 10% “supplementary levy.”
Since then, taxes on North Sea profits have escalated from 40% to 65%, and now 75% – due to former Chancellor Rishi Sunak and his successor Jeremy Hunt. Moreover, this windfall tax now applies until 2028, instead of the originally announced 2025.
The Conservatives are eager to showcase their commitment to environmentalism, even though evidence from the government’s own net-zero advocate indicates that North Sea production will remain environmentally beneficial for at least another decade.
Ministers also believe this windfall tax will generate substantial revenue, assisting in addressing the massive post-lockdown gap in the national budget.
Data released last week revealed that, while government borrowing was £13.2 billion lower than anticipated over the last 12 months, the state still spent £139 billion more than it collected during 2022/23 – a deficit £18 billion higher than the previous year.
According to the Office for Budget Responsibility, the UK is projected to face triple-digit deficits for several more years. This situation emphasizes the need for pro-growth policies that boost GDP, making debt more manageable by expanding the economy.
However, Sunak and Hunt have chosen to impose the heaviest tax burden in 70 years, targeting the North Sea oil and gas producers.
The Conservative windfall tax is expected to generate an average of £8.6 billion annually between now and 2028, as stated by the OBR, up from £0.8 billion on average during the six years leading up to 2021. Thus, the tax burden on this single industry has increased almost eleven-fold, despite the evident national interest in maintaining North Sea production.
Indeed, crude prices increased after Putin’s invasion of Ukraine in February, peaking at $138 a barrel the following month. Throughout 2022, oil averaged $101, a 40% increase compared to 2021.
However, the oil price didn’t surge 11-fold, and neither did the profits of UK energy firms – so what justifies this tax increase?
Some multinational oil giants still operating in the North Sea did make substantial headline profits as global energy prices soared last spring and summer.
But these profits mainly originated from non-UK operations in regions with lower extraction costs.
Now, North Sea production is primarily controlled by smaller, UK-focused independent operators.
These companies lack the massive balance sheets of global energy firms and struggle to benefit from the tax breaks that Chancellor Hunt claims will encourage more investment.
In fact, as I discovered during a recent visit to Aberdeen, nine out of ten local operators have put their investment plans on hold – and is that surprising?
Consider undertaking a complex offshore drilling project involving tens of millions of pounds in debt, only to have the tax rate nearly double while labor and material costs also skyrocket.
Harbour Energy, one of the largest UK independents, posted a mere £6.4 million in post-tax profits last year, after reserving a staggering £1.2 billion for the so-called “energy profits levy.”
Far from being flush with cash, Harbour has just announced 350 onshore job losses, mostly in Aberdeen. The UK oil and gas industry, in the meantime, is grappling with the worst offshore worker strikes in a generation.
North Sea operators have been urging the Treasury to establish a “price floor,” so this exorbitant tax rate only applies when crude is above a certain threshold. Their requests have been firmly denied.
However, Hunt must realize that if this 75% tax rate is not reduced, North Sea production could decline substantially or even cease entirely.
Such an outcome would undermine the OBR’s elevated oil and gas revenue forecasts and could even end up costing the Exchequer.
If this is truly a “windfall tax,” Chancellor, why does it still apply now – when the price of Brent crude extracted from British waters is 20% lower than before Putin invaded Ukraine?
And why has this absurd tax rate on so-called excess profits been extended until 2028 – when no one can predict the future of oil prices?
