According to the trade body of the UK oil and gas industry, Offshore Energies UK, companies in the sector are reducing their operations in the North Sea and prioritizing investment outside the country due to windfall taxes imposed by the government.
Offshore Energies UK’s new CEO, David Whitehouse, said that 95% of members surveyed had been negatively impacted by the levy and were looking to invest elsewhere. Whitehouse warned that this situation would leave the UK dependent on imported energy, which would put the country’s energy security at risk.
The energy profits levy, introduced last year, aims to capture more of the oil and gas producers’ bumper profits following a surge in prices caused by Russia’s invasion of Ukraine. The government has since raised the levy, resulting in a total tax rate of 75% on the sector. However, there is also a generous investment incentive that allows for a tax saving of 91p for every pound invested in the UK.
Due to the windfall tax, Harbour Energy, the largest oil and gas producer in the North Sea, is planning to reduce and review its operations in the region. TotalEnergies of France, another significant player in British waters, is cutting its investment in the UK by 25%. EnQuest has deferred drilling at its Kraken oilfield, and US-owned Apache has cancelled a drilling contract in the North Sea, citing the tax as the reason for making the region less competitive.
Whitehouse warned that the tax is hitting all offshore companies, large and small, and not just those making headlines. Although there has been an increase in oil production, it will not alter the long-term decline of activity in the UK’s North Sea, nor will it directly lower fuel prices for domestic consumers since the oil price is set on international markets. However, Whitehouse emphasized that domestic output reduced reliance on imports and increased energy security.
Despite making progress in transitioning to renewable energy, the UK still relies on gas and oil for 75% of its energy due to the intermittency of wind and solar power and limited battery storage. This dependence on imported hydrocarbons and low levels of gas storage make the UK particularly vulnerable to price spikes, although its capacity to import liquefied natural gas and convert it back to its gaseous form mitigates some of the risks.
Although wholesale gas prices have fallen over the past few months, they remain volatile, and there are fears of shortages next winter. Energy analyst Wood Mackenzie warned that the energy profits levy has wiped an average of 40% off the value of North Sea producers.
Panmure Gordon’s analyst, Ashley Kelty, deemed the windfall tax inequitable since pharma and tech stocks, which also benefited massively from the pandemic, are only subject to UK corporate tax of 19% despite the supernormal profits they realized. However, Tessa Khan, director of the environmental campaign group Uplift, finds it galling that the oil and gas lobby is complaining about a tax rate that is roughly the global average, while companies like Shell are paying out more to shareholders than they’re investing in oil and gas.
