- Since the previous Tory government introduced a windfall profit tax on the energy industry back in 2022, oil and gas output from the North Sea has declined by 10%.
- Instead of supporting the development of the country’s own energy resources, the Keir Starmer government is prioritizing the shift away from North Sea oil and gas.
- Companies are beginning to consider relocation, leaving the UK with no locally sourced oil and gas, and no fat tax revenues for an ambitious government.
There is still plenty of oil and gas left in the UK’s North Sea. However, the industry needs a more favorable legislative context to get motivated to extract these. As things are, it seems unlikely that will happen any time soon.
The update about North Sea hydrocarbon resources comes from Wood Mac amid a strong push by the new Labour government in the country to decimate local oil and gas production, recently prompting warnings that this could increase the UK’s reliance on imported hydrocarbons.
That reliance is already increasing because of unfavorable legislation. Since the previous Tory government introduced a windfall profit tax on the energy industry back in 2022, oil and gas output from the North Sea has declined by 10%, Wood Mac reported. This represents some 5 billion pounds, or $6.5 billion, in lost cash flow, the energy consultancy said. Meanwhile, another 10 billion pounds worth of oil and gas sits under the North Sea, waiting to be tapped.
Instead of supporting the development of the country’s own energy resources, however, the Keir Starmer government is prioritizing the shift away from these energy resources to wind, solar, and hydrogen as it seeks to fulfill its ambitious transition commitments, which include a zero-emission grid by 2030. In order to fund these commitments, it is raising the windfall profit tax on the energy industry further.
With the latest increase, the energy industry’s total tax burden would increase to 78%—and companies would have no other option but to pay these taxes because Labour would also be removing a so-called investment allowance that reduced the total payable amount if a company invested its profits in further production.
Yet since the current leadership of Britain does not believe the country needs more production of energy commodities, taxing it is. The problem is, that companies are beginning to consider relocation, leaving the UK with no locally sourced oil and gas, and no fat tax revenues for an ambitious government.
Wood Mackenzie analysts point out that it would be a good idea to reduce that tax burden in order to encourage more investment in local energy commodity production, adding that it would be best if this happens as soon as next year. The worst-case scenario, according to the firm, is if the government leaves the windfall profit tax in place with no changes. This, Wood Mac said, would result in a 50% decline in UK oil and gas by 2030.
From the perspective of the Starmer government and climate activists, this would be a victory over fossil fuels, perhaps. The fact is that such a decline in local production would simply increase the UK’s reliance on foreign energy, which comes at a premium price.
The UK is already a growing energy importer. In the second quarter of the year, electricity imports from continental Europe hit 20% of total supply, which was a record high that may yet be exceeded by the end of the year. Yet even higher imports are not enough to ensure supply security—so there is now talk about electricity rationing, with critics warning it would have a negative effect on both the economy and the welfare of Britons.
Taxing the oil and gas industry out of existence and opting for rationing instead of locally sourced energy certainly seems like an odd way to do energy policies. The paradoxical plan to fund the transition with oil and gas tax money while regulating oil and gas producers out of the market highlights that oddity. It looks, however, that realizing the risks of this approach and the benefits of having your own energy might come too late to make a difference.
By Irina Slav for Oilprice.com
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