Windfall taxes curtailing investment in fossil fuel extraction, sector warns

Offshore Energies UK’s (OEUK) Business Outlook report finds that nine out of 10 North Sea operators are cutting back investment citing a mix of high taxes, political climate and inflation as key factors in their decisions.

It follows the windfall taxes imposed on North Sea oil and gas operators, under which their overall tax rate has risen from 40 per cent to 75 per cent in the last 10 months. The taxes were put in place to try and mitigate soaring inflation and prices that have caused a cost-of-living crisis for many of the UK’s most impoverished households.

Fossil fuel extractors globally have announced record profits in recent months driven by high prices in the wake of the Ukraine war. Both BP and Shell have extensive operations in the North Sea and were subject to windfall taxes but have still reported massive rises in profits in recent months.

Offshore wind operators also face a similar windfall tax, rated at 45 per cent, which is expected to remain in place till 2028.

Despite bumper profits, the OEUK report claims that the tax rises “make it much more difficult to finance new projects”. It also criticises Labour’s proposal to backdate and raise the tax, remove most tax allowances, and restrict further exploration, should it win power.

The cuts in investment mean the UK’s potential oil and gas resources have immediately been downgraded, with 500 million barrels less likely to be produced, the report found.

Last year, government climate change advisers said the best way to ease consumers’ pain from high energy prices was to stop using fossil fuels rather than drill for more of them and focus on other forms of energy that are not as damaging to the climate.

The report showed that the UK’s overall reliance on oil and gas has increased in recent times despite these climate efforts. It said the UK got 73 per cent of its total energy from oil and gas in 2020 which rose to 75 per cent in 2021 and 76 per cent last year.

Since 2018, oil and gas production from UK territories has fallen by 7 per cent and 26 per cent respectively due to falling investment and regulatory delays.

“Twelve new gas and condensate fields have started up over that period, which now provide 30 per cent of the UK’s gas production. Without them the UK would have had to scramble to meet a wider import gap,” the report said.

It warned that a continued lack of investment “could lead to overall production falling by as much as 15 per cent a year by 2030, so output in 10 years will be 80 per cent less than now”.

Ross Dornan, OEUK’s market intelligence manager, said: “Our report shows that there is no simple choice between oil and gas on the one hand and renewables on the other.

“The reality is that to keep the lights on and grow our economy, we need both. By the mid-2030s, according to the Climate Change Committee, oil and gas will still provide half our energy needs. We should be aiming to get as much as possible of that energy from our own resources – meaning the North Sea.

“That makes it essential for the UK to attract investment. The alternative is to become ever more reliant on other countries. Without investment we risk having to import not just our day-to-day energy but also the kit and expertise needed to reach net zero.”

A UK government spokesperson said: “The Energy Profits Levy strikes a balance between funding cost-of-living support from excess profits while encouraging investment in order to bolster the UK’s energy security.

“We have been clear that we want to encourage reinvestment of the sector’s profits to support the economy, jobs and our energy security, which is why the more investment a firm makes into the UK, the less tax they will pay.”