Industry boffins have challenged analysis that the windfall tax will deliver a win for the UK Treasury.
Research from accountancy RIFT has highlighted that tax revenue for the Exchequer hit their highest in the last 25 years due to the Energy Profits Levy (EPL).
However analysts have warned that the long-term harm of the windfall tax will outweigh short-term gains.
During the 2022/23 financial year, official figures show the industry provided around £9.4 billion in revenues for the economy, a 284% annual increase.
The EPL boosted this figure, contributing just over £4bn to the total.
This compares to £2.45bn in 2021/22, which itself was up 225% compared to year before, driven by increasing oil prices in the wake of the Russian invasion of Ukraine.
Bradley Post, managing director of RIFT, commented: “While North Sea oil and gas is far from the only pillar of the Scottish economy, it’s been a historically important one and so the sizable boost in revenues that has come from the Energy Profits Levy will be a very welcome one.
“While some may be calling the death of the industry as a result of the Energy Profits Levy, many more believe that the tax paid is far better off benefitting the Scottish economy than it is sitting in the back pockets of energy provider execs.”
Short-term thinking on windfall tax
However, Welligence Energy Analytics vice-president of operations David Moseley warned that any short-term rise in tax revenues due to the EPL could come at the expense of additional revenues in years to come.
“The introduction of the EPL made companies a lot more uncertain around progressing greenfield and brownfield projects,” he said.
“You’ve got a big increase in tax in the short-term through the EPL, which has effectively made companies quite risk averse, with the sector now quite unstable when it comes to taxation and companies are very uncertain about what the future will hold.
“As a result of that, we’re seeing companies pulling investment. So long term, over the next 10-15 years for example, tax receipts could be less.”
Offshore Energy UK (OEUK) previously predicted that 90% of companies working in the North Sea could cut their investment plans due to the EPL, risking cutting production by 80% by 2030.
The early cessation of platforms could also see decommissioning liabilities kicking in, at a cost to the exchequer.
RIFT’s analysis noted that North Sea oil and gas had already been in decline prior to the implementation of the EPL.
However, Westwood Energy Research Director Yvonne Telford said: “Oil and gas production in the UK is in decline, but the rate of that decline will be determined by the level of investment to maximise economic recovery from the basin.
“The impact of the EPL may deliver a short-term revenue win to the UK, but it has impacted investor sentiment and therefore in the longer term there is likely to be lower recovery, shorter field lives and therefore less revenues for tax payments.”
Falling investment
Numerous groups have already warned that the EPL is driving them to slash investment budgets and cut jobs.
Ithaca Energy said the EPL has “severely dampened” North Sea investment, warning the firm’s production will drop next year, pointing to its own Greater Stella Area (GSA), along with developments with partners like TotalEnergies’ Elgin-Franklin and Repsol Sinopec’s Montrose/ Arbroath fields as having suffered “deferral or cancellation” on their investments.
The company warned in its full-year 2023 results that it had taken a $500 million impairment against GSA “as a direct result” of the EPL.
Ithaca said the impairment charge for GSA follows the decision not to proceed with further infill drilling at the Harrier field, as “a direct result of the EPL and falling gas prices”.
Harbour Energy reported an $8m loss after tax in the first half of 2023, down from $1bn profit in the same period of 2022, with the company scaling back activities and cutting hundreds of jobs in Aberdeen.
It said it would “re-phase” up to $100m per year of decommissioning spend in the wake of the windfall tax.
EnQuest also reported a loss after tax for the first half of 2023 after seeing a profit in the same period of 2022, citing the impact of the EPL.
And Neptune Energy predicted the EPL would see it take a £53m tax hit.
March’s Spring Budget extended the EPL until March 2029, or until such time that oil and gas prices return to ‘normal’ levels for a sustained period of time.
The UK government also boosted it to 35% in January 2023, up from the original 25%.
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