Chancellor Rachel Reeves has delivered Labour’s first budget in 14 years, with the UK government delivering on its previously announced oil firm tax hike.
Reeves confirmed on Wednesday that the rate of the Energy Profits Levy (EPL), or windfall tax, would increase by 3%. This move brings the headline rate of tax imposed on UK oil and gas operators to 78%.
In addition to this, the levy’s investment allowances have also been removed, however, operators are still able to take advantage of capital allowances within the EPL.
This was little consolation for Aberdeen and Grampian Chamber of Commerce boss Russell Borthwick who slammed the “super tax” that operators face.
© Supplied by Michal WachucikBorthwick said: “We welcome the commitment to 100% first year allowances for oil and gas investment, something we have campaigned for, and confirmation of the initial funding Great British Energy.
“These are signals that the government is listening, although the devil will be in the detail.
“However, there is no justification for a super tax on ‘windfall profits’ which no longer exist in a world where the oil price has returned to $70.”
CEO of trade body Offshore Energies UK (OEUK) David Whitehouse concurred with the points made by Borthwick around commodity prices.
Whitehouse commented: “With an increase in tax despite commodity prices at recent lows, there is no hiding that this is a difficult day for the sector.”
© Supplied by OEUKThe end date for the windfall tax was also shunted back, having previously been set for 2029, now the levy will reach its sunset in March 2030.
The removal of what Reeves called “unjustifiably generous” investment allowances comes after months of lobbying against the move by oil and gas firms.
The industry warned that completely removing the investment allowances would “hasten the demise” of the North Sea and leave the sector “fatally wounded” in just five years.
Analysts also raised doubt that the EPL would raise substantial funds in the longer term, as tax takings from shrinking oil and gas profits remain flat.
Meanwhile, research from the University of Aberdeen found changes to the EPL investment allowances could have a greater impact than raising the headline tax.
Graham Kellas, senior vice president, global fiscal research at Wood Mackenzie, said: “North Sea companies will be relieved that the government has not followed through on its intention to reduce the EPL capital allowance.
“This is likely to allow minor near term investments to proceed. But the EPL remains deeply flawed and industry feels it is inappropriate for larger, longer term developments.”
Operators and supply chain to be hit
Borthwick argued that driving oil firms out of the UK with these measures places the county’s supply chain firms in “quicksand”.
He added: “The damage being done to the North Sea is clear for all to see. In the past week alone one major has put the for sales signs up on six fields, another has reported a 30% dip in profits and we have one operator paying millions to relinquish a licence rather than develop a loss-making field.
“Without significant long-term reform, this is not a fiscal foundation for growth; it is quicksand through which a world class industry and its supply chain could disappear.
“Therefore, we need to see a successor regime to the Energy Profits Levy accelerated to provide industry with confidence to invest in the oil and gas we need today, and the energy transition which will power our future.”
EIC’s head of external affairs and CEO, Rebecca Groundwater, and Stuart Broadley, also pointed to the impacts the budget will have on the UK’s supply chain.
Groundwater said: “This budget’s impact on our supply chain is not just about oil and gas, renewables, or onshore wind. The energy supply chain is integrated and global in its approach.
“At present, due to the lack of renewable or other technology projects reaching Final Investment Decision and execution, the majority of a companies’ profits is in oil and gas. This doesn’t mean companies don’t want to transition; it means there are no viable, long-term alternatives to provide that certainty of income to transition fully into.”
Broadley added: “The UK energy supply chain employs one in every 55 jobs, representing a vast number of people dispersed throughout the nation—not confined to clusters, regions, or specific projects. Our companies possess expertise across a range of technologies, and jeopardizing the UK’s attractiveness for investment puts these people and businesses at risk.”
Attentions turn to finding the EPL’s successor
© Supplied by Wood MackenzieRecently there have been rumours that the UK’s largest producer of oil and gas, Harbour Energy, is looking to sell its UK assets.
This move was described as a “stark warning” to the UK government by Aberdeen South MP and SNP Westminster lead Stephen Flynn ahead of the Autumn statement.
Since the EPL’s introduction industry has rallied against the controversial fiscal policy, arguing that operators will elect to spend capital overseas.
Kellas agreed with Borthwick that a suitable success needs to be found to the windfall tax.
He added: “Attention will now turn to finding a successor to the EPL that is predictable and fairer. The good news is that government appears to be listening to the industry’s concerns and where there’s a will, there’s a way.”
Whitehouse said: “Today we heard the Chancellor recognise the role of the oil and gas sector to support high quality jobs and strengthen the UK’s energy security.
“We welcome that and the meetings and dialogue which have taken place between industry and the new government.”
Budget ‘could sideline essential UK projects’
In response to the Autumn budget, CEO of supply chain firm Nexos (formerly Global E&C), Terry Allan, warned that the government’s approach to oil and gas “could sideline essential UK projects”.
Allan commented: “With an increased energy profits levy at 38% and the removal of the 29% investment allowance, the government’s approach risks a double fault on our energy future, undercutting the very security and job protection it aims to support.
“Oil and gas, alongside emerging renewables, such as the 11 green hydrogen projects announced today, form an essential partnership in our energy transition, not competitors.
“The stability needed to power this shift is undermined by sudden changes, threatening both investment and innovation across the energy sector.”
© Supplied by NexosHe explained that by removing investment incentives the government is “pushing companies to look elsewhere” in a move which will impact workers.
Whitehouse said: “Oil and gas companies, our world class supply chain and our highly skilled people will support the energy transition. We will not be successful without them.”
Allan added: “Rather than fostering agility and cooperation, these new policies may well hinder our ability to play the long game for a sustainable, next-gen energy future.”
Much like Allan, CEO of Aquaterra Energy George Morrison welcomed the government’s investment into renewable energy projects but warned of the impacts of an increased EPL.
Morrison said: “The government’s commitment to 11 new green hydrogen projects and £22bn for CCS is a promising nod toward the future of the UK energy sector.
“Yet, with ongoing challenges from the effects of the profits levy, potential alone won’t cut it.
“The North Sea’s future relies on swift regulatory action, strategic infrastructure investment, and robust supply chain support, alongside targeted measures to advance electrolyzer technology for green hydrogen at scale. Only with these in place can we bring these projects from paper to powerhouse.”
West Aberdeenshire and Kincardine MP, Andrew Bowie claimed that Labour had “betrayed” the north-east of Scotland with it’s statement.
The former energy minister said: “They have reversed, at a stroke, years of government support for the oil and gas industry. They’ve extended the EPL by six years, increased it, and scrapped vital investment allowances.
“Their tax plans will cause businesses to struggle more than they currently are.”
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