UK government plans to raise the windfall tax on North Sea oil and gas firms could cause a £13 billion hit to the UK economy between 2025 and 2029, a report has found.
Offshore Energies UK (OEUK), which has over 400 members, also warned close to 35,000 jobs are at risk over the same period due to UK projects not going ahead.
Since taking office, Labour has confirmed plans to increase the rate of Energy Profits Levy (EPL) on North Sea firms first introduced by the former Conservative government.
Chancellor Rachel Reeves also vowed to remove “unjustifiably generous” investment allowances in the upcoming October budget.
The policy has caused significant concern among industry leaders in Aberdeen amid warnings the fiscal changes will “hasten the demise” of the North Sea oil and gas sector.
Now, OEUK has released modelling outlining what it says will be the economic impact of the proposed EPL changes.
North Sea windfall tax
The trade body said its analysis shows the proposed fiscal changes would generate a loss in overall economic value of around £13 billion compared to the current regime.
The analysis is based on a scenario where the EPL headline rate increased to 78%, extended for one year, and all capital allowances are removed.
The change comes from an expected reduction in investment from oil and gas companies into UK projects.
Capital investments will fall from around £14bn under the current system to around £2bn, OEUK said.
Meanwhile, OEUK said that while tax takings to the Treasury would increase in the short term by around £2bn, “ultimately it would result in a £12bn loss in receipts”.
This would be caused by a “rapid decline in production” from the North Sea due to under investment this decade.
© Supplied by Sandy McCook/ DCTOEUK said its analysis shows the EPL policy will “undermine the UK offshore energy sector’s ability to support the government’s overarching goal of driving economic growth”.
OEUK chief executive David Whitehouse said the industry recognises the government faces “difficult decisions” in the upcoming budget, but warned against the EPL changes.
“This is a government that has made economic growth its main priority and yet our analysis shows that its policy will ultimately reduce this sector’s contribution to the UK economy,” he said.
“This paper shows that proposals to go further will trigger an accelerated decline of domestic production, and a corresponding reduction in taxes paid, jobs supported, and wider economic value generated.”
North Sea offshore energy industry
Whitehouse said Labour needs to honour its manifesto promise to manage the North Sea “in a manner that does not jeopardise jobs”.
“With an industrial strategy built in partnership with government, the UK can leverage the strengths of its offshore energy industry, put homegrown innovation and technology at the heart of its net zero ambitions, and ensure the UK is globally attractive for energy investment,” he said.
© Supplied by Kenny Elrick“For more than two years UK oil and gas operators have paid three times the rate of corporation tax of any other sector in the economy.
“Time is running out to mitigate damage that has already been done and to avoid further escalation.”
While the proposed 78% headline tax rate under Labour’s policy has been likened to Norway, which levies the same rate on firms operating in its waters, OEUK said the fiscal situations are not comparable.
OEUK said Norway’s system allows firms to claim a maximum £78 of relief for every £100 of expenditure, while Labour’s proposals would see tax relief of £46.25.
Under the previous system, North Sea firms had been able to claim up to £91.4 for every £100 spent.
EPL jobs impact
The OEUK warning on North Sea jobs echoes a report released by Aberdeen’s Robert Gordon University (RGU) in May, prior to the UK general election.
The RGU report found tens of thousands of jobs in Scotland are reliant on the UK achieving a successful transition to cleaner energy, part of which requires maintaining some activity in the oil and gas sector.
© ShutterstockRGU also highlighted the disproportionate impact failing to achieve a just transition will have on the North East of Scotland.
The UK offshore energy sector employs or supports approximately around one in 220 of the working population in the UK, compared to one in 30 in Scotland.
Windfall tax concerns
Offshore unions, supply chain firms, North Sea operators, industry analysts and investment bank Stifel have also warned of the potential impact of changes to the EPL.
Labour’s political opponents have also criticised the move.
SNP Westminster leader Stephen Flynn said the policy would “tip the balance“, preventing industry investment.
Meanwhile, during a visit to Aberdeen this month Conservative leadership candidate Kemi Badenoch said her own party’s policy was a “mistake“.
But not all North Sea firms have concerns about the policy.
Gas firm EnergyPathways told Energy Voice that Labour’s plans to retain the decarbonisation investment allowance indicated the government’s “commitment to support investment in energy transition projects”.
In response to the OEUK report, a spokesperson for HM Treasury said: “We are committed to maintaining a constructive dialogue with the oil and gas sector to finalise changes to strengthen the windfall tax, ensuring a phased and responsible transition for the North Sea.
“Our plans for a new National Wealth Fund and Great British Energy will create thousands of new jobs in the industries of the future.”
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