Offshore Energies UK (OEUK) released data in September modelling the impact of the Government’s announced stronger Energy Profits Levy (EPL) on the UK economy. It’s a plan that adds more pressure on the sector over a longer time.
The modelling, previously shown to the Treasury, demonstrates how the Government’s proposed fiscal policy would generate a loss in economic value of around £13 billion compared to the economic contribution generated under the current windfall tax regime.
The loss comes from an expected reduction in investment by oil and gas producers into UK projects, with capital investments over the period expected to fall to £2 billion compared to around £14 billion under the current regime. For businesses seeking to get a fair return on their investment, it’s not an inviting scenario.
© Supplied by OEUKOEUK has said the analysis shows the policy will undermine the UK offshore energy sector’s ability to support the Government’s overarching goal of driving economic growth.
The data has been published to help inform decision-making ahead of the Chancellor’s Autumn Statement at the end of October.
Continued uncertainty around the treatment of capital allowances, has further undermined the confidence of companies to invest in UK oil and gas production.
The data show that an environment in which the headline tax rate is increased to 78% and tax relief on investment against the EPL is removed would have a variety of unwanted consequences. In no other sector of the UK economy are investments treated so poorly yet profits taxed so heavily.
The sector’s total tax yield would peak in 2026 before declining sharply compared to the current scenario, which continues to generate increasing tax receipts over the period.
Around two thirds of additional production that could be approved under the current tax regime would be uneconomic. The UK would be more reliant on other countries to meet the domestic energy demand at a cost to the UK economy and net-zero.
Tax specialists working for OEUK have also pointed out that the proposed regime cannot be likened to Norway which allows companies a maximum of £78 of relief for £100 expenditure. Under the government’s new proposal, total tax relief could fall to £46.25.
We are already seeing a sharp drop in investment. Some projects have been abandoned by investors and others are facing additional setbacks after the government announced it would not defend judicial reviews of licensing decisions brought by environmental campaigners, which are expected to be heard by the courts later this Autumn.
The offshore energy industry recognises that difficult decisions will need to be made. The government is clear that economic growth is its main priority, yet our analysis shows that its proposed policy will ultimately reduce this sector’s contribution to the UK economy because companies will find it economically unviable to continue operating oil and gas platforms in the North Sea.
The fiscal analysis OEUK produced shows that proposals to cut tax relief against capital investment will trigger an accelerated decline of domestic production, and a corresponding reduction in taxes paid, jobs supported, and wider economic value generated.
The government’s ambition to decarbonise electricity by 2030 is still at a stretch achievable. But it will require vast investment and much of that has to come from existing private investors in the energy industry.
It is essential that policy makers work with the domestic energy production industry to put the long-term framework in place to achieve the energy transition we all want to see.
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