UK Government Urged to Revise Oil and Gas Tax Policies Now

The UK has the potential to increase tax revenues from oil and gas companies by nearly 25% through 2050 if the Labour government acts swiftly to replace the existing windfall tax on North Sea producers. This assertion comes from a report by the industry lobby group, Offshore Energy UK, which emphasizes the importance of immediate action to avoid detrimental effects on the sector.

The Energy Profit Levy (EPL), a windfall tax introduced by the previous Conservative government in 2022, is set to remain in place until the end of March 2030. This tax was implemented following a surge in energy prices triggered by Russia’s invasion of Ukraine. Recent discussions between government officials and industry representatives have focused on establishing a new tax mechanism to replace the EPL, which would activate during periods of elevated prices.

Oil and gas producers in the aging fields of the British North Sea have expressed concerns regarding the EPL’s increases and extensions. In 2024, the Labour government raised the EPL to 38% , resulting in a total tax burden of 78% on these companies. Consequently, some producers opted to consolidate or divest their assets in the North Sea.

A potential shift to a permanent tax mechanism by 2026 could generate an estimated £63.2 billion (approximately $85.3 billion) in tax receipts through 2050. In contrast, under the current policy, revenues are projected at £51.2 billion, according to the analysis from Offshore Energy UK.

The decision presents a significant challenge for Rachel Reeves, the Chancellor of the Exchequer. She faces tough choices in the upcoming autumn budget, particularly as the government seeks to recover costs associated with various policy reversals. While transitioning to a new system sooner may yield higher long-term revenues, it could also result in a short-term drop of £5.8 billion in tax receipts between now and 2034.

Despite the potential drawbacks, the lobby group argues that implementing changes in 2026 as opposed to waiting until 2030 could unlock approximately £41 billion in additional capital investment. This investment could lead to an increased output of 2.5 billion barrels of oil equivalent, totaling 6.01 billion barrels over the same period.

Moreover, advancing the tax changes could support an additional 23,000 direct and indirect jobs in the oil and gas sector by 2030. This job growth would be fueled by sustained investment in domestic production, as indicated by the analysis.

Offshore Energy UK’s projections are based on the assumption that a profit-based tax mechanism will be introduced with threshold prices set at $94 per barrel of oil and 119 pence per therm for gas, representing the 85th percentile of real-term prices over the past decade.

The urgency for reform is clear, as a delay could lead to a rapid decline in production at vital hubs in the North Sea. The time for decisive action has arrived, according to industry advocates who stress the need for policy changes that align with the evolving energy landscape.