North Sea oil and gas sector warily eyes UK election change of guard

North Sea oil and gas producers are in an apprehensive mood ahead of the UK's July 4 election, expected to usher in further tax hikes for the declining basin, as the front-running Labour Party defends its energy transition plans.

The runup to what seems a near-certain Labour victory, according to opinion polls, has seen several operators freeze development plans, noticeably the 100 million-barrel Buchan project, as oil output falls by 12% annually.

Operators have put projects on hold citing Labour's plans for a further increase, of three percentage points, to the Energy Profits Levy (EPL), alongside the proposed removal of investment allowances.

The EPL was originally introduced in 2022 as company profits jumped alongside surging consumer energy bills following Russia's invasion of Ukraine. It has taken the current headline tax rate on UK production to 75%. The sector argues "windfall" conditions are now past, and is particularly critical of Labour's proposed removal of investment allowances. A planned embargo by Labour on issuing new North Sea licenses is adding to tensions.

The Platts Dated Brent benchmark was on average 22% lower in the year to June 21 compared with the same period in 2022, at $84/b, while NBP gas prices were down 65%, according to S&P Global Commodity Insights data.

Executives point to punitive taxation, the proposed removal of investment incentives and a history of tax instability that they say pushes the UK down the pecking order for investment.

"Continual tinkering" with the tax regime by the incumbent Conservative government, together with the "rhetoric emanating from the front-running Labour Party, have had a severely negative effect on the ability of UK Exploration & Production companies to commit to long-term investments," independent operator Deltic Energy said April 30 in one of several industry broadsides.

"Industry believes Labour's policy implementation will be terminal for North Sea investment," Graham Goffey, skills leader for the Subsurface Task Force group of geoscientists, told Commodity Insights.

Labour says it expects the tax measures to raise an extra GBP1.2 billion ($1.5 billion) annually in a manifesto built around avoiding hikes in personal taxation, and argues there are opportunities for investments in green energy such as wind power.

"We see some companies paying very little of the EPL at all," shadow chancellor Rachel Reeves said in response to a question from Commodity Insights at Chatham House May 22, alluding to tax offsets for capital expenditure.

"We're going to need North Sea oil and gas for many decades still to come ... We will honor all the existing licenses for oil and gas, but we won't be granting new ones," she said.

Economic contribution

UK oil and gas production has fallen sharply. The country continues to produce flagship crudes Brent Blend and Forties and UK fields meet 47% of national gas needs. But many aging fields and facilities are becoming uneconomic and new projects have struggled to gain traction. UK oil production is expected to fall below 600,000 b/d by 2030 from 710,000 b/d in 2023, according to Commodities Insights' analysts. Brent Blend loadings at Sullom Voe -- once a major oil hub -- are expected to be around 23,000 b/d in July.

The industry argues investments in low-carbon energy, including carbon capture and storage, should go hand-in-hand with spending on remaining oil and gas resources – estimated at up to 13.5 billion barrels of oil equivalent – some of which can be extracted using existing infrastructure. Industry group Offshore Energies UK sees potential for GBP450 billion of investment to 2040, two-thirds of it in low-carbon energy and one-third in oil and gas, but warns supportive conditions are needed.

"We need the churn of new licences for a successful homegrown energy transition... We also need a globally competitive tax framework based on fair returns," OEUK said in response to Labour's manifesto. "Windfall taxes undermine this."

Some companies appear undeterred. Labour's plans were well known when Equinor approved the 300 million-barrel Rosebank project in September, although production from the field, due on stream in 2026-27, is expected to fall largely outside the EPL if, as promised by both parties, it is rescinded at the end of the decade.

Major investors remain adamant that the UK has to be attractive for both oil and gas and low-carbon projects to avoid dependence on imported fossil fuels.

"The reality is we're at risk of squandering our inheritance [as an] energy-independent island that has an abundance of oil and gas and an abundance of offshore wind capacity," Julian Regan-Mears, head of strategy, integration and corporate affairs at Italy's Eni, told a recent event. "The investor community will not pick and choose -- it will very clearly make the decision that if fiscal policy is unstable for one, there's a risk it becomes unstable for another."

That apparent mismatch between Labour policy and UK hydrocarbon reliance is highlighted even by some close to the party. Offshore workers' unions such as Unite have denounced Labour's plans for the North Sea, especially the embargo on new licensing.

The Tony Blair Institute, a think-tank of the former Labour premier, similarly questioned Labour's plans in a paper, Reimagining the UK's Net-Zero Strategy, which said "the focus primarily on UK targets is distorting policy without ... creating the infrastructure capable of meeting those targets."