UK to impose 25% 'windfall tax' on North Sea oil and gas, double investment relief

The UK is to impose a 25% 'windfall' levy on earnings from North Sea oil and gas production while doubling relief on investments in the sector in an "emergency" temporary measure to support the population in the face of surging energy and living costs, finance minister Rishi Sunak said May 26.

Speaking in parliament, the UK chancellor of the exchequer said he was taking a "sensible middle ground" designed to avoid deterring investment, despite warnings by the industry that a windfall levy would deter investment and ultimately reduce production, further eroding the UK's declining oil and gas production, as well as long-term tax revenues from the sector.

It follows a fraught debate in Western Europe's second-largest oil producer: the country meets around 75% of its energy consumption from oil and gas, with North Sea oil sold around the world, and oil production equivalent to around 70% of domestic demand.

Sunak also warned of impending measures in relation to the profits of parts of the electricity sector, saying the government was "urgently evaluating the scale of these extraordinary profits and the appropriate steps to take."

He estimated the announced measures in relation to oil and gas would raise GBP5 billion ($6.3 billion) in the coming year.

"The oil and gas sector is making extraordinary profits not as the result of recent changes to risk-taking, innovation or efficiency, but as a result of surging global commodity prices driven in part by Russia's war," Sunak said.

However, "it is possible to both tax extraordinary profits fairly and incentivize investment. We will introduce a temporary targeted energy profits levy, but we have built into the new levy a new investment allowance that means companies will have a new and significant incentive to reinvest their profits," he said.

"The new levy will be charged on profits of oil and gas companies at a rate of 25%, it will be temporary, and when oil and gas prices return to historically more levels the levy will be phased out with a sunset clause written into the legislation."

"With our new investment allowance we are nearly doubling the overall investment relief for oil and gas companies. For every pound a company invests they will get back 90% in tax relief," he said.

Industry concerns

Industry group Offshore Energies UK warned May 25 a windfall tax risked "lasting damage" that would reduce UK energy security and increase prices, reducing investment, including in energy transition projects needed to meet net-zero goals. It noted oil and gas production is already taxed more heavily than other sectors, with a headline rate of 40%. It had yet to respond to a request to comment on the latest announcement.

The government's secretary of state for business, energy and industrial strategy, Kwasi Kwarteng, earlier said he did not "believe in" windfall taxes, seeing them as a tax on investment.

OEUK said earlier the industry had been planning GBP200 billion ($252 billion) of energy investment of various types up to 2030, which would be put in question. It noted the government's own budgetary watchdog had forecast tax payments by the sector in the current financial year of GBP7.8 billion, up 20 times compared with two years previously as a result of commodity price instability.

The UK's North Sea oil production, which underpins the Platts Dated Brent benchmark, declined steeply in the wake of the pandemic, falling 17% in 2021 to under 900,000 b/d.

Dated Brent was assessed at $115.74/b on May 25, up roughly 50% since the start of the year.