UK set to levy windfall tax on North Sea oil and gas producers

UK finance minister Rishi Sunak was expected May 26 to announce a 'windfall' tax on North Sea oil and gas and other parts of the energy sector despite criticism, including from government ministers, that the results would be a reduction in investment needed to alleviate declining supply and boost the energy transition.

The expected announcement follows a fraught debate in what is 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 production levels equivalent to around 70% of domestic demand.

The measures to be unveiled are intended to raise billions of pounds to support consumers facing surging energy bills and cost-of-living increases and may be offset by tax incentives for investment. The latter could include incentives for spending on 'net-zero' projects intended to reduce emissions, including wind farms, carbon capture and storage and hydrogen, industry sources have said.

Citing "huge pressure" on households in the wake of the pandemic and Ukraine invasion, Steve Barclay, chief of staff to Prime Minister Boris Johnson, told the BBC that support for those in need should be provided while "looking at the balance" between government debt and "revenue raisers -- getting the balance right between inward investment, but also supporting those most in need."

However, industry group Offshore Energies UK warned May 25 a windfall tax risked "lasting damage" that over time would reduce UK energy security, increase prices and deter investment, including in energy transition projects intended to meet the government's net-zero goals. It noted oil and gas production is already taxed more heavily than other sectors, with a headline rate of 40%.

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

OEUK said 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.