UK plans to revamp North Sea windfall tax, affirms halt on new licenses

The UK government is planning a new mechanism to automatically tax oil and gas producers for future energy price shocks after it sunsets its Energy Profits Levy in 2030, it announced on March. 5.

A statement from the UK's Department for Energy Security and Net Zero confirmed a March 31, 2030 end date for the UK's Energy Profits Levy, a contentious windfall tax on oil and gas companies, and launched a consultation on a new "high price mechanism" that would respond to "unusually high" prices in future.

In a consultation document published on March 5, the UK Treasury set out two potential policy options for the mechanism. A revenue-based model would target "excess revenue" for oil and gas companies earning above a certain threshold, while an alternative, profit-based model would kick in when market prices spike.

The document did not propose specific price thresholds, but said it would base them on historical data and long-term forecasts.

In the statement, James Murray, Exchequer Secretary to the Treasury, said the new mechanism would provide "long-term certainty on taxation" for the sector after a string of recent changes, promising to support continued investment in domestic oil and gas production.

The policy move follows mounting pressure for the government to reduce its high tax burden on the UK's oil and gas sector, which the industry has accused of stifling new investment.

The Energy Profits Levy was imposed as a temporary measure in 2022 in response to soaring energy prices after Russia's full-scale invasion of Ukraine, but was increased by the Labour government late 2024 and extended to the end of the decade. As a result, UK oil and gas companies face a headline tax rate of 78%.

Lobbyists have warned that an unattractive fiscal environment will drive investment from the UK and accelerate natural output declines from the North Sea basin. In 2024, UK crude oil output hit a record low of 564,000 b/d and has dropped 77% from its 1999 peak, official figures show.

In contrast, the government has maintained that it has limited ability to lift output from the maturing North Sea basin, and has increasingly turned its attention to driving spending to new offshore industries, such as hydrogen, carbon capture and wind.

No new licensing

In a separate consultation launched on March 5, the UK's Department of Energy Security and Net Zero upheld the Labour government's commitment not to issue new licenses for oil and gas exploration, and called for input on its efforts to transform the North Sea into a clean energy hub.

"Future exploration and production licenses would not meaningfully increase UK production levels, nor would they change the UK's status as a net importer of oil and gas," the statement said.

License extensions and transfers will remain unaffected by the tougher stance on exploration, the government said, vowing to support existing fields to operate for their full lifespan and increase its support for decommissioning services.

Spending on decommissioning UK oil and gas assets is forecast to average GBP2.4 billion ($3 billion) in the coming years, and the government forecasts an investment of around GBP40 billion ($52 billion) is necessary over the next decade.

The consultation invited feedback on opportunities for repurposing oil and gas production facilities, job creation, and the future role for the North Sea Transition Authority, the current regulator.

As it has looked beyond declining North Sea output: the government has continued to back offshore renewables as a key growth engine.

The statement reiterated plans to spend GBP21.7 billion ($28 billion) on carbon capture, storage and hydrogen, and forecast employment in renewables sectors growing from 70,000 to 138,000 by 2030.

Industry response

Offshore Energies UK, a trade association for offshore energy, called the consultations a "vital" dialogue, and welcomed greater visibility on future tax structures for investors.

"We still have oil and gas reserves in our offshore waters and we should use them responsibly alongside renewable energy. We must get this right and this means meaningful engagement," said OEUK CEO David Whitehouse, calling for cross-sector support to avoid hiking the UK's energy import deficit.

Sharon Graham, general secretary at industry union Unite, also approved of the consultation, but called for firm investment pledges to generate employment in offshore wind and other low-carbon sectors.

"We need to resist any calls that amount to offshoring our carbon responsibilities for the sake of virtue signalling. We must not let go of one rope before we have hold of another," she said.

The DESNZ consultation on the North Sea's energy future closes April 30 and the treasury's consultation on a high price mechanism runs until May 28.