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UK oil, gas windfall tax will 'drive away investors,' hit North Sea supply: industry chief


Follows unscheduled 25% tax on upstream production earnings

Shell stresses need for stability, says investment relief 'critical principle'

Latest statistics confirm plunge in North Sea oil output

  • Author
  • Nick Coleman
  • Editor
  • Manish Parashar
  • Commodity
  • Electric Power Energy Transition Natural Gas Oil

The head of the North Sea oil and gas sector's industry body said the government's introduction May 26 of an "emergency" tax levy on upstream oil and gas profits would "drive away" investors, in turn hitting production levels in the key basin and increasing the UK's import dependence.

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Industry group Offshore Energies UK said in a statement that supporting consumers in the face of surging energy prices was essential, "but damaging the UK energy industry with new taxes is no way to do it."

"This is a disappointing and worrying development for industry, the shockwaves of which will be felt in offshore energy jobs and communities, and by consumers for years to come," OEUK Chief Executive Deirdre Michie said, adding the tax "will drive away investors and so reduce UK energy production. That means less oil, less gas, and less renewables."

"It ... makes it much harder for the UK to reach net-zero by 2050," she added.

Earlier, Chancellor of the Exchequer Rishi Sunak announced a 25% levy on oil and gas production earnings, raising the headline rate of tax to 65% from 40% while offsetting the hike with investment allowances he said would almost double total allowances for upstream spending.

He estimated the levy would yield an extra GBP5 billion ($6.3 billion) in tax in the current year, helping pay for reliefs for energy consumers, and said the electricity sector would also face additional tax measures to be unveiled subsequently. The levy will be phased out "if oil and gas prices return to historically more normal levels," accompanying government documents said.

Investor response

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 about 70% of domestic demand.

Platts Dated Brent benchmark, which is underpinned by the flagship UK crude brands Brent and Forties, was assessed at $115.74/b on May 25, up roughly 50% since the start of the year, according to data from S&P Global Commodity Insights.

North Sea oil production has declined steeply in the wake of the pandemic, falling 17% in 2021 to under 900,000 b/d, and was down 11% on the year at 900,000 b/d in the first quarter, including NGLs, data published May 26 showed.

Shell in a separate response stressed the importance of tax stability, but also noted the additional incentive to invest, saying: "We have consistently emphasized the importance of a stable environment for long-term investment. This is fundamental to our aim to invest between GBP20 billion and GBP25 billion in the UK in the next decade, mostly in low and zero-carbon products and services, with a significant amount also focused on ensuring security of energy supply for the UK. The chancellor's proposed tax relief on investments in Britain's energy future is a critical principle in the new levy."

"We recognize the burden that increased energy prices have across society, in particular on the vulnerable, and have hardship plans in place to help our customers," Shell added in an emailed comment.

The UK levy was met with a sense of inevitability by some in the industry. BP CEO Bernard Looney, while stressing the importance of tax stability, had said his company's plans for an estimated GBP18 billion of investment in the UK in the current decade are "not somehow contingent on whether or not there is a windfall tax," in comments at the company's annual general meeting May 12.