UK's Labour reaffirms plan for higher North Sea oil, gas tax ahead of vote

The UK Labour Party on the cusp of national elections reaffirmed plans to increase the Energy Profits Levy on North Sea oil and gas producers while removing tax breaks, with shadow chancellor Rachel Reeves saying renewables had a "really bright future" and would increase energy security.

The comments at London's Chatham House on May 22 came as the incumbent Conservative government called a general election for July 4, with opinion polls suggesting Labour are positioned for victory. It comes as multiple companies have reduced activity and investment, citing fiscal instability and exorbitant tax rates, with some specifically pinpointing Labour's plans.

Reeves took aim at previous Conservative governments for allowing reductions in gas storage capacity, which are now being partially reinstated by utility Centrica.

The UK still derives 74% of its energy needs from oil and gas, according to industry group Offshore Energies UK.

Current Chancellor of the Exchequer Jeremy Hunt said March 6 the government was extending the 35% Energy Profits Levy to 2029 from the previous cutoff in 2028.

Reeves, whose party was instrumental in pushing the Conservatives to bring in the EPL in 2022, said the levy would have a lifetime "no longer than the next parliament," albeit at a higher rate than presently. She added that greater use of renewables could be disinflationary thanks to technology advances.

Labour envisages "doubling down on the investment that we need to see in home-grown renewables so we are less at the mercy of those global markets for oil and gas," Reeves said. "This is about diversification, and it's about seeing what more we can do at home -- we've got huge potential ... to be producing more home-grown energy. This isn't just about meeting our climate obligations, it's also about ensuring that we are more secure as a country, and in turn bringing down energy bills."

Comparable to Norway's rate

On the EPL, which lifted the headline tax rate on upstream oil and gas to 75%, Reeves said her proposal for a further hike to an overall rate of 78% would be comparable with Norway. Critics of Labour's plans note Norway has a long record of tax stability, staged tax allowances for investment and generous tax breaks for exploration.

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

"We would extend [the Energy Profits Levy], we would increase the rate to 78%, as is the rate in Norway, and we would get rid of the investment allowances," she said. "We see some companies paying very little of the EPL at all. But that would be a time-limited extension of the windfall tax, it would last no longer than the next parliament."

Reeves' comment about some companies paying little of the EPL refers to companies using past investments to offset potential tax liabilities, which because of the size of project spending can provide a significant cushion.

Reeves said that her party had been "really clear" with the industry and the industry continued to invest, adding, "We see a really bright future for the North Sea because of the huge potential in some of the low carbon industries of the future."

Regulatory reform

The comments come as the UK gears up for a potential change of government after more than 14 years of Conservative-led government.

Numerous oil and gas operators have criticized the UK tax regime, with companies such as TotalEnergies saying it is scaling back normally routine drilling operations and others holding off approving new projects.

UK oil output decline accelerated to 12% in 2023, with average output falling to 716,000 b/d. UK oil output is now down by more than a third since 2019.

The industry argues the sky-high price spikes in gas that might have justified windfall taxes on the sector are far in the past, with gas prices back to levels seen before Russia's invasion of Ukraine, and oil markets well supplied going into the summer. The Platts Dated Brent benchmark was assessed at $81.50/b May 21, down 83 cents on the day. Platts is part of S&P Global Commodity Insights.

Reeves, however, insisted more investment could be attracted in renewables through reforms to the planning system, for example to facilitate offshore wind farm construction.

"We need in the UK ... to address some of the structural issues that are holding back investment," she said. "If you say to companies who are looking at doing floating offshore wind or carbon capture, or building a new giga-factory, or in other industries ... they're not saying to us, give us a huge subsidy and we will do this, they're saying reform your planning system."