The North Sea is approaching an “endgame zone” after Rachel Reeves pushed through a widening tax raid on oil and gas companies.
On Monday, the chancellor delivered on Labour’s election pledge to impose tougher taxes on oil companies by increasing the Energy Profits Tax. Reeves announced that the tax, originally introduced by the Conservatives, would now be extended for an additional two years, ending at the end of March 2030, with the headline rate rising from 75% to 78%.
It also eliminated an “unjustifiably generous” allowance that allowed companies to deduct part of their investments in new oil and gas fields from their tax obligations. The allowance will expire on November 1, although investments made before that date will not be affected.
A separate tax deduction for investment in green energy projects will still be possible.
The Chancellor’s decision was strongly criticised by oil and gas companies, who described it as “reckless, wrong and economically damaging to the North Sea”.
Russell Borthwick, chief executive of the Aberdeen and Grampian Chamber of Commerce, which represents a large part of the industry, said: “The new government is pushing the North Sea dangerously into ‘game over’ territory, putting our energy transition at risk. Instead of seeing the energy sector as a solution to the UK’s fiscal challenges, the Chancellor has chosen to tax the industry into oblivion.”
“This decision will cost the Treasury £20 billion in lost revenue, increase reliance on imported oil and gas – which is worse for the planet and the economy – and potentially cost tens of thousands of jobs,” he added.
Before Labour’s election victory earlier this month, Reeves estimated that expanding the windfall tax would generate an extra £10.8bn in revenue. However, analysts have warned that the move could have “unintended consequences”, accelerating the decline of the North Sea.
Earlier, an analysis by Wood Mackenzie warned that the new tax could prompt oil and gas companies to “freeze investment” until the tax expires, with some companies likely to end production at older fields prematurely, withdraw supporting infrastructure, and reduce investment in green technologies such as offshore wind and carbon capture and storage.
While the new headline tax rate matches that in Norway, the removal of capital allowances and frequent rate changes in the UK have made the UK look like a “financial Wild West”, deterring investors, Wood Mackenzie’s Graham Kells added.