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UK government must scrap the windfall tax if oil and gas prices decline, offshore industry leaders to tell ministers

8 December 2022

The UK’s leading offshore energy producers are to meet with senior Treasury ministers and officials on Friday (December 9) with a stark warning that the windfall tax risks causing a rapid reduction in investment and jobs – and in the UK’s production of oil and gas.

They will warn that the 75% tax rate imposed on the industry is already deterring investment – as shown by TotalEnergies’ recent decision to cut UK investment by 25% – about £100 million.

The meeting marks the reinstatement of the ‘Fiscal Forum’ – a longstanding group that brings together the UK Treasury, led by Jeremy Hunt, the chancellor, oil and gas producers, and Offshore Energies UK, the industry’s leading trade body. Senior officials from the Department for Business, Energy and Industrial Strategy (BEIS) are also expected to attend the event in Edinburgh.

The forum’s aim is to find ways to support the UK’s energy security and economy by maximising the output of oil and gas from the UK’s surrounding waters – meaning the North Sea, Irish Sea and Atlantic waters north of Scotland.  

The meeting follows the UK government’s decision to increase the Energy Profits Levy (EPL) on oil and gas companies from 25% to 35%. When added to existing levies this brings the total taxes on UK oil and gas production to 75%, one of the highest rates in the world.

OEUK and oil and gas industry executives have repeatedly warned that imposing such a high rate on the industry could drive capital from the ageing basin at a time when the government is trying to increase the UK’s energy security.

This is because the amounts of gas and oil produced are directly related to the levels of exploration in the years before – so if investment declines it will soon be followed by falling output.

OEUK will warn that, without investment, UK gas production could halve by 2030 – leaving the UK highly dependent on imports. Last year the UK produced about 38% of the gas it consumed.

OEUK’s key point is that windfall taxes should only apply to windfall profits – so if prices and profits decline the tax should be scrapped. This is a view widely shared across the industry.

Deirdre Michie, OEUK’s chief executive, will put three key asks to ministers:

  1. Scrap the windfall tax on homegrown energy when oil and gas prices fall back to normal levels
  2. Rebuild investor confidence – starting with a lasting, predictable tax regime
  3. Engage with the industry long-term – including building a lasting consensus with other political parties and stakeholders

Deirdre Michie said: “We are very concerned about the impacts of this tax on our industry and on the UK’s energy security. We want to make Jeremy Hunt, the chancellor, aware of those impacts and work with the government to minimise the damage it is doing.

“At the moment our members produce nearly 40% of the nation’s gas. We can only maintain that kind of output by constant investment. It means we spend billons of pounds a year on exploration, drilling, installing platforms and pipes and many other types of equipment. It is an extremely high-risk industry.

“Our message to Jeremy Hunt is that the windfall tax has made it far riskier – to the point where energy companies are deciding to invest overseas rather than here. We are asking for his explicit commitment to rebuilding a competitive regime so that the offshore industry can provide energy for consumers now as well as building the low-carbon energy systems of the future.

“This tax is a potential slow disaster for the UK. If investment falls now, then in a few years time our gas and oil production will plummet and we will become ever more reliant on imports. And if we produce less oil and gas then we will also be producing less jobs and, ironically, far less taxes.”

Fast Facts

The UK gets three-quarters of its total energy from oil and gas.

  • 24 million (86%) of UK homes rely on gas boilers for heating
  • 1.5 million more homes rely on heating oil
  • 42% of the nation’s electricity comes from gas-fired power stations
  • 32 million vehicles run on petrol or diesel
  • Gas is still the UK’s largest energy source, supplying 43% of total UK energy last year.
  • The UK consumed 76 billion cubic metres (bcm) of gas last year – equivalent to 1,100 cubic metres per person.
  • About 32bcm were imported from Norway and 29bcm were from the UK continental shelf
  • Most of the rest was imported as liquefied natural gas from a mix of countries.
  • Oil is the second largest UK energy source at 32% of total energy
  • The UK’s production of oil and gas fell sharply in 2021.
    1. Oil Production was 45m tonnes
    2. Gas production was 29bn cubic metres of gas
    3. These figures represented a 17% decline on 2020 and a 20% decline on 2019 
  • Imports surged in 2021 when the UK’s net imports were the equivalent of:
    1. 62% of its gas
    2. 18% of its oil
  • Imports will keep rising. By 2030, without additional investment, the UK will have to import around 80% of its gas and 70% of its oil.

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