The new Labour Government announced well before it was elected that it would introduce a new windfall tax on oil and gas companies, and the EPL will increase tax for these companies by 3% on 1 November.
The increase will lead to the headline tax rate for oil and gas operations reaching 78% – one of the highest in the world.
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The tax’s extension into 2030, the decision to remove investment allowances for companies and the reduction of capital allowances could have grave implications for the UK’s the oil and gas industry.
The UK Offshore Energies Association (OEUK), the trade association supporting companies in the offshore power generation industry, published a letter in late August highlighting the risks of Labour’s windfall tax for the industry.
In the open letter signed by more than 40 companies, the association explained that the windfall tax will put thousands of jobs at risk, affect companies that are critical to the UK Government’s industrial strategy and hinder continued progress toward net–zero targets.
According to Offshore Technology’s parent company, GlobalData, the oil and gas industry employs an estimated 150,000–200,000 workers in the UK, mostly along the North Sea coast.
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By GlobalDataA collaboration between the new government and the oil and gas industry is essential, argues the OEUK, for the government to realise the benefits of a homegrown energy transition that supports jobs, skills and companies in the UK.
The association wants the government to invite leaders in the oil and gas industry to join the Industrial Strategy Council and Supply Chain taskforce and be involved in the conversations about the energy infrastructure of the future.
Companies in the oil and gas supply chain are also concerned about the impact of a possible additional windfall tax.
The OEUK has identified the £200bn ($262.3bn) private and domestic financing cited by Labour prior to the July election as money ready to support the wider energy transition. This could be used in the deployment of domestic offshore wind, carbon capture and storage, and hydrogen technologies that can be unlocked and utilised by more globally competitive polices in the sector.
However, increasing and extending the EPL that is paid by the operators and reducing the rate of capital allowance could undermine long-term energy infrastructure solutions and jeopardise jobs and local communities across the UK.
Due to increasing costs caused by the windfall tax, companies may need to restrict or postpone investment in energy infrastructure, with the ramifications felt throughout the supply chain.
The largest British oil and gas producer in the North Sea, Baker Hughes, a signatory to the letter, reported a decrease in the company’s net profit in its first-half financial report for 2024. In the first half of 2023, its net profits hit $429m, some 8.3% higher than the most recent net profits of $393m.
For the OEUK, the government must demonstrate a significant commitment to working in partnership with oil and gas companies and recognise the contribution they can have on industrial strategy.
David Whitehouse, CEO of OEUK, commented in that letter that to “harness the full potential of these world class UK companies… there is no simple choice between oil and gas or renewables. The reality is that we will need both to support these companies, power the country and grow the economy.”
He added: “If oil and gas operators scale back activity as a result of the proposed changes to the Energy Profit Levy, it has a direct impact on our world-class supply chain. The impact of the energy profit levy changes will be felt much more widely than oil and gas operators who pay the tax directly.”
There is a clear commitment from the oil and gas industry to be involved in conversations regarding the development of future energy infrastructure. The OEUK pledge to the new Labour government is to echo this same commitment.
Higher taxes will impact UK companies of all sizes attempting to deliver a homegrown energy transition. For the OEUK, Labour’s new windfall tax will hinder significant economic growth, energy security and the journey to net zero.
Just a few days ago, the OEUK said plans to increase the EPL would eventually have a detrimental impact on Britain’s economy.
Citing its own research, it argued that the “expected tax take from UK oil and gas producers would increase in the very short term; ultimately, it would result in a £12bn ($15.7bn) loss in receipts compared to the current regime”.
The body argued the fall “is due to a rapid decline in production due to under investment over this decade. The analysis confirms the impact would be felt widely across the economy.”
For its part, the government has said it is committed to a “constructive dialogue” with the oil and gas industry over the changes, thus “ensuring a phased and responsible transition for the North Sea”.
