OEUK: North Sea could power UK for decades, but windfall taxes discourage offshore investment

(WO) — The North Sea could power the UK for decades, but a mix of windfall taxes and political uncertainty is driving away the billions of pounds of investments needed to maintain oil and gas production now and create low carbon energy in the future, says a new report.

Offshore Energies UK’s Business Outlook report describes how nine out of 10 of North Sea operators are cutting back investment. The companies cite a mix of high taxes, political uncertainty and inflation as key factors in their decisions.

It follows the windfall taxes imposed on North Sea oil and gas operators, under which their overall tax rate has risen from 40% to 75% in just 10 months. Offshore wind operators face a similar windfall tax, rated at 45%. Both taxes will remain in place till 2028 – even as prices drop and the ‘windfalls’ disappear.

Those tax rises make it much more difficult to finance new projects – as have the Labour party’s additional proposals to backdate and raise the tax, remove most tax allowances, and restrict further exploration, should it win power.

The cuts in investment mean the UK’s potential oil and gas resources have immediately been downgraded, with 500 MMbbl less likely to be produced – enough to support the nation for six months (or same as one year’s North Sea output).

The Business Outlook report will show, however, that the UK overall reliance on oil and gas has actually increased. The UK got 73% of its total energy from oil and gas in 2020. That rose to 75% in 2021 and 76% last year.

Several offshore operators have publicly announced decisions to cut back investment in North Sea oil and gas exploration. This will lead to sharply reduced production of both oil and gas which OEUK has quantified.

The report says, “OEUK estimates that oil and gas equivalent to 250 MMboe have been removed from company plans and another 250 MMboe have been downgraded from ‘probable’ to possible meaning a less than 50% chance of progressing ... It means 500 MMboe have been lost, equivalent to a year of UK output. This will impact on the UK’s future energy security and economic prosperity.”

On a positive note, the Business Outlook report also finds that offshore operators and their supply chain companies are rapidly moving to embrace offshore wind and other low carbon technologies.

“The ongoing diversification of oil and gas companies is accelerating and will be crucial in building future capacity,” said the report. “Companies expanding from oil and gas have plans to support the development of over 8GW of UK capacity, and up to £20 billion in capital investment, by 2030.

“In total OEUK members, including companies solely focused on wind projects, have plans which support 13 GW and £30bn respectively. Together, these could cumulatively power over 14 million homes in 2030.”

However, it warns that regulatory and technological barriers are undermining progress, as are the impacts of the Energy Generator Levy – a 45% windfall tax imposed on larger renewable power providers for the next five years, which has shaken investor confidence just as the energy profit levy did with oil and gas operators.

The report will say the EGL, or renewables windfall tax, has “significantly damaged investor confidence” in the UK market. It adds, “On planning most of this decade’s projects are not yet consented … Overall, it is taking about a decade to consent and build some projects, which is far too long.”

The UK now has 2,700 turbines installed with 14 gigawatts of capacity – enough to power up to 18 million homes when the wind is blowing. However, the target is to expand this to 50GW by 2030, meaning installing more than 40 new windfarms – or one large turbine every day for the next seven years. That rate would be several times higher than now. The report says that the marine engineering skills of oil and gas companies will be essential to achieving this ambition.

Ross Dornan, OEUK’s market intelligence manager, who led the team that wrote the report, said. “Our report shows that there is no simple choice between oil and gas on the one hand and renewables on the other.

“The reality is that to keep the lights on and grow our economy, we need both. By the mid-2030s, according to the Climate Change Committee, oil and gas will still provide half our energy needs. We should be aiming to get as much as possible of that energy from our own resources – meaning the North Sea.

“That makes it essential for the UK to attract investment. The alternative is to become ever more reliant on other countries. Without investment we risk having to import not just our day-to-day energy but also the kit and expertise needed to reach net zero.

“That net zero transition will need £1.4 trillion of investment – which should be benefiting British companies and workers. But the current windfall levies and political statements about the future of such levies risk driving that investment away. They give the Exchequer a short-term boost in terms of tax income – but the long-term impacts could be disastrous for consumers and the economy.”

David Whitehouse, OEUK’s chief executive, said: “The windfall levies are driving investment out of the UK.  The total tax rate for offshore oil and gas operators is now 75% - three times that of conventional UK business. When prices fall, as is already happening, the ‘windfalls’ will disappear – but the tax will remain because it is locked in place till at least 2028.

“That makes these taxes a deterrent for investors. The same issue applies to offshore wind operators who face a similar windfall levy. Together these levies risk turning the North Sea, which should be the bedrock of the UK’s energy security, into an unattractive place to invest. Some projects will proceed but not the number we need for our energy security and jobs.

“Our industry is committed to helping the UK reaching its target of net zero by 2050 but our policymakers should remember that this is a huge and costly enterprise. The Office for Budget Responsibility costed net zero at £1.4 trillion in 2020 prices – of which more than £1 trillion will have to come from the private sector.  We need fiscal policies that attract those investors.

Our industry has shown what collaboration and long-term planning can achieve. We’ve powered the UK’s homes and businesses and fuelled its economy for 50 years. Now we’re ready to power the future too - with traditional fuels for now, whilst building the low carbon energy systems of the future. But that depends on moving back to a fair, balanced, and predictable tax regime.”