Wood Mackenzie urges UK government to establish stable tax policy for North Sea oil and gas

(WO) - According to new analysis by Wood Mackenzie, the UK government must create a more predictable tax regime for the North Sea oil and gas sector to ensure long-term stability. After a history of ad hoc changes, the need for a clear tax framework has become urgent.

The UK government has acknowledged that oil and gas production in the North Sea will be required for “decades to come.” However, recent and proposed modifications to the Energy Profits Levy (EPL) — which is set to end in 2030 — have created “unparalleled sector uncertainty and consternation,” the report states.

Designing a system that is equitable for both the government and industry is crucial for maintaining investment in this mature sector. The planned changes to the EPL will be confirmed in the Budget on October 30, which may also outline the timeline for establishing its successor.

For a predictable fiscal system to be implemented, Wood Mackenzie highlights several challenges that government and industry must address:

• Defining a price ‘shock’ and its duration.
• Determining the appropriate government share during a price shock and how it should vary.
• Deciding whether to target only excess income or apply a measure to a company’s entire taxable income.
• Creating a fair tax system for companies with both oil and gas production amid fluctuating prices.
• Simplifying the current tax structure.

The report emphasizes that solutions must be “predictable, transparent, simple to administer, and self-adjusting during periods of price volatility to minimize the need for further government intervention.”

Graham Kellas, senior vice president of Global Fiscal Research at Wood Mackenzie, stated, “North Sea oil and gas operators are trying to make long-term financial decisions beyond 2030, but the current fiscal regime does not allow for such clarity. Price responsiveness, predictability, fairness, simplicity, and transparency must all be considered to ensure the correct outcome is reached at what is a crucial juncture for the sector."

He added that achieving consensus will be challenging, not only between industry and government but also among companies themselves. Potential conflicts may arise between objectives, such as simplicity versus fairness and responsiveness versus transparency. “The consultation will be far from easy, but there are some shared objectives and where there’s a will, there’s a way,” Kellas concluded.