WoodMac claims changes to profit levy could sound death knell for North Sea energy industry

Leading global commodity research firm Wood Mackenzie says proposed new UK government taxes could spell the end of the North Sea oil and gas industry.

The UK oil and gas industry has been in turmoil following the change of government last month, with numerous majors already pulling out and now new tax changes are expected to see more operators shut down.

Already in decline due to dwindling reserves, Wood Mackenzie says the mooted changes to the Energy Profits Levy (EPL) – a windfall tax aimed at oil and gas companies operating in the North Sea – could paralyse upstream investment if implemented in the October budget.

Extraordinary profits

The EPL was introduced in May 2022 to tax the extraordinary profits of oil and gas companies operating in the UK and on the UK continental shelf.

The levy is currently set at 35%, bringing the headline rate of tax on upstream oil and gas activities to 75%.

The government has told industry that the levy is due to expire on 31 March 2029 but will end sooner if oil and gas prices fall to thresholds set out in the Energy Security Investment Mechanism.

According to new research by Wood Mackenzie, while the government says its proposed changes to the EPL could bring in annual average revenue of around $2.3 billion, it could also cause major damage to the North Sea oil sector.

The new government has proposed increasing the EPL from 35% to 38% and extending the sunset clause (the time when the levy will be abolished) by 12 months to 31 March 2030.

It has also revealed plans to abolish a 29% investment allowance and reduce the capital allowances.

Uncertainty remains

“After less than a month in power, the Labour government has continued in the same vein as the previous Tory government by making further temporary changes to the upstream tax system without addressing the uncertainty over the critical capital allowances,” senior vice president of global fiscal research at Wood Mackenzie Graham Kellas said.

“The short-term gains of tweaking the EPL could result in the premature slowdown of investment across the upstream sector which could lead to accelerated cessation of production.”

James Reid, a senior research analyst at Wood Mackenzie, said the extension of the sunset clause to 2030 was surprising because Labour had previously stated it would keep its version of the EPL for the duration of the parliament which will end in 2029.

“To therefore extend the sunset clause to 2030 makes little sense and retains one of the EPL’s critical flaws: the misalignment of fiscal terms between the investment phase and the producing phase,” he said.

“The sunset date has been extended so often investors will now pragmatically assume that the EPL is a permanent feature of the system, rather than assuming terms become more favourable in the future.”