Why the North Sea Oil Industry’s Reaction to the Government’s Windfall Tax Doesn’t add up

Last month, more than 40 oil and gas firms operating in the North Sea signed a letter addressed to the Treasury expressing “grave concerns” following the Government’s decision to raise the Energy Profits Levy from 3% to 78%, extending the tax by one year until 2030. 

Referring to the tax plans, introduced by the previous Conservative Government in May 2022, as a “blunt response” which risks jeopardising future investment and incurring job losses, the letter argued that the Government’s proposals “risk operators – big and small – further scaling back or postponing their investment plans in response” and warned that, “the ramifications will be felt throughout the supply chain, through jobs, and the communities this industry supports, both directly and indirectly”.

It also claimed that a punitive tax regime would shift investment away from a transition to renewable energy, stating that “the companies investing in nascent opportunities like floating offshore wind and CCS will require the cash flow from a stable and predictable oil and gas business to fund these opportunities”.

The letter was published by oil and gas trade association Offshore Energies UK, whose Chief Executive David Whitehouse argued in The Financial Times that the windfall tax has “meant that so far this year we are at historical lows for wells drilled in the North Sea and that fundamentally means we are not seeing the investment that the sector needs”.

While the North Sea basin is in terminal decline, with the amount of oil and gas produced by new licences since 2010 amounting to just over two weeks worth of domestic demand, this has little to do with an excessively harsh tax regime having deterred investment.

In fact, despite generous tax breaks, the North Sea oil and gas industry has become a net drain on the taxpayer over the past decade. According to Green Alliance research, between 2016 and 2020, oil and gas companies received £9.9 billion in tax relief for new exploration and production, combined with £3.7 billion in relief for decommissioning costs. 

Despite this, in 2019, the British Government received less than $2 in revenue per barrel of oil – compared to a figure of $22 per barrel for the Norwegian government – and, between 2015 and 2017, the British government made a net loss from North Sea production, subsidising it to the tune of £361 million, while decommissioning costs grew as a proportion of total operating costs, reaching 15% in 2017.

Stuart Dossett, senior policy adviser at think tank The Green Alliance, disputed that North Sea oil and gas firms would be deterred from investing in an energy transition by allegedly punitive tax rates.

“Amid surging energy prices in recent years, oil and gas companies have seen record profits and left households to foot the bill,” he explained to Byline Times.

“These companies have chosen to spend those profits on payouts to shareholders rather than reinvesting in new renewable energy projects. In 2022 Shell made £32 billion, its highest profits in 115 years.

“Of that, 65% was given to shareholders, dwarfing investment in renewable energy projects at just £2.8 billion and even oil and gas investments at £10 billion. We know these companies are not short on cash, they are simply choosing not to invest in renewable energy generation,” he continued.

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Will an Extension of the Windfall tax Harm Energy Security?

Chris Weaton, an analyst at investment bank Stiefel, was quoted in The Financial Times as saying that the extension of the Energy Profits Levy would “cause a very dramatic decline in investment and therefore production and jobs, and a big hit to energy security”. 

However, as gas production has declined by around 67% since 2000, the majority of what remains in the North Sea basin is not in fact gas, but oil, 80% of which is exported due to its incompatibility with British refineries.

Issuing new exploration and production licences would have a negligible effect on lowering energy prices, which are set on the international energy market. Then-energy secretary Claire Coutinho admitted in November that increasing supply “wouldn’t necessarily bring energy bills down”.

Investors in North Sea energy firms now face a quandary, risking ‘stranded assets’ as the exploration and production of new oil and gas infrastructure, estimated to take until the 2040s, may be undercut by cheaper renewable alternatives.

This was acknowledged by former Bank of England governor Mark Carney during a speech at Lloyd’s bank in 2015, where he argued that “increasing levels of physical risk due to climate change could present significant challenges to general insurance business models”.

This, when combined with the recommendations of the International Energy Agency (IEA), which has stated that no new fossil fuel production is compatible with limiting global warming to 1.5 degrees C as per the terms of the 2015 Paris Agreement, creates an uncertain investment climate, meaning that the ownership of North Sea oil and gas is unlikely to be undertaken by firms willing to reinvest in domestic job creation and clean energy production.

Indeed, North Sea oil ownership is rapidly shifting from publicly-listed, traditional oil majors towards opaque private equity firms and foreign petrostates.

Analysis by the think tank Common Wealth has found that private enterprise controlled 30% of North Sea energy in 2020, up from 8% in 2010, while energy giants such as Shell, BP, ExxonMobil and Centrica own 33.4%.

Traditional majors have sold over £20 billion worth of assets since 2017, as many of the important players are foreign state led enterprises such as Chinese firm CNOOC, which acquired Canadian oil and gas company Nexen in 2012, and Russian based firm Gazprom, which made £39 million profit from North Sea oil in 2023.

Motivated by short-termist production imperatives and insulated from legal financial and corporate disclosure requirements which would constrain the behaviour of publicly-listed companies, such firms are relatively free from obligations to reinvest capital in domestic production, to provide jobs to British workers, and to protect workers’ rights.