NOVEMBER 2024 – The Labour government, under Chancellor Rachel Reeves, has enacted significant adjustments to the fiscal framework governing North Sea oil and gas operations. These measures, aimed at balancing revenue generation and renewable energy funding, include an increase in the Energy Profits Levy (EPL) from 35% to 38% and an extension of its duration to 2030, bringing the headline tax rate on oil and gas activities to 78%. This rate aligns with Norway’s, despite the UK’s more mature and investment-constrained North Sea basin.

Key Budgetary Changes

1. Tax Increase & Investment Allowance Removal: Effective November 1, the EPL will remove the 29% investment allowance, previously used to offset tax liabilities from capital reinvested into oil and gas projects. A “first-year allowance” and a 66% decarbonization allowance are retained, allowing some relief for investments focused on decarbonization initiatives.

2. Impact on Investments: North Sea operators, such as Harbour Energy and Serica Energy, have expressed concerns over these tax hikes, warning that increased taxation without sufficient fiscal incentives could further deter investments in the declining basin. The Office for Budget Responsibility (OBR) predicts that capital expenditure in offshore energy will decline by 26% over the forecast period, with projected reductions of 6.3% and 9.2% in oil and gas production, respectively.

3. Mixed Market Response: While North Sea companies like Harbour Energy and Serica Energy saw stock price gains, some, including ExxonMobil, are reducing their UK presence due to concerns over high taxation and declining production.

4. Renewable Energy Funding: The revenue generated from the EPL is earmarked to support renewable energy projects, including £500 million for hydrogen infrastructure, £1 billion for Track 1 carbon capture and storage (CCS) projects, and £125 million for establishing Great British Energy in Aberdeen. This approach aligns with Labour's broader strategy to reduce dependency on oil and gas, while advancing the UK's renewable energy capacity.

5. Energy Transition & Investment Zones: The government has pledged further investments in green infrastructure, establishing investment zones in Aberdeen, Glasgow, and the East Midlands, and aligning freeports with an upcoming national Industrial Strategy. These zones aim to support advanced manufacturing and green industries, fostering an environment that encourages a gradual energy transition.

6. Industry Sentiment & Future Fiscal Outlook: Industry leaders and analysts are sceptical that these measures will spur the desired energy transition, citing excessive tax burdens and reduce fiscal predictability post-2030. A consultation on a successor regime for the post-EPL period is planned for early 2025, intending to establish long-term stability in the sector.

Summary

While the government's measures reflect a firm commitment to driving the energy transition, the immediate impact may hinder investment in North Sea oil and gas. By reducing fiscal incentives, the government risks accelerating production declines, which could impact the UK's energy security and lead to higher reliance on imports.

For 15 years, the World Energy Capital Assembly (WECA) has been the premier meeting place for energy executives, financiers, and investors. Considering the seismic changes the upcoming budget could bring, WECA24 will be the pivotal event where industry leaders come together to analyse, adapt, and seize the opportunities emerging from this fiscal overhaul. If you want to understand how these changes will shape the future of UK energy—and your place within it—WECA24 is where you need to be