Wheels up to change rules of oil & gas game in UK waters while windfall tax hike gets green light

The United Kingdom (UK) plans to embark on consultations to come up with new environmental guidance for offshore oil and gas projects in the aftermath of the recent Supreme Court ruling, which embedded consideration of greenhouse gas (GHG) emissions from the combustion of oil and gas into environmental impact assessments for hydrocarbon extraction projects for the first time in Britain’s history. Meanwhile, the government will raise and extend the energy profits levy (EPL) on oil and gas production to a headline rate of 78%, despite warnings that such a move could derail energy investments, endangering both energy security and the transition to a more sustainable future, since the net zero shift is estimated to come with a price tag of over £1 trillion or more than $1.29 trillion.

While some countries, like Norway, which want to see oil and gas thrive alongside renewables to strengthen energy security and diversify the energy mix, have tried to set attractive fiscal policies to attract further investment in the energy sector where hydrocarbons still play in the starring role, others are doing their utmost to discourage further pursuit of fossil fuels. Critics of the UK government’s recent moves claim that the country has put itself in the second category.

In response to a recent court ruling, Britain is looking to up its environmental guidance for offshore oil and gas developments amid growing net zero transition urgings, which are increasingly pushing the fossil fuel phase-out narrative as the only way forward rather than promoting the coexistence of all energy sources against the backdrop of rising security of supply concerns as advised by an ever-increasing number of energy experts given the ongoing geopolitical tensions.

The UK government has confirmed its plans to consult on updated environmental guidance for offshore oil and gas projects after a recent court ruling brought emissions created when the oil is burned into play, putting Shell’s Jackdaw and Equinor’s Rosebank projects at risk as the date for the court challenge over their approval draws near. The government has disclosed its decision to drop its legal defense of these two North Sea developments.

Britain’s government justifies its actions by claiming it committed itself to a fair and prosperous transition in the North Sea that delivers stability, supports investment, protects jobs, and meets climate obligations. The ruling in the Finch case, delivered on June 20, requires operators to consider the impact of burning oil and gas in their projects’ environmental impact assessments. 

As a result, the UK believes the updated environmental guidance for offshore oil and gas projects will provide greater certainty and stability for the industry in response to the Supreme Court ruling, setting out the elements to be considered by operators when assessing emissions from burning oil and gas they produce.

To this end, the government claims it acted quickly and will now consult with stakeholders, including the offshore industry on draft guidance to ensure its implementation from the upcoming spring. Separately, the government will also consult before the end of the year on the implementation of its commitment not to issue new oil and gas licenses to explore new fields, as part of its plan to ensure what it considers to be a fair and prosperous transition in the North Sea.

Michael Shanks, UK’s Energy Minister, commented: “We have already started plans to speed up the North Sea’s clean energy transition to protect jobs and investment, from pushing ahead with new industries such as carbon capture, to launching Great British Energy – headquartered in Aberdeen.  

“Now we are acting quickly to provide greater stability for our offshore industries, by consulting on new environmental guidance that complies with our legal obligations. We will continue to work closely with industry to ensure a prosperous future for the North Sea and our offshore workers.”

These steps follow the government’s action to accelerate the transition to the North Sea’s clean energy future to boost Britain’s energy security and ensure good, long-term jobs. This includes launching Great British Energy, headquartered in Aberdeen, and signing a new agreement with the Scottish government to support investment in clean energy supply chains and infrastructure.

Alongside this, the government is speeding up a new skills passport to help oil and gas workers move into roles in offshore wind and has revealed the biggest-ever investment in this renewable power source. In addition, it is moving ahead with new North Sea industries like carbon capture and storage (CCS) and hydrogen. The consultation on draft supplementary EIA guidance for assessing the effects of scope 3 emissions on climate from offshore oil and gas projects is slated to close on January 8, 2025.

After the Supreme Court upheld the appeal, concluding the Council’s decision to grant planning permission for the oil development in question was unlawful because the end-use atmospheric emissions from burning the extracted oil were not assessed as part of the EIA, the judgment has implications for the application of the offshore oil and gas exploration, production, unloading, and storage EIA regulations 2020, which implement the EIA directive concerning certain offshore projects.

This means that end-use emissions from the burning of extracted hydrocarbons need to be assessed as part of EIAs related to offshore oil and gas activities, even though the facts of the Finch case were about an application for planning permission of an onshore oil extraction facility, according to the UK government. As a result, the government is working on developing updated EIA guidance to help offshore operators understand the practical implications of the judgment.   

Within its Autumn Budget 2024, the government underscored that oil and gas companies would contribute more to support the energy transition and help make the UK a clean energy superpower. With this in mind, the government is determined to ramp up the rate of the EPL from 35% to 38%, removing the 29% investment allowance, and extending the levy until March 31, 2030.

However, the 100% first-year allowances in the EPL will remain and the government intends to consult in early 2025 on how the oil and gas tax regime should respond to price shocks once the EPL ends in 2030. Confirming changes to the windfall tax, the Chancellor claimed to have sought to ensure the country’s oil and gas industry can protect jobs and support domestic energy security.

While the government will increase and extend the energy profits levy on oil and gas production to a headline rate of 78% and remove the associated investment allowance, the 100% first-year capital allowance and the decarbonization allowance will be retained. The Chancellor also confirms the EPL will fall away in March 2030 unless the Energy Security Investment Mechanism is triggered before that date.

Rachel Reeves, UK’s Chancellor, said in her Autumn Budget 2024 speech: “To maximise the growth benefits of our clean energy mission, we have confirmed key investments such as carbon capture and storage to create jobs in our industrial heartlands. Our approach is already having an impact. Just two weeks ago – we delivered an International Investment Summit which saw businesses commit £63.5bn of investment into this country […] creating nearly 40,000 jobs across the United Kingdom.

“[…] Next, we committed to reform the Energy Profits Levy on oil and gas companies. I can confirm today that we will increase the rate of the levy to 38%, which will now expire in March 2030 […] and we will remove the 29% investment allowance. To ensure the oil and gas industry can protect jobs and support our energy security  […] we will maintain the 100% first year allowances and the decarbonisation allowances too. “

Wood Mackenzie’s analysis underlined that the country could extract up to £10 billion of North Sea oil and gas pre-tax value from existing assets if its government would implement a fiscal system that encourages investment, restoring trust within the industry.

David Whitehouse, CEO of Offshore Energies UK, highlighted: “Today we heard the Chancellor recognise the role of the oil and gas sector to support high quality jobs and strengthen the UK’s energy security. We welcome that and the meetings and dialogue which have taken place between industry and the new government.

“While the government will increase and extend the Energy profits levy on oil and gas production to a headline rate of 78% and remove the associated investment allowance, the 100% first-year allowance and the decarbonisation allowance will be retained.”

In the wake of the government’s decision, Offshore Energies UK (OEUK), a trade body for the country’s offshore energy sector, responded to the Autumn Budget by pointing out a different path that would generate more economic value, enabling a homegrown transition towards the country’s climate goals by anchoring the sector’s supply chain and supporting over 200,000 UK-wide jobs. OEUK also acknowledged the Chancellor’s support for GB Energy and funding for CCS and hydrogen projects across the UK.

Whitehouse underlined: “The Chancellor also confirmed that the EPL will fall away in March 2030. However, with an increase in tax despite commodity prices at recent lows, there is no hiding that this is a difficult day for the sector. Oil and gas companies, our world class supply chain and our highly skilled people will support the energy transition. We will not be successful without them.

“It’s why there is a different path for this industry which can deliver the energy future we all agree on. With industry and government working in partnership we can protect the North Sea as a national economic asset. It can and should serve as an engine to realise UK economic growth and climate goals.”

OEUK is campaigning for a homegrown energy transition that makes the most of the UK’s people and industrial strengths to be a secure, sustainable, and skilled future, given the 154,000 jobs directly or indirectly related to offshore energy, with 120,000 of these directly or indirectly supported by oil and gas projects. When induced jobs are included, this increases to over 200,000 while projects show that spending in the UK’s offshore energy sector could total £450 billion or over $581.7 billion by 2040.

Whitehouse continued: “We welcome that the government will consult in early 2025 on how the oil and gas tax regime can encourage investment and respond to changes in the oil price. We also note the consultation on end use emissions for oil and gas projects.

“That’s why we are calling for a homegrown energy transition – making the most of our whole homegrown sector – from oil, gas, wind, hydrogen to carbon capture projects with fair and competitive stable policies that keep jobs, skills and capital in the UK.”

OEUK emphasizes that the existing supply chain, built through experience supporting the oil and gas sector, can service 84%, 80%, and 58% of Britain’s CCS, hydrogen, and floating offshore wind sectors, respectively. While moving to net zero is estimated to require more than £1 trillion of investment across the UK economy, the trade body claims that the offshore energy sector is ready to spend £450 billion on projects in the next 15 years under the right investment conditions.

Caroline Bragg, CEO at the ADE,  noted: “The overall fiscal climate is difficult, but it is encouraging to see a renewed focus on investment in infrastructure. The UK Infrastructure Bank struggled to achieve the mandate it was given, and it was disappointing to see almost no investment by the Bank in heat networks.

“With this renewed funding through the National Wealth Fund we hope that this can be the start of a more fruitful partnership. Now is the time to put the UK on the lowest cost path for heat decarbonisation so that Britain can truly become a clean energy superpower.”

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Moreover, the UK imports around 40% of its energy needs, and its energy production is perceived to be the lowest it has ever been even though the country gets three-quarters of its total energy from oil and gas, with domestic production equivalent to around half these needs. OEUK points out that over 24 million homes rely on gas boilers for heating as 1.5 million more homes rely on heating oil, with over 30% of UK electricity being supplied by gas power stations and 38 million vehicles running on petrol or diesel.

Responding to the UK’s Autumn Statement, Terry Allan, CEO of nexos, warned: “With an increased energy profits levy at 38% and the removal of the 29% investment allowance, the government’s approach risks a double fault on our energy future, undercutting the very security and job protection it aims to support. Oil and gas, alongside emerging renewables, such as the 11 green hydrogen projects announced today, form an essential partnership in our energy transition, not competitors.

“The stability needed to power this shift is undermined by sudden changes, threatening both investment and innovation across the energy sector. Removing incentives for reinvestment could sideline essential UK projects, pushing companies to look elsewhere and leaving our workforce and energy security vulnerable. Rather than fostering agility and cooperation, these new policies may well hinder our ability to play the long game for a sustainable, next-gen energy future.” 

While many have expressed their dissatisfaction with the latest spike in EPL, Andy Wood, CEO of Primeval Energy, was among the most passionate opposition voices, labeling the UK government’s most recent move as “the assassination of North Sea oil,” which he considers to be an industry that has been “taxed out of existence.” Wood hammers his points home by providing two examples of current tax scenarios. The first one is related to Tesco, a British supermarket chain that recently disclosed revenues of £31.5 billion for six months, which he underlines pays only a 25% tax on its UK profits despite such a significant amount.

The second scenario is about the North Sea oil and gas players, which is Wood’s way of pointing out the vast difference in the tax system related to Britain’s oil and gas industry compared to the fiscal regime currently in place for other industries and sectors. According to Wood, the biggest oil and gas producer recorded a profit of £1.9 billion, which is estimated to be around 94% lower than the figure posted by Tesco. Despite this, the North Sea operator is paying 75% tax on its UK profits, which will now rise to 78% since it has been called out for making “‘windfall profits’ in the eyes of government.”

Wood emphasized: “This is nothing short of a strangulation of an industry and of the Northeast Scottish economy. Aberdeen is being bled dry. The hypocrisy of a government which is willing to import and burn fossil fuels for existential energy generation but unwilling to support its home-grown hydrocarbon industry, to catch the newspapers headline for political point scoring is astounding. Energy policy based on sentiment of the ill-informed is irresponsible and will have serious repercussions on a major industry and the regions which house it.

“There will however be no significant adverse affects for the policy-makers. The new energy policy is to undertake a controlled demolition of the UK oil and gas industry while not providing satisfactory energy security at home. It will not provide employment. It is quite simply a dereliction of duty. If you are going to rely on hydrocarbons for your energy supply and so much more, have the courage to support a still profitable industry and its communities.”

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Wood’s view is shared by many industry professionals, including John Butler, Global Maritime’s Global Lead – Energy Transition, who urged mindfulness of “unintended consequences,” that would arise out of “strangling” Britain’s oil and gas sector as such a move would have the same effect on the UK’s supply chain which provides “the innovation, technology and most importantly the people to delivery offshore renewable energy projects.”

Butler, who expands Andy’s analogy by mentioning Amazon, which had net sales of $33.6 billion in 2023 and paid only “a small fraction” in tax, underlines that his view is not intended to be understood as “a witch hunt” but instead should be taken as an argument for “a diverse energy eco-system that includes O&G,” as such “diverse energy vectors are going to co-exist for decades to come.“

While pointing out that the road to ensuring energy resilience in the UK entails supporting the production of remaining oil and gas while moving to renewable energy, Butler underlines this enables the transition of the offshore supply chain in parallel.

Therefore, he is convinced that parity is needed “when considering what a ‘windfall tax’ is and who should be paying it, not demonising an industry and making a political football out of it.”