UK likely to unlock £10 billion worth of North Sea oil & gas with encouraging fiscal regime, WoodMac finds

Given the rising focus on energy security, Wood Mackenzie, an energy intelligence group, has pointed out that the United Kingdom (UK) could get its hands on an additional £10 billion of North Sea oil and natural gas value from existing assets if it puts the right set of fiscal and regulatory policies in place.

With the ongoing energy trilemma at the forefront, as it requires measures to be taken to pursue energy security, affordability, and sustainability with equal vigor, many countries around the globe, including Britain, have taken steps to diversify and shore up their supplies while advancing their energy transition journey.

The United Kingdom’s trade body for the offshore energy industry, Offshore Energies UK (OEUK), recently noted the progress the UK made in reaching its greenhouse gas (GHG) emissions reduction goals while emphasizing the need to secure a continuing supply of homegrown energy and sustaining the supply chain, perceived as vital to bringing wind or hydrogen energy ashore as Britain transitions to a greater reliance on clean renewable energy.

While the Autumn Budget statement is expected on October 30, the government has already announced it would increase the EPL rate by 3% to 38%, taking the UK’s marginal tax rate to 78%, and revealed its intention to remove the EPL’s investment allowance, reduce its capital allowance, and extend its sunset clause from 2029 to March 31, 2030.

David Whitehouse, OEUK’s CEO, stated: “The North Sea is a strategic national asset and must be treated as such. Our homegrown offshore energy sector has powered the UK for the past 60 years, and the sector’s firms and skilled people are critical to our energy future as drivers of economic growth.

“We welcome steps to accelerate the deployment of renewable energy, and the recognition that we will use oil and gas for decades to come. Windfall taxes extended on oil and gas producers when no windfall exists deter the very investment that we need across our energy transition.“

OEUK, which pinpointed the decarbonization of oil and gas production as the best way forward to power the nation’s homes and businesses with low-carbon and zero-emission energy, also warned that government revenue from the North Sea could fall by as much as £12 billion by 2029 if all the proposals under discussion at the time where implemented to raise total taxes on profits to 78% and remove tax allowances on new investment.

“While we use oil and gas, we must surely prioritise investment in our homegrown production, value in our economy, and our jobs. {…} The government has heard from people across the sector, and now decisions will be made. On Wednesday, the Autumn Statement will be a marker. We are in a global race for energy investment. Let us choose the path that encourages and attracts it, to build on our national strengths, so the whole of the UK can win.”

Taking into account the current investment climate in the UK, a recent analysis by Wood Mackenzie 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 were to implement a fiscal system that encourages investment, restoring trust within the industry.

As the findings indicate that the oil and gas output from the North Sea has cumulatively dropped by 10% since 2022 due to the introduction of the Energy Profits Levy (EPL) and the ongoing regulatory uncertainty, the report underscores that this represents £5 billion in lost potential pre-tax cash flow.

Therefore, the report claims that the amount to which the EPL capital allowance is reduced is “fundamental to continued investment in the sector,” and goes on to address three scenarios. The first deals with the current dataset, representing an estimate of what would happen in the unlikely case the EPL would be unaltered in the Autumn Budget, beyond what is currently known.

The second scenario contemplates the possibility of an indefinite EPL, seen as “the catastrophic scenario” with no capital allowances that would lead to the country’s production halving by 2030. The third scenario, which has also been dubbed as the best-case one, shows an upside “if a pragmatic fiscal and regulatory consensus on a successor to the EPL is reached quickly and implemented as soon as practically possible,” as outlined within the report.

Furthermore, Wood Mackenzie is adamant the latter would necessitate the primary assumption that a new fiscal regime would be established in the H1 2025, tax rates would be fair, and encourage investment, trust between government and industry would be restored, and operators would commit to immediately resuming activity.

Fraser McKay, Senior Vice President of Upstream Research at Wood Mackenzie, commented: “Operators are fatigued by an ever changing and overly onerous tax burden and are accordingly adjusting the risked value associated with investing in the UK.

“The best-case scenario we have developed is improbably optimistic, but very important to recognise, as it highlights the substantial potential value at risk in the North Sea oil and gas industry, due to the UK government’s fiscal decisions.”

If this scenario were to take place, it is said that it would lead to 15% more reserves recovered from existing assets than in the current dataset’s projections, and up to 41% more than in the indefinite EPL case. In light of this, the direct impact on the gross sector value is seen as similarly significant, even before considering the supply chain and indirect service value-add to the UK economy.

Moreover, the energy market intelligence player notes that gross revenue from existing assets would rise by 13%, and pre-tax value would be up by 14%, both discounted at 10%. The variance, when compared to the indefinite EPL scenario, is outlined as 42% and 38%, respectively, equating to £20 billion of gross revenue and nearly £10 billion of pre-tax value, with both discounted at 10%, to share between government and companies, relative to the current data set.

Based on the report, the anticipated upside would add value and curb scope 1 and 2 emissions associated with importing energy, as the average intensity of imported oil and gas is seen as being more than double the 22 kg/boe average from domestic UK production.

Wood Mackenzie further explains that the difference between these scenarios represents an opportunity to save 23 million tonnes of carbon emissions in the current dataset versus an indefinite EPL scenario, and 12 million tonnes in a best-case scenario versus the current dataset over the next decade.

 “There is still a chance for the UK to realise some or all of this additional value, to reduce its scope 1 and 2 impact, and for stakeholders to channel this cash flow into funding the UK’s energy transition. But the longer the government waits, the fewer growth opportunities there will be, due to decommissioning and the maturity of the UKCS,” concluded McKay.

Following the government’s decision to drop their legal defense of the two North Sea developments and a recent court ruling, which brings emissions created when the oil is burned into play, Shell’s Jackdaw and Equinor’s Rosebank will need to face a court challenge next month.

Greenpeace claims that a lot is riding on the verdict in this case, as it could prevent Shell and Equinor from developing Jackdaw and Rosebank while setting a precedent for stopping other oil and gas developments.