UK windfall tax hike stokes fears of a collapse in North Sea oil & gas investments

Ever since the UK government decided to increase a windfall tax on oil and gas producers’ profits, as a part of a raft of budgetary measures aimed at shoring up the UK’s finances and tackling the cost of living crisis, many companies and organisations have pointed out the negative effects such a hike would have on investments in the sector. In light of this, many players are contemplating downgrading their UK portfolio or even exiting the North Sea, as they move to other oil and gas playgrounds in a bid to reap the benefits of the oil and gas boom in a lower-tax environment.

The windfall tax was first imposed last year when global energy prices surged to all-time high levels in the aftermath of the Ukraine crisis. A few days before the UK government disclosed plans to change the UK Energy Profits Levy (EPL) once again, increasing it to 75 per cent for oil and gas producers from 1 January 2023 until March 2028, Offshore Energies UK (OEUK) warned that the windfall ‘supertax’ proposal would risk driving out oil and gas investments from the UK waters, which could hinder the UK’s energy security along with its transition plans for a low-carbon future.

Following the windfall tax hike, OEUK underscored that the UK offshore industry would be “hit hard” by these tax changes on oil and gas production, which threaten to drive out investors and drive up imports, leaving consumers increasingly exposed to global shortages. In light of this, Moody’s outlook confirmed that the higher tax rate would result in lower projected positive free cash flow (FCF) generation with the related impact on cash flow lasting longer because of the levy’s extension beyond the end of 2025.

In addition, Westwood Global Energy recently highlighted that these tax changes had the potential to not only put oil and gas investments at risk but also amplify the mass departure of rigs from the North Sea, which could lead to the point of no return for North Sea rigs. While the windfall tax has been locked in place until 2028, global oil and gas prices have significantly decreased, which indicates that the windfall tax could be in place when there is no longer a windfall. As a result, several operators have already announced plans to curb investment in the North Sea and other UK waters.

Bearing this in mind, OEUK has been calling for a trigger price for the windfall tax, so that, it would only apply when oil or gas prices are high, and a windfall profit was being earned. For Offshore Energies UK, the prospect of the tax being applicable with no mitigation even when there is no windfall profit being earned has proven to be “a massive deterrent to investment” in the UK North Sea with 90 per cent of operators confirming that they are cutting back on investments. 

With the windfall tax hike casting a shadow over the once thriving North Sea basin, INEOS’ founder and chairman told his Forties Pipeline System business, which links over 85 fields in the North Sea, that the government’s 75 per cent windfall tax on oil and gas producers in the North Sea would lead to a collapse in investment in the basin.

Sir Jim Ratcliffe, Founder and Chairman of INEOS, underscored: “The UK has hiked the tax take in the North Sea from 40 per cent to 75 per cent and we are now seeing many operators pausing or cancelling their investment plans. The big winners are in the U.S. where operators in the Gulf of Mexico can pay just 37 per cent tax and investment is at its highest level for a decade.”

As the UK has imposed three taxes on operators – a 30 per cent Corporation tax, a 10 per cent Supplementary charge and a new 35 per cent Energy Profits Levy – businesses across the basin are reassessing their investment plans and many are deciding not to proceed with new North Sea developments. Ratcliffe claims that a lot of the money that was scheduled to go into the North Sea is being switched to the U.S. where oil and gas investments are booming.

“The UK government’s so-called windfall tax is really primitive politics. There has been no thought given to the long-term consequences of this ‘tax it to death’ move. Taxes are now so high that profits no longer fund future investments and on top of this, new investments have poor returns with invariably high tax rates,” added Ratcliffe.

While INEOS FPS, which operates the Unity platform located in Block 21/9 of the North Sea in 122 metres of water, is currently investing up to £1 billion to upgrade the network to ensure it is fit for purpose until the 2040s, this is dependent on the basin remaining a viable oil and gas hub. The INEOS Forties Pipeline System carries 575,000 barrels per day from 85 fields over 169 kilometres to its Kinneil processing facility at Grangemouth.

“In the UK, we have seen perpetual tinkering with tax rates and now a massive tax hike. What the country needs is energy security, which means encouraging developments in our strategic energy reserves in the North Sea, not taxing it out of existence and shutting down the basin,” concluded Ratcliffe.