UK Government Announces New Oil and Gas Tax Changes

The UK government has announced new oil and gas tax changes, which it says are set to protect energy security and British jobs.

In a statement posted on its website, the government noted that the Energy Profits Levy, which it highlighted puts a marginal tax rate of 75 percent on North Sea oil and gas production, will remain in place for the next five years while oil and gas prices remain higher than historic norms, but added that the tax rate will fall back to 40 percent “when prices consistently return to normal levels for a sustained period”.

While the levy included an investment allowance to encourage firms to continue to invest in oil and gas extraction in the UK, industry has warned that companies are cutting back on investment, the government noted in the statement, adding that this puts the long-term future of the UK’s domestic supply at risk.

The government outlined that the Energy Security Investment Mechanism, which sees the tax rate drop back to 40 percent when oil and gas prices maintain normal levels, came in response to this. The government pointed out that the mechanism was announced to give the oil and gas sector certainty to raise capital and invest in new and existing projects, “securing affordable and reliable domestic energy supply and protecting some of the 215,000 British jobs the sector supports”.

The tax rate for oil and gas companies will only return to 40 percent if both average oil and gas prices fall to, or below, $71.40 per barrel for oil and GBP 0.54 per therm for gas, for two consecutive quarters, the government revealed. This level is based on 20-year historical averages, according to the government, which noted that, based on the independent Office for Budget Responsibility’s forecast, the mechanism won’t be triggered until before the tax’s planned end date in March 2028.

In its statement, the government said the levy was put in place to tax extraordinary profits made by the industry following record high prices of oil and gas driven by Putin’s invasion of Ukraine. It has raised around GBP 2.8 billion ($3.51 billion) to date and is expected to raise almost GBP 26 billion ($32.6 billion) by March 2028, the government revealed.

The government also revealed that it has published the terms of reference for an oil and gas fiscal regime review that was announced at the Autumn Statement. The review will focus on how the tax regime can support the country’s energy security and its net-zero commitments, while ensuring the UK retains a fair return in exchange for the use of its resources when responding to any future price shocks, the government said in its statement.

“It is right that we recover excess profits resulting from Putin’s war and use the money to help people with their energy bills,” Gareth Davies MP, Exchequer Secretary to the Treasury, said in a government statement.

“Thanks to the revenue raised from windfall taxes on energy profits, we will have helped save the typical household GBP 1,500 ($1,881) on their energy bill by July,” he added.

“While we stepped in to help, never again can our energy supplies be at the whim of petrostate despots like Putin. That’s why it’s so important that we secure investment in our own domestic supply, protecting the tens of thousands of British jobs that come with it,” Davies continued.

“It would be beyond irresponsible to turn off the North Sea taps overnight. Without oil and gas from British waters, we would be forced to import even more from overseas, putting our security of supply at risk,” he went on to state.

Industry Response

When Rigzone asked industry body Offshore Energies UK (OEUK) for comment on the UK government’s oil and gas tax change statement, OEUK sent through a note which said “the industry still faces considerable challenges to safeguard the jobs of its 200,000 strong skilled workforce, ensure the UK’s homegrown energy security, and power the transition to net zero and beyond with homegrown oil and gas rather than imports”.

“We’ve always been clear that when the windfall conditions go, the windfall tax should go,” OEUK Chief Executive David Whitehouse said in the comment.

“This is a step in the right direction, but many more will need to be taken to restore confidence to our sector. We will now work closely with government and lenders to understand the detail of the measure and its effectiveness at unlocking investment,” he added.

“Enabling continued UK energy production now and in future depends on a predictable and fair fiscal environment. The UK must be competitive if we are to be successful in the global race for energy investment,” he continued.

In the comment, Whitehouse said the industry was “proud to make a huge contribution”.

“In 2022/23 alone we will add over GBP 20 billion ($25.0 billion) to the UK economy overall. We provide over 200,000 good, skilled jobs across the length and breadth of the UK,” Whitehouse added.

“As we build the future there is no simple choice between oil and gas or renewables. The reality is we need both. In the mid-2030s, oil and gas will still provide 50 percent of our energy needs,” he continued.

“By investing in homegrown production, we avoid costlier, less secure, and higher carbon imports while supporting an industry we need to make cleaner, more affordable energy in the UK, for the UK. Our sector is expanding into renewable energy, supported by a world class supply chain,” Whitehouse said.

“We will continue to work closely with government and all parties on the journey to restore sector confidence,” he went on to state.

Back in March, OEUK highlighted in a statement posted on its site that it had been calling for a “trigger price” for the windfall tax, “meaning the tax would only apply when oil or gas prices are high, and a windfall profit was being earned”.

“The prospect of the tax applying even when there is no windfall profit being earned, with no mitigation, has proven a massive deterrent to investment in the UK’s North Sea with 90 percent of operators confirming that they are cutting back on investments,” OEUK noted in that statement.

Energy Profits Levy

In a policy paper posted on its website on March 15, the UK government outlined that the Energy Profits Levy was introduced from May 26 last year “to tax the exceptional profits of oil and gas companies operating in the UK and on the UKCS”.

“To maintain the incentive for companies to invest in oil and gas production to support the UK’s energy security, the EPL included a[n] … 80 percent allowance against the levy based on investment expenditure,” the policy paper stated.

The tax was due to expire on December 31, 2025, however, at the Autumn Statement, the UK Chancellor of the Exchequer announced changes to the Energy Profits Levy, including an extension to March 31, 2028, the paper outlined. Other changes included a rate increase from 25 percent to 35 percent and the reduction of the rate of the investment allowance to 29 percent for all investment expenditure other than in decarbonization, the paper highlighted.

The Chancellor also announced that, from January 1, 2023, qualifying investment expenditure on decarbonization of upstream production will be eligible for a higher expenditure allowance at 80 percent, instead of the 29 percent allowance, the paper noted.

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