UK windfall tax hike could cost the government $16 billion

London: The planned additional hike in the UK’s windfall tax on North Sea oil and gas operators could lead to $16 billion (£12 billion) lower tax receipts for the country compared to the current tax regime, offshore industry group OEUK warned in a new report on Monday.

The Labour Party, which came to power after a landslide victory in the July general election, has pledged to further raise the already high windfall tax on oil and gas profits in the North Sea and scrap tax relief for operators for part of the investments in oil and gas assets they have made.

In July, the Labour government said that it intends to raise the rate of the Energy Profits Levy (EPL) to 38% from 1 November 2024, from 35% now, bringing the headline rate of tax on upstream oil and gas activities to 78%, up from 75% currently. The levy will be further extended by a year to 2030.

The proposed changes, expected in the Autumn Statement at the end of October, will have a material negative impact on the sector and the UK economy and supply chain, according to the OEUK industry body.

Apart from reducing revenues for the state, the tax hike is set to reduce viable capital investment on the UKCS from $18.5 billion (£14.1 billion) to just $3 billion (£2.3 billion) in the period 2025 to 2029, OEUK’s analysis has found.

As much as 63% of additional production that could be sanctioned under the current regime would be uneconomic under the future proposal in the long term, OEUK said. Thus, the UK would be more reliant on other countries to meet the UK energy demand at a cost to the UK economy and net zero, the industry body warned.

In addition, OEUK said that around 35,000 jobs are at risk in 2029 alone due to projects not going ahead.

Last week, Equinor, the operator of one of the major new field developments in recent years, Rosebank, said it awaits clarity on the UK tax regime by the Labour government before strategizing and committing to investments in the UK North Sea.

As a result of the planned hike in the windfall tax, UK North Sea producers have already warned they are considering moving to more fiscally stable jurisdictions such as Norway.