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Oil and gas production in the North Sea could halve by 2030, far faster than currently expected, under tax proposals that would cause “irreversible damage” to the sector, according to a report from energy consultants Wood Mackenzie.
North Sea oil and gas companies have already dramatically scaled back their activity while they wait for a decision on taxes in next month’s Budget. “The ongoing uncertainty makes planning extraordinarily hard and financing all but impossible,” said the report.
Companies will have to pay 78 per cent tax from November, after an increase in the “energy profits levy” (EPL) windfall charge that was originally introduced in the wake of Russia’s full-scale invasion of Ukraine, when energy prices jumped.
They also face the prospect of losing capital expenditure and investment allowances, after the government said it planned to close “unjustifiably generous” tax loopholes.
Wood Mackenzie said in the absence of more information, companies have made contingency plans for the EPL to continue indefinitely and for all allowances to be removed.
“This scenario would wipe out £19bn, or 65 per cent, of the UK’s remaining development capital expenditure, halve UK production by 2030, and all but eliminate industry cash flows by the 2030s,” said the report, circulated among its clients and seen by the Financial Times.
In a better-case scenario for oil and gas companies, in which the EPL expired in 2030 and capital allowances were retained, oil and gas production would fall by 30 per cent by 2030.
Graham Kellas, one of the authors of the report, said they had chosen those scenarios because they are what oil and gas companies themselves are using to make their plans.
Several North Sea oil and gas companies have paused or halted new projects this year, and the industry has warned that new investments will not be possible.
The Wood Mackenzie report added that it was also likely that smaller companies would fail, leaving their partners, and potentially the UK government, on the hook for future decommissioning costs.
The North Sea Transition Authority, which regulates the industry in the basin, believes that the cost of removing oil platforms and capping wells at their end of their lifetime will be £40bn.
While Wood Mackenzie’s analysts said they did not expect the government to choose the worst-case scenario for the industry, the report added: “Having stated it believes UK oil and gas must be kept healthy and productive ‘for decades to come’, [the government] is creating an investment environment where the industry is fatally wounded in less than five.”
Wood Mackenzie is one of the most respected consultancies in the energy industry but has historically specialised in, and still draws many of its clients from the oil and gas sector.
Following the dramatic rise in oil and gas prices in late 2021 and 2022 and the introduction of the energy profits levy in May 2022, tax revenues from the sector reached a peak of £9.8bn in 2022-23, compared with £2.6bn the year before, official figures show.
By 2028-29, the receipts from various oil and gas taxes are forecast to fall to £2.2bn. The Office for Budget Responsibility, the UK’s independent forecaster, said in April that future tax revenues will wane as investment and production in the North Sea dries up.
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In September, Offshore Energy UK, a lobby group, said the government’s tax proposals would put 35,000 jobs in the North Sea at risk and would see companies cut back their capital investment in UK projects from £14.1bn to just £2.3bn between 2025 and 2029.
Fraser McKay, another of the authors of the report, said: “The UK does not have four or five years to get this wrong because of the maturity of the basin. That is why we use the word irreversible in the report.”
In July, the Treasury said it recognised “the importance of providing the oil and gas industry with long-term certainty on taxation” after a series of changes to the tax regime in the past.
