Chancellor Rachel Reeves may consider ending the windfall tax on the UK oil and gas sector sooner than anticipated. This comes as Prime Minister Keir Starmer expressed his intention to prioritize North Sea drilling.
Reeves is reportedly looking at using her upcoming budget to lift the energy profits levy in March 2029, rolling back a prior decision that pushed its end to March 2030. However, she is under significant budgetary pressure and seeks guarantees from oil and gas companies that this move will encourage investments and create jobs, ultimately benefiting the government’s revenue.
Sources from the industry indicate that the Treasury has been asking for investment plans during recent discussions, as both Reeves and Starmer focus on utilizing North Sea resources to stimulate economic growth in the UK. While there is skepticism in the Treasury, discussions about ending the windfall tax a year early are ongoing.
This shift would mark a departure from the government’s previous focus on renewable energy, with Reeves now open to the idea that the offshore oil and gas industry requires additional time to evolve. Labour has plans to ban new exploration licenses but will maintain existing fields throughout their operational life.
Offshore Energies UK claims that replacing the windfall tax with a more stable tax system could unlock up to £40 billion in investment across 90 projects. They argue that the current tax structure is costing approximately 1,000 jobs per month.
The independent Office for Budget Responsibility had estimated that extending the energy profits levy until March 2030 would generate about £1 billion, though there was uncertainty surrounding that figure.
If Reeves opts to reverse this decision, she would attempt to persuade the Office for Budget Responsibility to factor in potential growth in the North Sea sector in its economic forecasts.
Starmer emphasized the importance of oil and gas in the energy mix for the future while also promoting renewable energy opportunities, particularly for Scotland.
OEUK has urged Reeves to replace the temporary windfall tax that was introduced following the surge in oil and gas prices after Russia’s invasion of Ukraine. Brent oil prices have since decreased significantly. The Treasury is now contemplating a permanent tax structure based on profits to restore industry confidence.
David Whitehouse, OEUK’s chief executive, stated that upcoming decisions are crucial for the North Sea’s future and the UK’s energy landscape, impacting job retention and investments.
The Labour government recently increased the effective tax rate on upstream oil and gas profits to 78%. This has led smaller operators and supply chains to cut jobs or consider relocating to more favorable markets.
Some insiders characterized the potential changes to the tax as a compromise that may not satisfy either side of the ongoing energy transition debate. The Treasury has declined to comment on any speculative tax changes ahead of the budget announcement.
In a related note, the government confirmed that the UK is set to meet and exceed legal caps on greenhouse gas emissions for the next five years. Energy Secretary Ed Miliband stated that Labour’s net-zero delivery plan aims to enhance the economic well-being of British citizens while focusing on low-carbon energy and improved home insulation.