Oil and gas executives have expressed concerns that Labour’s proposal to eliminate North Sea tax allowances could jeopardize their investments in the region, with numerous projects already on hold.
Extraction companies have refrained from drilling new wells in the area this year, as they await the outcome of the July 4 election to determine the future tax regime.
Proposed Tax Changes
Labour announced this week that, if elected, they plan to increase the windfall tax on North Sea oil and gas profits to 78 percent and remove what they consider “unjustifiably generous investment allowances” that reduce companies’ tax burdens.
Analysts project that these measures will raise billions over five years if fully implemented.
While the industry anticipated Labour’s intention to halt new oil and gas exploration licenses, several companies told the Financial Times they are now uncertain about the profitability of existing projects.
Major companies like BP and Shell have mostly exited the basin, but numerous smaller operators continue to extract the remaining reserves.
Economic Impact
David Latin, chair of Aim-listed extractor Serica, stated, “You need a 15 to 20 percent return to justify the effort. Under the new regime, returns won’t cover costs.”
Last year, production among the top 20 companies in the North Sea dropped by 11 percent, despite a £4.4 billion investment.
Serica, along with partners Jersey Oil and Neo, has postponed decisions on the Buchan field until after the election.
A seasoned North Sea oil and gas banker warned that Labour’s proposals would make it difficult for new projects to cover costs, including the largest undeveloped project, the Rosebank field.
Equinor and Ithaca have invested £3.8 billion in Rosebank’s first phase, but neither commented on its future under a new tax regime. Equinor stated, “The project is on track, with start-up planned for 2026-27.”
Financial Repercussions
Removing the investment allowance, which lets companies reclaim 29 percent of their taxes if they reinvest profits, will raise taxes for Harbour, Serica, and EnQuest by $200 million annually, according to Jefferies analysts.
Labour’s strong poll lead suggests their pledges could soon become UK government policy, impacting share prices of major explorers. Since the announcement, Deltic Energy’s shares have dropped 24 percent, EnQuest by nearly 13 percent, Serica 11 percent, and Harbour Energy 5.4 percent.
David Whitehouse, CEO of Offshore Energies UK, emphasized the importance of stability and trust. “We’re witnessing a significant decline in sector confidence, leading to fewer projects moving forward.
The removal of the investment allowance will exacerbate this trend,” he stated. So far this year, no exploration wells have been drilled on the UK continental shelf under the current fiscal regime.
Historical Context
Last year, Apache ceased drilling on the historic Forties oilfield, purchased from BP in 2003, due to the “challenging” environment.
Harbour Energy plans to expand internationally, while Serica’s chair Latin noted the difficulty in making even small decisions under the current regime. “It was the first time I needed five fiscal scenarios to make a decision,” he said.
Labour remains steadfast in their policy, integral to their net zero 2050 strategy. “No one in Norway’s oil and gas industry had issues with a 78 percent tax rate,” a Labour official remarked. “Industries always claim they’ll withdraw when taxes rise, but that’s a common response.”