Labour's tax raid to trap 1.5bn barrels of oil and gas under North Sea

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23-05-2025

Labour's windfall tax on oil and gas producers will leave 1.5bn barrels of oil and gas stuck in abandoned North Sea oil wells, according to new analysis of the levy's impacts.
The predicted output between now and 2050 has fallen 40pc from 3.6bn barrels of oil equivalent to just 2.1bn barrels, according to a report from investment bank Stifel.
The findings are based on data supplied by the North Sea Transition Authority (NSTA), the Government's oil and gas regulator.
The slump in expected output comes after a surge in the number of companies abandoning productive wells, following Rachel Reeves's decision to extend the tax on oil and gas profits to 78pc. Ed Miliband, the Energy Secretary, has also banned new drilling.
Christopher Wheaton, a Stifel analyst, warned that the tax take from oil and gas was also set to plummet, partly because of declining production volumes but also because the price of oil has fallen so far that there is no longer a windfall to tax.
The report said: 'The UK North Sea industry is being destroyed by taxes that are too high, taxes which threaten energy security, jobs, investment and economic growth.
'The impact of lower investment and production is already being felt through job losses, lower tax receipts and more energy imports.
'The Office for Budget Responsibility's current forecast for North Sea tax receipts to 2030 is £10bn too high due to declining production and lower energy prices.'
The forecast represents a potential headache for Ms Reeves, the Chancellor, who has left herself only a narrow margin to meet her fiscal rules and is already borrowing more than forecast.
The UK has about 280 oil and gas fields that last year produced 29bn cubic metres of gas and 28m tonnes of oil. These amounts were lower than a decade ago when the UK produced 38bn cubic meters of gas and 38m tonnes of oil.
The reduction has largely been driven by natural decline but experts have warned that recent tax raids on the sector have accelerated the North Sea basin's demise.
The NSTA's 2023 production forecasts said that the UK would produce oil and gas equivalent to 46m tonnes of oil in 2028. But its latest forecasts, just issued, downgrade that to 40m tonnes, falling further to 33m tonnes in 2030.
By 2040, the NSTA predicts the UK will be producing just 9m tonnes of oil and 4bn cubic metres of gas – way below what the country will still need by then, meaning more imports.
The fresh forecasts suggest the windfall tax, or Energy Profits Levy, has roughly doubled the rate of decline.
Robin Allan, the chairman of Brindex, an offshore industry trade body, said: 'An accelerated decline of North Sea output will see UK dependency on imports reach more than 85pc by 2030. The windfall tax is self-defeating and it should be removed.'
The tax was first proposed by Labour in opposition but was adopted by the then Conservative government under Rishi Sunak in 2022 in response to the surge in oil and gas prices caused by the Ukraine conflict.
Mr Sunak initially said it would only remain in place while the windfalls lasted. However, he and then Labour subsequently decided to retain it until 2030, even though oil prices have fallen from a peak fo $139 a barrel to about $60 now.
Offshore operators say the tax is so high that there is now more incentive to decommission productive wells and claim the associated tax rebates than to expand production.
Serica, one of the largest UK operators, separately warned on Thursday that Ms Reeves's windfall tax and Mr Miliband's ban on new exploration was killing off the UK industry.
David Latin, Serica's chairman, said: 'The impact of the inappropriate fiscal environment, and the years of uncertainty, is taking a heavy toll. UK production fell 5pc in 2024, drilling activity is at a record low, 10,000 jobs have been lost and companies continue to exit the UK North Sea.
'All of this will reduce tax receipts going forward and, given demand which will not go away any time soon, lost production will have to be imported – imports which are worse for the environment since they involve significantly increased emissions.'
A government spokesman dismissed criticisms, saying: 'The Government has reformed the Energy Profits Levy to support investment and give industry certainty and stability.
'We are delivering a fair and orderly transition in the North Sea, with the biggest ever investment in offshore wind and two first-of-a-kind carbon capture and storage clusters.'
The Conservatives, the original architects of the tax, said the political consensus on the windfall levy was gone forever.
Andrew Bowie, Conservative shadow energy spokesman, said: 'The report shows in the starkest terms what many have been warning about for months if not years – that the windfall tax is killing the North Sea oil and gas industry.
'Up to 10,000 people have already been laid off with 250 in the last weeks alone. And the new jobs promised in renewables just do not exist yet. Labour must think again and speed up any future fiscal arrangement for the North Sea before we see an entire industry disappear.'
Richard Tice, energy spokesman for the Reform Party, said: 'A Reform government would encourage people in the oil and gas sector to get ready to explore when we win the next general election. We are urging them to have new licences ready to approve on an accelerated timeframe.'
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