HMT tests out windfall tax exit strategy
Why reform the Energy Profits Levy? It’s a question the industry, long frustrated, has been answering for years, but the chorus is now swelling beyond the North Sea.
Major reports in recent days - branded a “wake up call” by industry body Offshore Energies UK - have ramped up the pressure to bring it to an end, and it’s the voices of the supply chain and those seeing the real effects of the levy which are adding urgency to the debate.
The CEO of charity Aberdeen Cyrenians said the “human impact” of the Energy Profits Levy (EPL) is rising homelessness, food insecurity and mental health crises: “The EPL is not just failing workers; it’s failing families, public services, and the third sector absorbing the fallout,” said Donna Hutchison.
Port of Aberdeen, a prominent player in the day-to-day activity of Europe’s oil and gas capital, said it has seen a 25% reduction in oil and gas activity from last year. An astonishing figure - evidencing the rapid decline of the sector - especially, as the Port’s CEO Bob Sanguinetti put it, offshore wind at scale remains “a distant prospect for the region”.
And just two weeks ago, energy services firm Hunting announced it is moving manufacturing for its wells division out of Aberdeen for Dubai. They squarely blamed the effects of the EPL, with regional managing director Graham Goodall saying “there’s no trust in the government”. The firm said in March it was consulting on job losses.
Then there’s Petrofac - long seen as a flagship of the UK’s energy services sector. Its collapse into administration isn’t the fault of the EPL, but the absence of a willing investor to step in and back a world-class capability employing around 2,000 skilled UK staff is deeply concerning. It speaks to a wider lack of confidence in the North Sea supply chain. With clearer policy and a defined path beyond the windfall tax, that picture could yet change.
“It’s failing families, public services and the third sector”
More than three years on since the “windfall” tax was introduced, the price of Brent crude is now roughly half the value it was in May 2022, while investment continues to be lost along with jobs. From 2023-24 alone, says Robert Gordon University, the UK industry workforce declined by 5,000 roles.
Another voice in the debate last week was Tony Blair’s think tank, the TBI, calling for “genuine energy realism” and warning that the levy and the exploration ban have accelerated the North Sea’s decline. The report said this has resulted in a doubling of spend on imports to £117bn in 2023 (vs 2021).
The UK government’s own figures, published in July, show domestic energy production is now at record low levels, with reliance on imports accounting for nearly 44% of our overall demand.
Meanwhile, remarkably, another report came out just days ago from the industry regulator, the North Sea Transition Authority, showing there remains a “significant” resource in the UK sector’s discovered but undeveloped resources of 6.3 billion barrels of oil and gas. That, the NSTA said, would require substantial investment in both new field developments and incremental projects.
To be clear, the industry is prepared to do that - with the right conditions in place. OEUK’s formal proposals to the government showed potential to deliver over £40bn of new investment, unlocking economic value more than three times that figure.
Little wonder, then, that the Scottish Affairs Committee also made its own intervention, highlighting the need to bring in a successor regime to the EPL “as soon as possible” before its current planned sunset of 2030. That certainty is one vital step on the way back to investment and a managed transition - the same report rightly highlighted that renewables jobs are not growing at the pace required to manage the decline of oil and gas.
Is the Treasury listening?
It’s good to see these interventions, but is anyone listening at 1 Horse Guards Road? Perhaps.
Eyebrows were raised last week when Politico reported that the Treasury is indeed considering removing the EPL - as soon as 2026 - in a bid to drive growth.
Welcome news, for sure. But if the Treasury is merely floating policies in the press to see how they land, the industry must speak up loudly to show such a move will be received very well. That means a united voice - industry, political allies, supply chain, unions and, yes, renewable energy too, if it hopes to have a supply chain to transition by the time its projects are due to be realised.
Double down...
Even the Prime Minister, when pushed on the future of the Rosebank oilfield, said he wanted to “double down” on oil and gas, while ramping up renewable energy. That’s exactly what the industry wants to see and the best economic and environmental policy to play.
Getting it right means there’s a huge prize to get after, especially for the North of Scotland. Crown Estate Scotland estimates that ScotWind and INTOG projects - the majority of which are proximate to the North and North East - could deliver investment of £96bn.
However, none of this is guaranteed. Renewables need reform of transmission charges - the levy for grid build-out and maintenance - and a bullish budget for the upcoming Allocation Round 7 Contracts for Difference pot. There’s also the lingering question of Chinese manufacturer MingYang. Political instability is a risk too - as seen with Orsted’s plan to cut 2,000 jobs by the end of 2027.
Ending the windfall tax is a vital step in building the foundations of that clean energy future. An industry task force recommended clearly, in March, the end of the EPL as soon as is practicable with a levy which is proportionate, adjustable in response to price shifts, and designed to restore investor confidence. The wake-up call has been made, the ask for ‘energy realism’ has been set out. Now the industry must throw its full weight behind those arguments ahead of the November 26 Budget