OEUK says windfall tax “threatens UK energy security” despite ambitious renewables strategy

(WO) — Britain's future energy security remains a key concern despite the government’s ‘Powering up Britain’ strategy and its recognition of the “vital role” of oil and gas in powering the nation and providing the bedrock for the transition to net zero and beyond, OEUK's Chief Executive said.

In a series of documents published today, the UK government set out further detail on its ambitions on home insulation, offshore wind, mass hydrogen production, and carbon capture, use and storage (CCUS). 

Its Energy Security plan recognized the North Sea Transition Deal in UK energy security and making the transition to cleaner energies possible. However, the lack of any detail on how the current 75% windfall tax can be revised to boost the long-term investment needed to simply maintain current levels of oil and gas production and supply remains a significant obstacle for North Sea firms.

The windfall tax was first imposed last year when global energy prices surged in the wake of Russia's invasion of Ukraine.  Since then, the windfall tax has been increased to 75% and locked in place until 2028 - but global oil and gas prices have significantly decreased.

The Chancellor himself said that wholesale gas prices have now fallen to a level similar to before the crisis in Ukraine. This means the windfall tax could be in place when there is no longer a windfall. Several key operators have already announced plans to cut investment in the North Sea and other UK waters.

OEUK has been calling for a ‘trigger price’ for the windfall tax meaning the tax would only apply when oil or gas prices are high, and a windfall profit was being earned.

The prospect of the tax applying even when there is no windfall profit being earned, with no mitigation, has proven a massive deterrent to investment in the UK's North Sea with 90% of operators confirming that they are cutting back on investments.

The UK consumes 77 Bcm of gas a year (1,150 cubic meters per person), plus 61 million tonnes of oil (just under a tonne per person). It already has to import about half of this energy – and last year’s price rises saw the cost of those imports soar from £54 billion in 2021 to £117 billion in 2022. Any reduction in UK production would risk even higher future import bills.

David Whitehouse, OEUK’s chief executive, said, “The future must be powered by lower carbon energies and technologies including offshore wind, hydrogen and solar and carbon capture, so we are pleased with the measures announced today to support them and manage demand. 

“Oil and gas still supply 76% of the UK’s total energy, so while we build that future, there is no simple choice between oil and gas on the one hand and renewables on the other. All political parties have an obligation to be honest with the public about the central role of oil and gas for domestic and business use here in the UK for the decades ahead.

“The reality is that to keep the lights on and grow our economy, we need both. The companies producing oil and gas here are many of the same companies expanding and driving wind, hydrogen and carbon capture. 

“We need to rebuild investors’ confidence – but windfall taxes are undermining our energy security and a successful home-grown energy transition.

“Prioritizing UK oil and gas over imports is better for the UK economy, UK jobs and for global emissions because we know oil and gas produced here often has a lower carbon footprint. 

“The total tax rate for offshore oil and gas operators is now 75% – three times that of conventional UK business. When prices fall, as is already happening, the windfalls will disappear – but the tax will remain because it is locked in place till at least 2028.

“That makes these taxes a major deterrent for investors and OEUK continues to make the case that delivering energy security and net zero today and in future is made much harder by the lack of clarity on when the windfall taxes will go. The same issue applies to offshore wind operators who face a similar windfall tax. Together these taxes risk turning the North Sea, which should be the bedrock of the UK’s energy security, into an unattractive place to invest. 

“The Office for Budget Responsibility costed net zero at £1.4 trillion in 2020 prices – of which more than £1 trillion will have to come from the private sector. We need fiscal policies that attract those investors to the UK– rather than driving them away.”