These are dark times for oil and gas exploration in the UK sector of the North Sea. The mature hydrocarbon basin, which was already suffering from heavy fiscal pressure, saw the situation deteriorate further after a change of government in July.

The country’s Labor Party and its chancellor Rachel Reeves have ensured that North Sea operators face the biggest tax rises instituted by a British government in recent memory. Widely ridiculed fall budget tabled October 30.

It provided for an increase in the so-called exceptional tax on North Sea oil and gas producers from 35% to 38% and an extension of this levy for one year until March 2030. It increased the rate of The UK’s overall tax rate on oil and gas operations is 78%, among the highest in the world.

The changes also included the removal of the 29% investment allowance, which allows hydrocarbon explorers to offset tax on reinvested capital. The new fiscal framework has sparked widespread fears about a drop in investment and an exit from the North Sea.

The increase in the windfall profits tax, formerly known as the energy profits levy, and other new measures came into effect on November 1. Just a week later, explorer Apache Corporation announced its decision to cease production in the North Sea at its UK assets and business. exit by 2030.

Since leaks and information provided to the media had widely publicized what Reeves and the Labor Party had in store for the North Sea, many others actually implemented their plans to reduce their exposure before the government’s plans are actually revealed. in the British parliament.

A week before the budget, Reuters reported that another operator, Harbor Energy, wanted to sell stakes in its North Sea holdings in order to reduce its exposure and move its stock market listing from the UK to the US

Japex, Neo Energy and Deltic Energy were also among those seeking to reduce or eliminate their exposure and/or reduce their respective investments in the basin.

As for the oil and gas majors, most have already left or are ending their decades-old adventure in the British North Sea. They include Chevron and ExxonMobil. TotalEnergies, another supermajor and huge operator in the North Sea, is suspending further exploration for the time being.

The tax increases went hand in hand with a suspension of the issuance of environmental permits for new oil and gas projects. Additionally, two major projects – Rosebank and Jackdaw – face legal challenges from environmental groups.

HAS ADIPEC 2024the world’s largest energy exhibition and conference, which concluded in Abu Dhabi on November 7, behind the smiles at the market presentations, the mood among Britain’s oil and gas operators was rather gloomy.

What a bargain?

The Labor government plans to channel higher tax revenues from the North Sea towards decarbonisation and renewable energy. But many believe this goal is unlikely to be achieved if investment continues to fall.

The new fiscal framework could even have the opposite effect, as falling natural gas production in the North Sea could expose the UK to increased international imports.

In addition, the windfall profits tax – initially levied in 2022 following Russia’s invasion of Ukraine – seems to have exceeded its objective following the recent drop in oil prices.

A spokesperson for industry lobby group Offshore Energies UK said it welcomed the deployment and acceleration of renewable energy supported by tax revenue, but that the North Sea was a strategic asset capable of supplying oil and gas that we will need for decades.

“Therefore, windfall taxes imposed on oil and gas producers when there are no windfall profits discourage the investments we need in our energy transition.”

Several ADIPEC participants also highlighted recent analysis by Wood Mackenzie which stated that up to £10 billion ($13 billion) of the pre-tax value of British North Sea oil and gas could be released from existing assets if the country’s government implemented a tax system which encourages investment – ​​and restores confidence in the industry. What has been put forward does not correspond to this description.

A most “unstable” tax system

Instead, a new round of politically motivated tinkering has reinforced the perception that the UK’s North Sea tax regime is one of the most unstable in the world, according to Dr Carole Nakhle, founder and CEO of Crystol Energy and expert in international oil and gas matters. taxation.

“Traditionally, this instability has been offset by a reduction in the UK government’s fiscal levies on investors and operators, as well as reduced prospects of geopolitical upheaval,” she added.

“However, today we are seeing high marginal tax rates (in the UK North Sea) which are not common in jurisdictions like this, but typical in countries where the deposits are larger and the sector is dominated by large companies, including state-owned enterprises.”

That said, the fiscal framework remains profit-based, i.e. progressive unlike other regimes which rely heavily on revenue-based mechanisms such as royalties and are therefore regressive as the government increases when profitability declines.

“Moreover, despite the latest changes, the government has provided clarity for the coming years, thus offsetting to some extent the increase in revenue. Overall, what Reeves has proposed is far from ideal for a declining industry, but it nonetheless has some interesting benefits. characteristics compared to what is offered elsewhere,” concluded Dr. Nakhle.

The problem for the UK North Sea is that with the majors having all but left the basin, the independents packing up and leaving, and those who stayed behind reducing their investments – there may not be much left to this rate within a few years.

On balance, few market participants would have thought that politicized taxation – not economics coupled with falling production volumes – would accelerate the North Sea’s downward spiral, as it currently appears to be doing.