North Sea output to halve by 2030 under labor tax proposals, report warns

Stay up to date with free updates

Simply register at UK energy myFT Digest — delivered straight to your inbox.

North Sea oil and gas production could halve by 2030, much faster than currently expected, under tax proposals that would cause “irreversible damage” to the sector, according to a report by energy consultants Wood Mackenzie.

Oil and gas companies in the North Sea have already cut back sharply as they await a tax decision in next month’s budget. “Continued uncertainty makes planning extraordinarily difficult and financing nearly impossible,” the report said.

Companies will have to pay 78% tax from November, following an increase in the one-off ‘EPL’ levy which was originally introduced as a result of Russia’s full-scale invasion of Ukraine, when energy prices soared.

They also face the prospect of losing capital spending and investment allowances after the government said it planned to close “unduly generous” tax loopholes.

Wood Mackenzie said that in the absence of more information, the companies had made contingency plans for the EPL to continue indefinitely and for all allowances to be removed.

“This scenario would wipe out £19 billion, or 65%, of the UK’s remaining development capital expenditure, halve UK production by 2030 and almost eliminate cash flows from the industry by the 2030s ,” said the report, circulated among its customers and seen. by the Financial Times.

In a better-case scenario for oil and gas companies, where the EPL expired in 2030 and capital allowances were preserved, oil and gas production would decline by 30% by 2030.

Graham Kellas, one of the report’s authors, said they chose those scenarios because they are what oil and gas companies use to make their plans.

Several North Sea oil and gas companies have suspended or halted new projects this year, and the industry has warned that new investment will not be possible.

The Wood Mackenzie report added that smaller companies are also likely to fail, leaving their partners and potentially the UK government on the hook for future decommissioning costs.

The North Sea Transitional Authority, which regulates the industry in the basin, estimates the cost of removing the oil rigs and capping the wells at the end of their life will be £40bn.

While Wood Mackenzie analysts said they did not expect the government to choose a worst-case scenario for the industry, the report added: “After saying it believes UK oil and gas must be kept healthy and productive ‘for decades future’ (Government) creates an investment environment where the industry is mortally wounded in less than five.”

Wood Mackenzie is one of the most respected consulting firms in the energy industry, but has historically specialized and still draws many of its clients from the oil and gas sector.

Following the dramatic rise in oil and gas prices in late 2021 and 2022 and the introduction of the Energy Profits Tax in May 2022, tax revenues from the sector peaked at £9.8bn in 2022-23, compared to 2 .6 billion pounds in the year 2022. ahead, official figures show.

By 2028-29, receipts from various oil and gas taxes are expected to fall to £2.2 billion. The Office for Budget Responsibility, Britain’s independent forecaster, said in April that future tax revenues would fall as investment and production in the North Sea dried up.

In September, Offshore Energy UK, a lobby group, said the government’s tax proposals would put 35,000 jobs in the North Sea at risk and see companies reduce their capital investment in UK projects from 14 .1 billion pounds to just 2.3 billion pounds between 2025 and 2.3 billion pounds. 2029.

Fraser McKay, another author of the report, said: “The UK doesn’t have four or five years to get this wrong because of the maturity of the basin. That’s why we use the word irreversible in the report.”

In July, the Treasury said it recognized “the importance of providing the oil and gas industry with long-term certainty of taxation” after a series of changes to the tax regime in the past.