Replacing the windfall tax with a new mechanism linked to high commodity prices would add an extra £137 billion to the UK economy and help reduce reliance on energy imports, according to a new report.
It warns that without changing the tax system North Sea oil and gas could disappear “within years, not decades.”
The proposed new system would mean axing the energy profits levy and introducing a tax mechanism that is activated only when both oil and gas prices exceed a set threshold.
Under this system the headline tax rate drops from 78% to 40% but would still ensure additional tax revenue is generated when commodity prices are high.
Offshore Energies UK (OEUK) says its proposal would secure £41 billion of extra investment by 2050, support 23,000 additional jobs and unlock £12bn of additional tax receipts.
It says this would offer companies greater predictability, a fairer investment environment, and stronger incentives to reinvest in UK projects.
It also comes ahead of a speech at the oil and gas conference in Aberdeen by Conservative party leader Kemi Badenoch who will call for extraction to be maximised.
The findings, published in OEUK’s new report, Impact of UKCS Fiscal Policy on UK Economic Growth, show the current fiscal regime exacerbated by the continuation of the Energy Profits Levy (EPL) until 2030, is accelerating decline of offshore energy production by deterring capital investment.
The modelling also shows that without reform of the current fiscal regime, oil and gas production will fall from 2025 levels by approximately 40% within the next five years.
The warning comes after The Office for Budget Responsibility (OBR) revised down its forecast profits for the EPL. It now expects the levy to raise just £21.1bn between 2023 and 2028, compared to an earlier estimate of £65.7bn.
The levy is already having a severe impact on the sector, with around 1,000 jobs a month being lost and nine out of 10 supply chain companies looking overseas because of lack of work in the UK.
OEUK’s paper, shared with the Treasury and key ministers, warns that keeping the levy until 2030 may boost short-term tax revenue by £6bn, but will accelerate the North Sea’s decline with wider economic damage.
The EPL is blocking new field development and stalling existing projects. With 282 fields operating, the levy is creating a “no new investment” scenario, threatening domestic energy supply and long-term growth. With reforms, the sector could pay an extra £12bn in taxes by 2050 as production is maintained.
It is estimated that the UK will use around 10-15bn barrels of oil and gas between now and 2050 in the event net zero targets are met, however UK producers are only on track to meet 4bn barrels of this demand – and even this is now at risk.
With new projects this could reach half of demand, yet without new opportunities to responsibly replace declining fields, the UK risks undermining national energy security and economic resilience.
The analysis is based on fiscal and econometric modelling of the UKCS conducted by OEUK, based on industry data. It also reflects wider analysis of UKCS potential undertaken by the energy analytics firm Westwood Global Energy Group.
OEUK Chief Executive David Whitehouse said: “It’s set to be a tough autumn budget for households and sectors across the UK, and we recognise the pressures on the economy. Our paper lays bare the choices facing the Chancellor when it comes to domestic oil and gas taxation.
“We are saying reform the Energy Profits Levy to boost national energy production, investment, unlock 23,000 jobs, and add over £137bn to communities – or keep the tax, gain short-term revenue, and risk the North Sea industry’s collapse.
“Without changes to the fiscal regime, UK oil and gas could disappear within years, not decades. That’s a risk we cannot take.”
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