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Few companies enjoy volatility, but it is the avoidable kind that most chief executives really loathe. Yet that is what the UK continually serves up when it comes to North Sea oil and gas.
A government consultation on securing the North Sea’s “energy future” closes next week. As the UK moves towards cleaner energy sources, the aim is to avoid the kind of industrial shock that accompanied the closure of coal mines and steel works in the eighties and nineties.
Consultations on the “future” of any industry can give the impression there is plenty of time. Trouble is, a future where domestic oil and gas production plummets might be approaching faster than expected.
Brent crude prices may have regained some poise after dropping below $60 a barrel earlier in April at the peak of tariff turmoil, and are still comfortably above the estimated cash flow break-even price for fields in UK waters. Yet they are still down by a quarter in the past year. And price is just one layer of volatility that is disincentivising companies from drilling for remaining North Sea barrels.
UK oil and gas production peaked at the turn of the millennium. The industry experienced a small revival in the second half of the last decade, which ended when the Covid pandemic caused prices to sink. Now the UK’s uncertain fiscal and regulatory regime also threatens to hasten the end of production. An “energy profits levy” (EPL), first introduced in May 2022, has since been extended and raised multiple times. The headline tax rate on oil and gas producers now stands at 78 per cent, once all levies are totted up.
No company wants to pay more tax. Admittedly several companies have already found creative ways to reduce their tax bills by merging UK portfolios and making use of historic tax losses. Even so, it is volatility in the sector’s tax treatment that makes forecasting difficult.
There are other issues: the industry is also awaiting the outcome of another consultation that could affect how emissions from new schemes are assessed.
All of this is music to those who want a swift end to fossil fuel production, of course. But policies on technologies such as carbon capture usage and storage (CCUS) — which could safeguard some North Sea jobs — have also been chopped and changed over the past 20 years.
There are some encouraging signs: contracts for the UK’s first CCUS projects were finally signed in December. Other blockages, such as “skills passports” to enable workers to move more easily between industries, are also being looked at. Still, the easiest way to secure any kind of future for the North Sea is to make decisions that both fossil fuel and clean energy producers are confident will have some longevity.
nathalie.thomas@ft.com
