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UK oil and gas drillers face a new tax that would see them pay more if global prices rise, under proposals to overhaul the North Sea duties regime in the wake of the energy crisis.
The mechanism would replace the controversial “windfall tax”, under plans outlined in a consultation on the future of the North Sea to be published on Wednesday, according to people within the industry and government.
The industry has called for greater predictability in the regime, in order to guarantee investments that can span decades.
The “windfall tax” — introduced in 2022 in response to surging prices in the wake of Russia’s full-scale invasion of Ukraine — is a 38 per cent levy on profits made from oil and gas on top of the permanent tax regime of 40 per cent.
It is due to expire in 2030. New proposals would see companies continue to pay the permanent taxes, but with a mechanism that means the rate would climb sharply if wholesale prices also rise.
Drilling companies have complained that the windfall tax’s sudden introduction and subsequent extension undermined investor confidence.
They have argued that implementing a flexible rate pegged to energy prices would make the tax system more predictable compared with introducing one-off charges.
The consultation is also expected to include Labour’s plans to ban new oil and gas exploration licences in the North Sea, in line with its manifesto commitment.
The plans have been criticised by the GMB union — one of the Labour party’s most generous donors — with general secretary Gary Smith calling it “madness” against the backdrop of an increasingly fraught world.
“For as long as we need oil and gas, banning new licences never made any sense. In the new geopolitical reality it is madness,” Smith, one of Britain’s most powerful trade union chiefs, said.
The consultation is expected to set out options on how this would work in practice. Industry has been pushing for ad hoc licensing of fields next door to existing ones or originally explored decades ago to be allowed.
Such measures, which have been discussed inside government, are likely to spark criticism from climate campaigners. Officials said the consultation was very “open-ended” and would not indicate the government’s preferred route.
Figures close to the process said the consultation had been delayed by several weeks because of jitters in Downing Street about how the move would be seen in the White House. President Donald Trump wants American oil companies to “drill, baby, drill”.
Oil and gas accounted for 75 per cent of the UK’s total energy demand in 2023, according to government figures, with petrol cars, gas-fired boilers and gas-fired power stations still playing a huge role despite efforts to decarbonise.
The North Sea is in decline with oil majors seeking opportunities elsewhere in the world. Oil production hit a record low of 34mn tonnes in 2023, about a quarter of its peak levels in 1999.
David Whitehouse, chief executive of trade group Offshore Energies UK, has pointed to forecasts suggesting the UK will meet less than a third of its oil and gas demand from domestic production between now and 2030.
