<\/p>\nWith billions of pounds of investment, national energy security and tens of thousands of jobs on the line, the next few months could be defining for Britain\u2019s oil and gas industry.<\/p>\n
Companies operating in the North Sea are accustomed to political meddling, but now they are waiting nervously to see if the Labour government will offer a lifeline amid plans to encourage a shift to renewable power and away from hydrocarbons. If not, the bosses of nation\u2019s biggest producers have warned that the pace of production decline will increase, investment will fall and redundancies will follow.<\/p>\n
Rachel Reeves has confirmed that Labour\u2019s manifesto pledges, which included an end to new exploration drilling, a further three percentage points on the windfall tax (taking the top rate to 78 per cent) and a removal of some investment allowances, will be introduced from November. The chancellor also extended the timeframe of the levy for a further 12 months to 2030.<\/p>\n
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Faced with that prospect, Offshore Energies UK, a trade body, has warned that the tax plans will lead to a drop in revenue for the state of almost \u00a312 billion between 2025 and 2029 compared with the existing tax regime.<\/p>\n
The finer details will be announced in the budget on October 30, with those in oil and gas hoping for some form of help, perhaps in enhanced capital allowances, a form of tax relief for capital expenditure, to offset the burden.<\/p>\n
Labour has acknowledged that oil and gas will form part of Britain\u2019s energy mix for years to come, but there will be an inevitable and growing reliance on imports if domestic production declines rapidly. While North Sea production peaked about 2001, a Westminster-backed \u201croad map\u201d produced a decade ago by Sir Ian Wood, the Scottish oil services billionaire and philanthropist, suggested that the UK continental shelf would be capable of providing fossil fuels until at least 2050. Today that seems optimistic, with several projects and deals having been delayed or dropped even before the general election result was known.<\/p>\n
Deltic Energy, whose chairman Mark Lappin, 63, was Labour\u2019s election agent for West Aberdeenshire and Kincardine, has blamed fiscal uncertainty and negative political rhetoric for his company\u2019s decision in June to pull out of the Pensacola project with Shell, a discovery in the southern North Sea. The Aim-listed Deltic had been unable to secure an investor or alternative financing to take on its share of a development estimated to contain more than 72 million barrels of oil.<\/p>\n
A decision on moving forward with the \u00a3900 million Buchan project, developed by Serica Energy, Jersey Oil & Gas and Neo Energy, similarly has been delayed, raising doubts over whether a production date of late 2027 will be achieved.<\/p>\n
Harbour Energy, Britain\u2019s biggest producer, cut jobs in response to the introduction of the windfall tax in 2022 and this year struck an $11.2 billion deal to buy Wintershall DEA\u2019s assets in Europe, Mexico and Africa. Further deals are expected, whether from existing North Sea operators merging to gain greater efficiencies or by following Harbour\u2019s lead and extending their operations to other parts of the world. Ithaca Energy, for example, agreed an all-share transaction worth about \u00a3754 million to acquire the UK assets of Eni, the Italian oil major, boosting its production to more than 100,000 barrels a day.<\/p>\n
Bob Keiller is an oil industry veteran. He was an asset manager for Hess, the American energy group, and a managing director of KBR Production Services before creating PSN, a North Sea-focused oil services group, via a \u00a3220 million buyout of some of Halliburton\u2019s operations. Five years later, in 2010, he sold the business to John Wood Group for about \u00a3600 million.<\/p>\n
Keiller, now 60, went on to become chief executive of Wood and now runs his own consultancy firm. He believes that the \u201cpunitive\u201d North Sea tax regime must change: \u201cThe country is going to be reliant on hydrocarbon resources while we execute a transition,\u201d he said. \u201cI would like to see the focus on sustaining the jobs and skills within the industry while we work on that transition to renewables.<\/p>\n
\u201cWe all want the same thing, a country that is not reliant on non-renewable energy sources and that is prosperous and filled with skilled and talented people. I can understand politically why the windfall taxes were so attractive when they were introduced, but now they have been in place for a while you can see the punitive effect they have on investment.<\/p>\n
\u201cThe whole thing is presented for political gain rather than economic sense. People cannot make a reasonable return on their investment if there is an unpredictable political landscape. If you are running an oil and gasfield, as I have in the past, there are so many other uncertainties you have to deal with.\u201d<\/p>\n
Industry bodies have raised concerns that any significant drop in investment will result in tens of thousands of jobs being lost. Offshore Energies expects investment in the industry to fall from \u00a314 billion to about \u00a32.3 billion. It said the proposed tax changes would \u201ctrigger an accelerated decline of domestic production and a corresponding reduction in taxes paid, jobs supported and wider economic value generated\u201d.<\/p>\n
Chris Wheaton, an oil and gas analyst at Stifel, the investment bank, has suggested that up to 100,000 out of about 200,000 direct and indirect jobs are at risk. He also thinks that domestic gas production could drop by as much as 70 per cent by the end of the decade, leaving the UK importing about 80 per cent of its requirements.<\/p>\n
While the country has been a net importer of gas since 2004, domestic production typically makes up nearly 50 per cent of its requirements. At present, the bulk of imports come from Norway.<\/p>\n
\u201cLabour needs to find the middle ground of a sensible tax regime that continues to incentivise investment to underpin the UK\u2019s energy transition and thus secure jobs for the future,\u201d Wheaton said. \u201cIt cannot extract an additional \u00a36 billion in tax from the industry over the next five years without killing off investment and, with that, destroying jobs and skills vital for the energy transition, reducing the UK\u2019s energy security by making it more reliant on imported energy and increasing the UK\u2019s carbon emissions.\u201d<\/p>\n
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The Energy Transition Institute at Robert Gordon University in Aberdeen has calculated that the direct oil and gas workforce could halve to 60,000 by 2030. Its most recent analysis also looked at scenarios where greater renewables investment could help to sustain the numbers among the wider offshore workforce. Its models suggested a best-case scenario of 225,000 jobs at the end of the decade, up from 154,000 in 2023, but also warned of the potential for a 15 per cent drop to 130,000.<\/p>\n
Brian Wilson, a former Labour energy minister under Tony Blair, is hopeful that now fresh ministers are in place there will be closer collaboration with industry. \u201cYou have to recognise that you need to leave a degree of flexibility which takes account of the balance of events,\u201d he said. \u201cYou have to make progress on renewables in order to deliver the other side of the equation.<\/p>\n
\u2022 Part one: Great British Energy and plans for a wind of change<\/p>\n
\u201cIf the process of the decline in the North Sea speeds up, then the transition has to speed up as well. That means delivering on the supply chain, the manufacturing and the installation of these wind farms. And that is a huge challenge.\u201d<\/p>\n
A senior executive within one of the North Sea\u2019s larger producers was adamant that the industry was not \u201ccrying wolf\u201d over the cliff-edge facing it and predicted a \u201cmore rapid decline\u201d unless companies were given some encouragement over spending: \u201cThe thing you always do is stress-test your economics on a project and just now it\u2019s so hard because you don\u2019t know what the investment regime looks like. We\u2019ve already got the highest tax-rate and highest break-even cost, so our risk reward balance is all wrong.\u201d<\/p>\n
The industry is clinging to hopes that Labour will offer a pathway to plan for the future. \u201cWe continue to need a fiscal climate that promotes investment in the offshore energy sector to assure a managed transition to clean energy which does not depend on increased imports,\u201d David Whitehouse, the chief executive of Offshore Energies, said recently.<\/p>\n
The Treasury has said it is \u201ccommitted to maintaining a constructive dialogue with the oil and gas sector to finalise changes to strengthen the windfall tax, ensuring a phased and responsible transition for the North Sea\u201d.<\/p>\n","protected":false},"excerpt":{"rendered":"
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