By Nicholas Earl
The government has softened the windfall tax in a bid to soothe industry concerns over the UK’s investment climate, with North Sea oil and gas producers pulling out of new projects and pivoting away from domestic waters.
The Treasury has announced this morning that the Energy Profits Levy (EPL) – a 35 per cent levy on the profits of fossil fuel producers – will no longer apply to companies until prices fall below 20-year historic averages.
It has unveiled the Energy Security Investment Mechanism (ESIM), which establishes a price floor at $71.40 per barrel and 54p per therm.
At this point, the windfall tax would fall away entirely – with taxes dropping from 75 to 40 per cent.
The industry supports 215,000 jobs in the UK with domestic fossil fuels meeting half the country’s oil and gas needs.
North Sea oil and gas exploration is also featured in the government’s energy security strategy – as it looks to reduce its reliance overseas supplies.
The levy is designed to bolster certainty in the oil and gas sector to raise capital, following fossil fuel producers including Total, Enquest and Harbour Energy withdrawing from key projects this year.
Meanwhile, Rosebank – the largest undeveloped oil and gas field in the North Sea – faces an uncertain future with minority stakeholder Ithaca Energy weighing up whether to invest in the project.
However, oil prices would need to fall below the price floor for a period of six months for the windfall tax to be removed.
Based on forecasts from the Office for Budget Responsibly, ESIM will not be triggered before the tax’s planned end date in March 2028.
The levy’s investment allowance, set at 91p in the pound, for firms that develop domestic projects, also remains.
The government first introduced the windfall tax last May to harness extraordinary profits in the sector – fuelled by Russia’s invasion of Ukraine – to help fund support for household energy bills.
However, since then oil and gas prices have dropped significantly, and while much of the media focus has been on global energy giants with worldwide revenues – independent and smaller North Sea oil and gas producers were heavily hit by the levy.
So far, the government has raised around £2.8bn to date and is expected to raise almost £26bn by March 2028.
Overall, the windfall tax takes the total revenues from taxes on oil and gas companies to £50bn over the next five years.
These taxes will have helped the government save the typical household over £1,500 to July, and also helped cut the energy bills of businesses from pubs to leisure centres, with just under £40bn paid out across businesses and households to date.
Rosebank is set to be the litmus test for the latest announcement, with a final investment decision needing to be agreed between Ithaca and Equinor.
The project is still awaiting approval from OPRED and the NSTA before it reaches energy secretary Grant Shapps’ desk – who is widely expected to approve the project.
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