KEY POINTS
- UK increases windfall tax on North Sea oil to 38 percent for renewable funding.
- Investment allowance removal prompts concerns among North Sea producers.
- Industry seeks clarity on tax policy beyond 2030 to support new projects.
In a bid to boost funding for renewable energy, the UK government has raised the windfall tax on North Sea oil and gas producers from 35 percent to 38 percent, extending the levy’s duration by one year to March 2030.
The move, announced by Finance Minister Rachel Reeves during the Labour government’s first budget presentation, brings the overall tax rate on oil and gas production activities to 78 percent, placing it among the highest globally.
While the energy sector laments the rise in prices, analysts were quick to mention that this was an improvement from expectations.
Some of the major players in the North Sea include Harbour Energy and Serica Energy; the two firms saw their stocks increase after the media release. Market response was also firm as shares of Harbour Energy rose 3.5 percent and shares of Serica Energy rose almost 13 percent.
Industry reacts to changes in investment allowances
As part of the adjustment, the government removed the windfall tax’s 29 percent investment allowance, which allowed companies to offset tax by reinvesting in production.
However, Reeves confirmed that capital allowances on other tax rates will remain unchanged. North Sea producers have warned that the higher tax burden could lead to decreased investments in the mature basin, where production levels have been steadily declining.
Harbour Energy, one of the UK’s largest independent oil companies, has already expressed intentions to divest from North Sea oilfields and is reportedly exploring a U.S. listing.
The energy sector’s smaller players, including Serica Energy, are now eyeing opportunities beyond the UK. Serica’s Chair David Latin emphasized the need for ongoing discussions with the government to ensure a fair long-term fiscal regime, one that supports domestic oil and gas in a declining but still vital North Sea sector.
Funding renewables amid calls for policy clarity
The UK’ s Labour government, which came to power in July, has pledged to spend the money obtained from the increase in the windfall tax on renewable energy projects.
Nonetheless, more industry leaders bear some policy uncertainty regarding the period after 2030 as the absence of thepost 2030 vision is considered a barrier to project development.
According to Reuters, the previous Conservative government issued a 25 percent windfall tax in May 2022 due to soaring energy prices due to Russia’s aggression in Ukraine. This tax was later raised to 35 percent and adjusted for the years till the end of 2024.
And even though the raised tax is to bring more revenues for renewables, the action underlines the UK government’s problem of addressing climate targets and the economic consequences for the traditional energy sector.
