The North Sea oil and gas industry, centered on Aberdeen, Scotland, has been a significant contributor to the UK's energy needs for decades. At its peak in the early 2000s, the industry delivered over 2.7 million barrels of oil daily, accounting for 3.6% of global production, with an additional 1.8 million barrels' equivalent in gas fields. However, the industry's production has since declined, with fewer than one million barrels of crude pumped daily. Despite this decline, the industry remains a crucial employer, providing jobs for 25,000 people in and around Aberdeen and 200,000 across the UK. Oil and gas still meet around three-quarters of the UK's total energy needs, with renewables powering 36% of the country's electricity generation in 2022, up from 11% a decade earlier.
Although renewables have become more important, oil and gas remain essential for transportation and a range of industrial processes. Gas-fired turbines generated 40% of electricity used in the UK in 2022, up from 30% in 2012. Even the government-created advisory body, the Climate Change Committee, acknowledges that oil and gas will still account for half of the UK's energy usage in the late 2030s. With energy security becoming increasingly critical, it makes economic and geostrategic sense to make the most of the UK's own resources.
Moreover, using North Sea energy involves far fewer carbon emissions than doubling down on the UK's sharply increased reliance on gas drilled in the US and Qatar. That gas is liquidized, pumped into massive diesel-powered ships, then "regasified" after traveling thousands of miles to UK ports – a highly energy-intensive series of processes.
However, environmentalists are urging the immediate cessation of North Sea production, ignoring the realities of the UK's energy needs. These activists are not considering that for at least another decade or more, ongoing North Sea production will be environmentally useful, according to even the government's own net-zero cheerleader.
The UK Government is keen to parade its green credentials, and to this end, it has imposed a windfall tax on UK oil and gas producers. Just over a year ago, when other UK businesses paid 19% corporation tax, North Sea producers were charged 30% plus a 10% "supplementary levy." Since then, tax on North Sea profits has risen from 40% to 65% and now 75%, thanks to then Chancellor Rishi Sunak and his successor Jeremy Hunt. This windfall tax was also scheduled to apply from 2025, but it now extends until 2028.
The government believes that this windfall tax will raise significant revenue, helping to plug the huge post-lockdown hole in the national accounts. According to figures released last week, the government borrowed £13.2bn less than expected over the last 12 months, but still spent £139bn more than it raised during 2022/23 – an £18bn deficit increase from the previous year. The Office for Budget Responsibility predicts that the UK will face triple-digit deficits for several more years, highlighting the need for pro-growth policies to boost GDP, making the debt more manageable by expanding the economy, rather than increasing taxes.
However, Sunak and Hunt have imposed the heaviest tax burden on North Sea oil and gas producers in 70 years. The average windfall tax between now and 2028 will be £8.6bn, up from £0.8bn on average during each of the six years until 2021. On official estimates, the tax burden on this single industry has risen almost eleven-fold, despite the glaringly obvious national interest in making sure North Sea production is preserved.
Although some multinational oil majors still operating in the North Sea may be able to absorb the tax hike, it is the smaller and independent companies that will struggle. These companies, which employ around 40% of the North Sea workforce, will be particularly hard hit, and some may even go out of business. This would result in significant job losses and harm to the wider economy.
The windfall tax is also discouraging investment in the North Sea, which is needed to maintain production levels and ensure that the industry remains viable in the future. This lack of investment could lead to a decline in infrastructure and skills, making it more difficult and expensive to extract the remaining oil and gas reserves. This, in turn, would lead to greater reliance on imports and higher energy prices for consumers.
Furthermore, the tax burden on the North Sea industry is not in line with the approach taken by other countries. For example, Norway, which has a similar industry, has a much lower tax rate and a more supportive policy environment for oil and gas production. This has allowed Norway to maintain its position as one of the world's leading oil and gas producers, while also investing heavily in renewables.
In conclusion, while the UK must transition towards a greener energy mix, it is important to recognize the continued importance of North Sea oil and gas production for the country's energy security and economy. The government's windfall tax on the industry is an excessive burden that could harm jobs and investment, and does not align with the approach taken by other countries. A more balanced and supportive policy environment is needed to ensure that the North Sea industry can continue to contribute to the UK's energy mix in a sustainable and responsible manner.
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