The Future of Oil and Gas Production in the North Sea
Introduction
The North Sea has played a critical role in supplying oil and gas for the UK and Europe, but recent trends suggest challenges to the industry. Falling oil and gas prices as well as rising inflation for other inputs have made new investment less attractive, even without the windfall gains tax in place. However, there are efforts to boost investment in the region. As reported by the Financial Times, Chancellor Jeremy Hunt is expected to reduce Britain’s windfall tax on oil and gas producers as part of these efforts.
Reducing Windfall Tax
To incentivize investment in the region, the UK government is expected to introduce a “minimum” tax of 35% that applies only when oil and gas prices trade above a certain level. Treasury officials are meeting with the oil and gas industry on Friday at a forum in Aberdeen. The government is likely to state that the move will help bolster energy security, after producers argued the current structure of the levy discouraged investment in the basin.
Norway’s state-owned oil company, Equinor, could also become more active in the region if the windfall tax is reduced. Equinor is weighing whether to go ahead with its major new North Sea Project, Rosebank. It is not yet clear where the minimum threshold for the windfall gains tax can be set. An industry source suggested the industry would like to see it set at around 120% of the long-term average price, but said there was little industry consensus.
Controversy Over Windfall Tax Softening
The move is likely to be controversial among cost-of-living activists as consumers continue to face high energy bills. Wholesale oil and gas prices have fallen sharply in recent months, but government support for households and businesses has also been reduced. Plans to introduce a plan were previously reported in March in view of the Budget, but subsequently shelved by the government.
Labour Party Policy on North Sea Drilling
Meanwhile, the Labour Party has said it will end new gas and drilling licenses in the North Sea if it wins a general election next year. Labour leader Sir Keir Starmer re-announced this policy in response to increasing climate change concerns. The matter has taken on greater prominence as the party has established a clear lead in the polls and the measure has provoked a backlash from the party’s union supporters.
Gary Smith, general secretary of the GMB union, urged Starmer to scrap the plan, warning him “strangulation” the North Sea oil industry would be ‘bad for jobs’ and it would be ‘bad for the environment’ because the UK would still have to import gas and oil from overseas with a higher carbon footprint. Smith added, “We need to get real about where our gas and our oil is going to come from. The North Sea, with high standards, with good jobs, with good security of supply, being an ethical producer of energy, is one of the best places on the planet to do that.”
Potential Impact of Labour Party Policy
The Labour Party’s policy could disrupt the oil and gas industry in the North Sea and impact the country’s energy security. If new gas and drilling licenses are ended, companies may lose jobs and the economy may suffer. Furthermore, the UK would have to import more oil and gas from overseas, potentially with higher carbon footprints, and become more vulnerable to fluctuations in global energy prices and supply.
Conclusion
Efforts are being made to boost investment in the North Sea, including reducing the windfall tax and increasing industry support. However, there is also opposition to new gas and drilling licenses in the region. It remains to be seen how the situation will unfold and what long-term consequences it may have for the energy industry and the UK economy.
Sources:
– Financial Times: UK set to reduce north sea windfall tax in boost for oil industry
– Financial Times: UK government faces union backlash over Labour’s North Sea drilling ban
– Labour Party: Labour announces bold plans to tackle climate emergency
– BBC: Labour would end North Sea oil drilling for UK energy transition
– OilPrice.com: Norway’s Equinor Weighs North Sea Megaproject Amid Clampdown
– Petroleum Economist: UK must address North Sea investment-exhaustion
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Britain’s windfall tax on oil and gas producers is expected to be reduced as part of efforts to boost investment in the North Sea, according to three people briefed on the government’s plans.
The chancellor, Jeremy Hunt, is expected to confirm plans to introduce a “minimum” tax of 35% in the coming days so that it only applies if oil and gas prices trade above a certain level. Treasury officials are meeting with the oil and gas industry on Friday at a forum in Aberdeen.
The move comes after months of pressure from the industry and as Norway’s state-owned oil company, Equinor, weighs whether to go ahead with its major new North Sea Project, Rosebank.
It is not yet clear where the minimum threshold for the windfall gains tax can be set. An industry source suggested the industry would like to see it set at around 120% of the long-term average price, but said there was little industry consensus.
Windfall tax softening likely to be controversial among cost-of-living activists as consumers continue to face high energy bills. Wholesale oil and gas prices have fallen sharply in recent months, but government support for households and businesses has also been reduced.
Plans to introduce a plan were previously reported in March in view of the Budget, but subsequently shelved by the government.
The government is likely to say the move will help bolster energy security, after producers argued the current structure of the levy discouraged investment in the basin. Falling oil and gas prices and rising inflation for other inputs have made new investment less attractive, even without the windfall gains tax in place.
Ministers introduced a tax on earnings on North Sea oil and gas producers last year to offset an estimated £29.4bn bill to subsidize household energy bills as wholesale prices soared in the wake of Russia’s invasion of Ukraine .
Under the measures, the tax rate rose from 40% to 65% in May and then to 75% from January 1 this year, until 2028.
Producers argued the measure discouraged investment by taxing projects heavily as prices returned to more normal levels and banks withdrew funding from the sector.
After reaching a peak of over £6 a temp last summer, UK wholesale gas prices are back to just over 60 pence a temp, only slightly above the long-term average over the last decade . Oil prices are back to approx $75 a barrel – roughly the level they were at before the Russian invasion of Ukraine – having reached $130 a barrel last year.
Meanwhile, the Labor Party has said it will end new gas and drilling licenses in the North Sea if it wins a general election next year.
Labor first announced their plan last year and the policy was re-announced by party leader Sir Keir Starmer in January. But the matter has taken on greater prominence as the party has established a clear lead in the polls and the measure has provoked a backlash from the party’s union supporters.
Gary Smith, general secretary of the GMB union, last month urged Starmer to scrap the plan, warning him “strangulation” the North Sea oil industry would be ‘bad for jobs’ and it would be ‘bad for the environment’ because the UK would still have to import gas and oil from overseas with a higher carbon footprint.
An industry figure said he expected the Conservative Party to feel the backlash against Labor’s plans had “opened up the policy space” to review the income tax, allowing the Conservatives to position themselves as strong supporters of the industry.
The government declined to comment.
https://www.ft.com/content/f69e5069-1a00-42c1-8219-84ccd5cbbfd9
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