Britain’s oil and gas industry faces an uncertain future

The oil and gas industry is a volatile business. Swings in energy prices and the precarious nature of drilling into seabeds are part and parcel of the trade, says David Latin, chairman of Serica Energy, a producer in the North Sea. He once ran oil and gas fields threatened with blockades and militant attacks during a civil war in Libya. He likens the experience to operating in Britain, where a tumultuous tax regime has made it “impossible” to invest.

North Sea oil and gas has been used in Britain for 50 years. But as the country targets net zero greenhouse-gas emissions by 2050, which will rely on a shift to green energy, the industry must be wound down. The Labour government has promised to ban new exploration, though some sites could run beyond 2050. Industry bosses say an uncertain fiscal regime is making the transition harder.

Much of the upheaval has come from a tax squeeze. In 2022 Rishi Sunak, then the chancellor, introduced a 25% Energy Profits Levy (epl) on oil and gas firms; seven months later it was bumped up to 35%. Initially due to end in 2025, the tax was extended until 2028—and later to 2029. What began as a one-off levy on high profits caused by the spike in oil and gas prices after Russia’s invasion of Ukraine has given way to a drawn-out tax that has been constantly fiddled with.

Politicians are still tinkering. Oil and gas prices have dipped below the highs of 2022. However the EPL will be increased to 38% from November and extended to March 2030. Stacked on top of corporation tax and an existing surcharge on North Sea profits, that will raise the effective tax rate to 78%—among the highest in the world. Rachel Reeves, the chancellor, also says she wants to scrap the levy’s “unjustifiably generous” 29% investment allowance, which permits companies to claim some of their exploration costs.

Norway has equally high taxes. But it has done more to cushion the blow, allowing producers to claim back all of their exploration costs. It has also provided more stability, maintaining the same rates for nearly three decades. British oil and gas fields tend to be old, which contributes to higher running costs. Britain has “among the highest break-even cost and highest cost-per-barrel in the world,” according to Steve Bowyer, who manages the North Sea assets at EnQuest, a producer in Aberdeen.

British firms have continued to invest in the ageing basin even as larger companies, including Shell and ExxonMobil, have sought higher profits elsewhere. But British banks no longer fund their projects. Nor can the industry count on much sympathy from the public, which may help to explain the stance of politicians. The frosty climate stands in contrast to Ms Reeves’s courtship of other business leaders. For Serica, which produces 5% of Britain’s natural gas, the shift to clean energy feels less like a transition than a cliff-edge.

Harbour Energy, the North Sea’s largest producer, has slashed investments and hundreds of jobs. EnQuest might divert funds to South-East Asia. Tax rises could see investment fall by 55% over the next decade, a drop of £20bn ($25.4bn), according to Stifel, an investment bank. A disorderly decline risks making it harder for workers to retrain, as happened with the closure of Britain’s coal mines in the 1980s. It would also bring forward decommissioning costs; some firms might be put off shifting their investment into green projects.

Britain is still reliant on fossil fuels, imports of which are likely to grow with the North Sea’s demise. Three-quarters of the country’s energy still comes from oil and gas; in the mid-2030s, half will. “We might all disappear but demand won’t,” says Mr Latin. As wind turbines sprout up along Britain’s coastlines, it is right to phase down fossil-fuel production. But back in Libya, Mr Latin at least knew that oil and gas fields would be needed once the war ended. This time feels different. ■