When the Labour Party took office, it pledged to increase taxes on the oil and gas industry. Despite warnings that this could lead to negative consequences, the government pressed ahead. Now, banks are hesitant to lend to North Sea operators, raising concerns about potential energy shortages.
In its pre-election manifesto, Labour stated, “To deliver our clean power mission, we will work with the private sector to double onshore wind, triple solar power, and quadruple offshore wind by 2030.” However, their strategy for oil and gas focused on higher taxes and stricter regulations.
After Keir Starmer’s government formed, the pressure on the oil and gas sector intensified. The windfall tax, established by the previous Conservative government, was maintained, but investment incentives aimed at keeping the industry stable were removed. Labour’s approach suggests a rapid transition financed by increased taxes on oil and gas.
This tax strategy has provoked a strong reaction from the industry, and now banks are tightening their lending policies as well. North Sea operators have warned that they may need to relocate to survive. “The UK is now fiscally more unstable than almost anywhere else on the planet,” stated the CEO of Serica Energy, one of the region’s largest oil and gas producers. “We are considering investing in new locations, like Norway.”
Now, banks are further discouraging energy companies from remaining in the UK by reducing the amount of financing available, citing the windfall profit tax. This tax is intended to fund the energy transition, but its effect may lead to the decline of the oil and gas sector.
“The North Sea oil and gas industry, especially in Scotland, is facing a financing crisis,” an insider told the Financial Times. “This financial strain is affecting not just banks but also insurance companies, which threatens many businesses,” warned David Larssen, CEO of Proserv, a company that supports offshore operations.
The windfall profit tax was introduced in 2022 in response to record profits following the disruption in oil and gas supplies due to the Russian invasion of Ukraine. Initially set at 25%, it is set to increase to 35% next year, bringing the total tax burden for oil and gas companies to around 75%.
While the previous Tory government allowed tax exemptions for companies reinvesting profits, Labour has removed this option and increased the tax to 38%. This shift could cost the state billions and jeopardize energy supply security.
Data from Norwegian investment bank SpareBank 1 Markets shows that reserve-based lending to North Sea operators has dropped by 40-50% since the windfall tax was enacted. This type of lending is based on projected future cash flows, which are now highly uncertain.
“We are struggling to secure funding because capital providers are unsure if they will get their money back due to policy changes,” said Robert Fisher, chairman of Ping Petroleum.
The crux of the issue is that without sufficient financing, energy companies cannot maintain or expand production. This could lead to lower state revenues and reduced oil and gas supplies, which are still essential.
“If the government implements the windfall taxes being discussed, UK energy production could face a steep decline,” warned Chris Wheaton, an analyst at Stifel. “This would dramatically reduce investment, production, jobs, and energy security.”
Additionally, tax revenues from the energy sector, which nearly reached £10 billion last year, could plummet to just £2 billion in four years if current tax policies persist. Such a decrease would hinder the funding needed for energy transitions while increasing the UK’s reliance on imports—an unwise strategy given the country’s own oil and gas resources. This situation may serve as a cautionary tale for future generations.
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