Impact of U.K. Government’s oil and gas tax changes on sector’s contribution to UK economic growth
Offshore Energies UK (OEUK) today released data which models the impact of the Government’s announced stronger Energy Profits Levy (EPL) on the UK economy.
The modelling, previously shown by OEUK to the Treasury, shows that the Government’s proposed fiscal policy would generate a loss in economic value of around £13 billion compared to the economic contribution generated under the current windfall tax regime.
The loss comes from an expected reduction in investment by oil and gas producers into UK projects, with capital investments over the period expected to fall to £2 billion compared to around £14 billion under the current regime.
OEUK has said the analysis shows the policy will undermine the UK offshore energy sector’s ability to support the Government’s overarching goal of driving economic growth.
The analysis shows that while the expected tax take from UK oil and gas producers would increase in the very short term, ultimately it would result in a £12 billion loss in receipts compared to the current regime. This is due to a rapid decline in production due to under investment over this decade. The analysis confirms the impact would be felt widely across the economy.
The data has been published to help inform decision making ahead of the Chancellor’s Autumn Statement in October.
Continued uncertainty around the timeframe of the sunset clause, and the treatment of capital allowances, have further undermined the confidence of companies to invest in UK oil and gas production.
The data show that an environment in which the headline tax rate is increased to 78% and all EPL allowances are removed would lead to:
• A reduction in viable capital investment on the UKCS from £14.1 billion to £2.3 billion in the period 2025 to 2029.
• A reduction in the total economic value of the sector of £13 billion in the period 2025 to 2029.
• The loss of economic value directly impacts the UK supply chain companies and risks losing the capability and assets to other regions.
• Approximately 35,000 jobs are at risk over the period due to projects not going ahead.
• The sector’s total tax yield peaks in 2026 before declining compared to the current scenario, which continues to increase HMT receipts over the period.
• 63% of additional production that could be sanctioned under the current regime would be uneconomic. The UK would be more reliant on other countries to meet the UK energy demand at a cost to the UK economy and net-zero.
• The proposed regime cannot be likened to Norway which allows companies a maximum £78 of relief for £100 expenditure. Under this proposal, total relief would be £46.25.
The assessment concludes that most potential investment in the sector will be curtailed if all capital allowances are removed, resulting in a rapid cessation of investment and eventual loss of critical infrastructure.
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