UK Budget 2025: North Sea announcements risk low carbon ambitions

Chris Sawyer of Pinsent Masons was commenting after the government published important policy papers relevant to the North Sea industry on Wednesday, alongside UK chancellor Rachel Reeves’ budget.

In response to consultations opened earlier this year, the government firstly confirmed that it will continue to operate the energy profits levy (EPL) until 31 March 2030, when it will expire, rather than end the levy early as the industry had hoped.

The EPL was introduced in 2022 as a temporary measure in response to the perception that oil and gas companies were profiting excessively from the rise in energy prices that followed the end of the Covid-19 pandemic and Russia’s invasion of Ukraine. In March, the government opened a public consultation on proposals for replacing the EPL with a new permanent oil and gas price mechanism (OGPM). It has now confirmed (24-page / 246KB PDF) that this new tax measure is due to replace the EPL when it expires.

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Instead of targeting ‘windfall’ profits, the OGPM will be a revenue-based tax. Oil and gas companies operating in the UK or UK Continental Shelf will be subject to the tax where they dispose of oil or gas and the price they receive for that disposals exceeds set price thresholds – one for oil, and one for gas – which “will be adjusted annually in line with CPI inflation to maintain their real value and ensure predictability over the long term”, the government said

While the OGPM “will be a permanent feature of the fiscal regime”, the government said it “will only apply during periods of high prices”. Only the amount of revenues companies generate exceeding the thresholds will be “chargeable to the OGPM”, it confirmed.

In addition to its announcement on the OGPM, the government also published its response to its separate consultation on ‘building the North Sea’s energy future’. In that paper (127-page /1.17MB PDF), the government confirmed that it will “cease issuing new oil and gas licences to explore new fields” but would grant ‘transitional energy certificates’ to operators to enable them to maximise the extraction of resources from the seabed “adjacent to an existing licensed block”.

Sawyer said the North Sea industry will be disappointed with the responses published by the UK government.

“The energy profits levy remains in place, which is making it difficult for businesses to plan investments and risks government ambitions of transitioning to a lower carbon future,” said Sawyer, who recently described support for North Sea oil and gas production as vital to support the UK’s longer-term decarbonisation goals, owing to the fact that many of the companies in the existing supply chain will be ones the government – in pursuit of net zero targets – looks to, to facilitate offshore renewables and cleantech projects at scale.

He added: “The current ban on new licences and new exploration continues, with limited opportunity for future oil and gas development projects offshore. The UK can’t afford for growth to stall in this crucial part of the economy, especially as domestic oil and gas continues to play a leading role in upholding the UK’s energy security, reducing dependence on costly imports and providing tax revenue from both employers and employees."

According to the Office for Budget Responsibility (OBR), North Sea tax revenues, including revenues derived from the EPL, are expected diminish between now and 2030-31 owing to “falling production levels”. Tax revenues will fall from £2.7 billion in 2025-26 to £0.3 billion in 2030-31, it has forecast (205-page / 1.63MB PDF).