When the Labour Party took power, it promised to impose higher taxes on the oil and gas industry. Despite warnings that this could backfire, the government pressed on, leading to banks now refusing to lend to North Sea operators. This trend raises concerns about potential energy shortages in the UK.
In its pre-election manifesto, Labour emphasized its commitment to renewable energy, stating, “To deliver our clean power mission, Labour will work with the private sector to double onshore wind, triple solar power, and quadruple offshore wind by 2030.” However, the party’s approach to oil and gas involved an increased focus on taxation and regulation.
Following the establishment of the Keir Starmer government, the financial pressure on the oil and gas sector intensified. The windfall tax initiated by the previous Conservative government remained in place, along with the removal of an investment incentive designed to retain the industry. Labour’s strategy aimed for a rapid transition funded by revenue from oil and gas taxes.
This taxation policy has sparked backlash from the industry, now exacerbated by reactions from the banking sector. North Sea operators have voiced concerns about relocating to survive. “The UK is now fiscally more unstable than almost anywhere else on the planet,” stated the CEO of Serica Energy, a leading regional producer. “That means we are looking for new places to invest our money. Norway is a place where potentially we could recreate our business model.”
Currently, banks are further discouraging energy companies from remaining in the UK by reducing their lending due to the windfall profit tax. This tax, which the Labour government intends to use to support the energy transition, ultimately threatens the oil and gas sector’s survival.
“The North Sea oil and gas industry, particularly in Scotland, is being starved of financing,” an insider told last week. David Larssen, CEO of Proserv, noted that the financial strain is affecting not only traditional banks but also insurance companies, jeopardizing the viability of numerous businesses.
Imposed in 2022 during a period of record profits driven by supply uncertainties following Russia’s invasion of Ukraine, the windfall profit tax began at 25% and was later increased to 35%. Consequently, oil and gas companies now face a total tax burden of approximately 75%.
While the Conservative government had allowed an exemption from the windfall profit tax for companies that reinvested profits, Labour eliminated this option and increased the rate to 38%. As a result, the state budget could suffer losses in the tens of billions, while the country risks diminished energy supply security.
Data from Norwegian investment bank SpareBank 1 Markets indicates that reserve-based lending to UK North Sea operators has plummeted by 40-50% since the windfall profit tax was introduced. This type of financing, which allows companies to secure funds based on future cash flows, has dwindled due to heightened uncertainty about those cash flows.
Robert Fisher, chairman of Ping Petroleum, expressed frustration over the current lending climate: “We have recently found it very difficult because people who provide capital are very uncertain about whether they are going to get their money back because of changes in policy,” he told the Financial Times.
The crux of the issue is that without sufficient funding, energy companies cannot expand or maintain production. This scenario would lead to decreased state revenue and reduced oil and gas supplies, even as demand remains high.
“If the government implements the kind of windfall taxes they are discussing, then you end up with a cliff edge in UK energy production because the industry will be taxed into uncompetitiveness,” warned Chris Wheaton, an analyst at Stifel. “That will dramatically reduce investment, production, jobs, and energy security.”
Moreover, the decline in tax revenue from the energy sector, which reached nearly £10 billion ($13.3 billion) last year, is projected to plummet to just £2 billion within four years if current policies persist. This substantial drop would hinder the funding of a transition to renewable energy while making the UK increasingly dependent on energy imports—a concerning trend for a nation with its own oil and gas resources. The implications of this situation may serve as a case study for future generations.
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