The chancellor’s failure to reform or remove the energy profits levy (EPL) – AKA the North Sea windfall tax – in her spring forecast was a case of “political expediency and more to do with putting one byelection result before the economic needs of the country”. Who said that? Some Tory or Reform politician being opportunist as war in Iran puts the UK’s energy import dependency in the spotlight?
Actually, no, it was the general secretary of the GMB union, Gary Smith, on Wednesday, demonstrating once again that views on the North Sea oil and gas do not fit neatly into a left-right divide. He has been making the principled case for an orderly transition in energy for ages, warning that decarbonising via deindustrialising costs jobs and will end up pushing voters rightwards.
As it happens, one suspects Rachel Reeves’ silence on the EPL in her statement – despite heavy Westminster rumours that something was in the offing – was probably also motivated by war in Iran and spikes in the prices of oil and gas. It is harder, politically speaking, to reform a windfall tax if there is a chance that windfall conditions are returning.
But Reeves knows this issue is not going away. The question of what volumes the UK should extract from the North Sea during an age of energy transition is now at the centre of the energy debate. It’s no use parroting, as Labour frontbenchers tend to do, that “more North Sea oil and gas won’t take a penny off bills”. That statement is true but misses multiple points: the case for a rethink on North Sea policy is about jobs, skills, the competitiveness of UK industry, revenues for the Treasury and security of supply.
Nobody pretends the production dial would go back to the 1990s if Labour loosened the windfall regime to incentivise more “tieback” developments in the North Sea – those on, or near, existing fields that Ed Miliband, energy secretary, sanctioned last year. Imports are a fact of life in all circumstances given the natural decline of the North Sea basin. This is really a question of what proportion should be produced domestically of the oil and gas that the UK will consume on the way to net zero in 2050 – should it be a quarter, which is the rough current trajectory, or would it be better to aim for a half or some figure in between?
Greg Jackson, chief executive of Octopus Energy – a big renewables fan, note, as well as being a non-executive director at the Cabinet Office – put it accurately on the BBC this week: “While we are still dependent on gas, I can’t see any problem with getting more from the North Sea – but it would be a drop in the ocean. What you would have is more British companies paying more tax, which would help in times like this.”
That does indeed seem the calm-headed approach: do the renewables and do the nuclear developments to clean up the grid and enable electrification in the rest of the economy. But also optimise North Sea production – especially gas – in the knowledge that the output is less carbon intensive than imported liquefied natural gas (LNG) that is transported halfway around the world in diesel-powered ships, and sometimes from countries stuck behind the strait of Hormuz pinchpoint.
The EPL was introduced by the last Tory government after Russia’s full-scale invasion of Ukraine in 2022 and has survived even as every other European country has removed their equivalents. It puts the effective tax rate on North Sea production at 78%, which is why industry complaints that it is internationally uncompetitive and deters investment are credible. The evidence is in the investment numbers and factory closures in industries such as chemicals, where the boss of its trade association warned again on Wednesday that it is “in the fight of its life here in the UK, as it battles against an extended period of depressed global demand and, I regret to say, hostile government policy”.
Reeves has a ready-made reform in her pocket if she wishes to use it. It is her intended successor to the EPL, now due to expire in 2030: the Oil and Gas Price Mechanism which would impose windfall-like charges when market prices hit higher thresholds than under the EPL – $90 a barrel for oil and 90p a therm for gas. Early introduction would go some way to addressing the mounting anger in heavy industry and among trade unions.
Instead of clarity, Reeves’ meeting on Wednesday with oil and gas bosses yielded this cryptic statement from a government source: “The chancellor was clear with industry that she wants the EPL to come to an end. She has made that promise and she stands by it. Indeed, it was a commitment she wanted to make this week. But the crisis in the Middle East has had real-time consequences on oil and gas prices and it is right that we respond to this.”
What does “come to an end” mean? That the EPL will definitely go early when prices fall? It would be better to say it out loud now.
