UK Oil and Gas Taxation Crisis: Labour’s Proposal Sparks Fiscal Instability

The UK is facing a significant crisis in its oil and gas industry as Labour‘s proposed changes in taxation have stirred fiscal instability. The Energy Profits Levy (EPL), initially introduced as a ‘windfall tax’ in 2022, is now set to be extended until 2029. Labour’s plan includes increasing the EPL rate from 35% to 38%, aligning it with Norway‘s tax rate, and closing perceived ‘loopholes’ to boost tax revenue.

Following Labour’s announcement, the Conservative UK Government decided to extend the EPL regime until March 2029, marking the second extension since its inception. Notably, this ‘temporary windfall tax’ is expected to persist for at least seven years, raising concerns about prolonged fiscal uncertainties.

Harbour Energy, the UK’s largest oil and gas producer, recently disclosed that due to EPL’s treatment of decommissioning costs, it faced an effective tax rate as high as 95%. Some industry players reportedly endure effective tax rates exceeding 100%, indicating the severity of the tax burden.

Oil and gas projects, such as the Rosebank field, undergo years from discovery to production, with investments evaluated based on post-tax cash flows. However, the current fiscal unpredictability has eroded investor confidence in the UK once known for its stability in the oil and gas sector.

An environment of fluctuating tax rates, ambiguous investment incentives, and uncertainties surrounding EPL’s duration has prompted investors to reevaluate their commitments. Labour’s prevailing lead in opinion polls heightens the anticipation of policy changes, further dampening investment prospects.

The looming impact extends beyond investment delays, posing risks to the wider supply chain, energy transition goals, and the UK’s net-zero ambitions. The prospect of project cancellations and reassessments looms large, potentially stalling progress in the oil and gas industry.

In the realm of acquisitions and disposals, valuations have become contentious, with buyers and sellers struggling to reconcile differing tax scenarios. Complex deal structures involving contingent considerations further complicate transactions, necessitating innovative solutions to navigate the evolving landscape.