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Election spells end of North Sea as Labour policies doom oil industry

The 'UK continental shelf is finished' should Labour deliver on their promises
The 'UK continental shelf is finished' should Labour deliver on their promises - Igors Aleksejevs/iStockphoto

The looming early election threatens the end of the North Sea oil industry, according to experts, with Labour’s threat to extend the Government’s windfall levy set to hasten the sector’s decline.

Analysts said a likely victory for Sir Keir Starmer would prompt operators to give up on British waters, meaning some of Britain’s biggest oil and gas reserves may never be recovered.

“If Labour deliver on their promises, the UK continental shelf is finished,” said Ashley Kelty, research director at Panmure Gordon, a leading investment bank.

The future of the North Sea oil industry was thrown into doubt in 2022 when the Government imposed a windfall levy on the profits from oil and gas production that took total tax to an eye-watering 75pc.

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Labour has pledged to add another 3pc, along with banning new drilling and, perhaps most damaging of all, stripping offshore companies of the tax breaks they get when investing in new fields. The plans were confirmed by shadow chancellor Rachel Reeves at a meeting last week.

Many operators are already moving investments overseas, including Serica Energy, one of the top 10 UK producing oil and gas companies. It operates 11 fields producing the equivalent of 46,000 barrels of oil a day.

David Latin, Serica’s chairman, said: “Government policy for the UK upstream sector has been erratic for decades but it’s become even more arbitrary and short term. That’s forced us to focus more on finding investment opportunities overseas instead of the UK in order to be resilient against future unpredictable shifts in UK government policy.

“Analysis suggests that if Labour’s rumoured tax plans are implemented, investment in the UK oil and gas sector will be reduced by £20bn over the next 10 years, which would result in UK production being halved compared to what it would be otherwise.

“That lost production will just be imported. The result will be less UK jobs and tax revenues and higher global emissions.”

Another offshore operator, Kistos, said it had “walked away” from two recent offshore investment opportunities because of uncertainty over the next government’s plans.

Kistos has assets in Norway and the Netherlands as well as UK waters, and executive chairman Andrew Austin said it was now looking overseas for future investment.

He said: “We are not going to invest in UK waters under the current level of fiscal uncertainty. I have already walked away from two investment opportunities.”

If a Labour government were to carry out its pledge to ban new drilling, then the oil and gas in Cambo field, Britain’s biggest unlicensed resource, is likely to never be recovered. The controversial Cambo field has a potential yield of 200 million barrels.

This will be welcomed by many environmental groups, who argue that the UK should stop exploiting its own fossil fuel reserves because of climate change.

Others disagree, warning that the UK still gets 75pc of its total energy from oil and gas and shutting off its own supplies before there are low carbon replacements will just mean having to increase imports.

James Reid, a senior research analyst at Wood Mackenzie, said: “The UK will still need oil and gas to support its energy mix, even in a net zero world. If we don’t produce it domestically, we will need to increase our reliance on high-cost, emissions intensive supply from overseas, such as LNG imports.”

Labour’s plans will cause similar problems for many other companies, with analysts pointing to EnQuest’s proposals to drill the Bressay and Bentley fields 80 miles east of Shetland.

EnQuest is another top 10 company, producing about 44,000 barrels of oil a day. Bressay alone could yield 200-300 million barrels, putting it on a par with Cambo and Equinor’s giant Rosebank field.

All such projects cost billions of pounds and financing them involves calculating not just the costs of production but also the cost of financing. Banks generally raise interest rates when politicians threaten to increase taxes or remove tax breaks.

Yvonne Telford, research director at Westwood Global Energy Group, said such political uncertainty was already deterring exploration for oil and gas in UK waters with no exploration wells drilled so far this year.

Ms Telford said: “The higher tax burden, be it 75pc or 78pc, is challenging for the sector and is impacting investor sentiment. However, the uncertainty related to a future government’s position on exploration and field developments is equally as challenging.

“At the start of the year, Westwood forecast that there could be up to eight exploration and three appraisal wells drilled in 2024. However, to date there have been no new wells drilled this year.”

Earlier this year Harbour Energy, another major player, announced 350 job cuts in Aberdeen and said it was abandoning new UK oil and gas projects in favour of investment overseas because of the UK political climate.

Deltic Energy, another operator, with a 30pc stake in the Pensacola field, the largest discovery in the southern North Sea for a decade, recently said it was struggling to find anyone willing to partner with it because of the fiscal uncertainties generated by UK politicians.

Chevron announced earlier this month that it plans to quit the North Sea including selling off its remaining assets. The US giant, which has operated in the area for 55 years, insisted the decision was unrelated to the windfall tax or politics.

Mr Reid said Labour’s proposals could strip £13.4bn from the UK’s offshore industry’s value.

He said: “We have modelled the impact of the proposed Labour terms… We estimate that £7.8bn of the companies’ remaining value would be transferred to the exchequer if the windfall tax investment allowance is removed.

“If Labour removes the capital allowance as well, this will increase to £13.4bn.”

Jack Baxter, an analyst at Rystad Energy, said: “Investor confidence was knocked by the initial announcement of the windfall levy back in May 2022 and for each subsequent update to the levy, confidence has been hit [further].”

David Whitehouse, chief executive at Offshore Energies UK, which represents the offshore industry, said the uncertainty threatened to damage not just companies but jobs and communities.

He said: “About 38,000 people work offshore, underpinned by 170,000 people working onshore in the supply chain across nearly every UK parliamentary constituency. These are good jobs, providing the UK with energy security as they have done for five decades. And those people have the very skills we need for the future.”

Claire Coutinho, the energy secretary, said Labour’s pledge to ban new drilling, cut tax breaks and raise the windfall tax would undermine the UK’s energy security. “We will still need oil and gas beyond 2050. Anyone who thinks we can ‘just stop’ oil and gas is not just wrong, but naïve. It is simply common sense to make the most of the natural resource on our doorstep.

“Handing Ed Miliband control of our energy system risks decimating proud oil and gas communities, risking our energy security, leaving us importing fuels with higher emissions and making the UK uninvestable.”

Labour was approached for comment.