North Sea: Exasperation and dire warnings in wake of Labour's oil and gas tax plans

Growing discontent with the political response to the North Sea oil and gas sector leads to calls for a new independent energy policy body

It is a sector that remains the driving force of the north east, contributing billions to the local economy. But as the North Sea oil and gas industry continues on its uncertain journey towards transition, there are mounting fears the end may be nearer than previously thought.

Over the past week, the region’s main offshore energy players have been plunged into crisis talks following Labour’s announcement of its green prosperity plan – a transformational set of policies that shadow chancellor Rachel Reeves has said will help “protect our planet for future generations”.

As part of the blueprint, Labour has proposed hiking the energy profits levy on fossil fuel firms from 75 per cent to 78 per cent. The levy would be extended to 2029 and investment allowances would be scrapped.

The party regards the policy as a key lever with which to bring in finance for the extra investment it has pledged should it enter government. Labour estimates the higher, “proper” tax will raise around £10.8 billion over five years, based on current Office for Budget Responsibility (OBR) forecasts, a sum that would significantly reduce the need to borrow money.

But nearly 50 years after the oil began to flow, the plans have been met with growing concern by an industry that finds itself short of political allies. Offshore Energies UK (OEUK), the leading representative body for the UK offshore energy sector, has warned that as much as £26 billion of economic value would be wiped out if Labour follows through on its promises, with as many as 42,000 jobs lost. Others put the figure even higher, at 100,000 jobs.

Amid growing disillusionment and anger at the stance adopted by not just Labour, but the Conservatives and the SNP – First Minister Humza Yousaf has opposed Labour’s plans, but supports a windfall tax – the potential disruption is causing significant unrest.

Ryan Crighton, policy director at Aberdeen & Grampian Chamber of Commerce, warned Labour’s plans would “strangle investment”, and were symptomatic of the political system’s “addiction to short-termism” that he says has sparked a reactionary approach.

Labour's plans to increase the windfall tax on oil and gas producers has intensifid unrest in the North Sea industry. Picture: Getty

“Right now, we are at risk of the North Sea oil and gas industry being wound down through rhetoric, rather than strategic policy,” he said. “If this continues unchecked, it will be as chaotic as it will be economically damaging. Instead of clarity, the industry has been lumbered with a cornucopia of contradiction from all the UK’s major political parties.”

Others in the north east share that sense of exasperation and frustration. Barney Crockett, a former leader of Aberdeen City Council who also served as the city’s lord provost, has spent his life championing his home city and its industry. Such support, he said, has never been needed more than the present time.

Last year, the veteran Labour politician quit the party after Sir Keir Starmer announced they would refuse to grant licences for the exploration of new North Sea oil and gas fields. Now serving as an independent councillor, Crockett was left reeling by the party’s plans to ramp up the oil and gas windfall tax. He described Labour’s proposals as “Thatcherism on stilts”, and warned that if implemented, the region would suffer a fate worse than those communities blighted by the closure of coalfields during the former Conservative prime minister’s time in office.

“It’s quite staggering how a policy in the Labour party has been created with so little contact with people in the area that would be most affected by it,” he said. “You won’t find the word ‘Aberdeen’ ever mentioned. There’s no mention of how the area would cope with the enormous negative effects of this policy.

“There’s a far bigger concentration of jobs in energy in Aberdeen than any other area had in the time of coal, steel and heavy industry, and intensity of the impact would be much greater than the closure of the coalfields. There’s been no serious thought given to that.”

Environmental groups, however, have questioned the scale of the proposed job losses being cited by those in the oil and gas trade. Tessa Khan, executive director of Uplift, which campaigns for a just and fossil fuel-free UK, said it was “a bit rich” for the industry to focus on the issue, arguing the past couple of years had seen the highest profits, but the lowest levels of investment in the basin in five decades.

“These profits have gone to shareholders, not investment to secure UK jobs,” she said. “For most of the past decade, the UK’s tax regime has made it one of the most profitable countries in the world to develop major oil and gas projects, yet the number of jobs supported by the industry has more than halved during this period.

“What this debate makes abundantly clear is the urgent need for a coherent plan for transitioning the UK to clean power that prioritises the interests of workers, the supply chain, communities and the UK’s energy needs.”

Even so, the sense that Labour’s proposals could have a dire economic impact on the region is one shared by those who study the finances of the oil and gas industry. Last year, Alexander Kemp, professor of petroleum economics at Aberdeen University, published research that found the existing energy profits levy was likely to discourage investment in new offshore oil and gas developments, particularly smaller fields. He is working on new research to assess the impact of Labour’s plans, but told The Scotsman that even at this early stage, he was confident what is being proposed would be detrimental.

“The net effect of the increase in the headline rate, plus reducing the rate of relief for investments, will be negative on investments, both in projects in existing fields, and certainly in newer fields, unless they’re very low cost,” he explained. “Construction costs have gone up quite a bit in recent years, and the same inflationary pressures apply offshore as well.

“At this stage in our modelling, I can’t give a figure on job losses or things like that, but we can be pretty confident in saying that the changes will have a distinctly negative effect on investment and production.

While Labour’s green prosperity plan refers to the investment allowances as “loopholes” that “funnel billions back to oil and gas giants”, Kemp, who is also director of the Aberdeen Centre for Research in Energy Economics and Finance, said the dynamics at play were considerably more complex than the party’s characterisation.

He argued the allowances, which provide generous tax savings for money spent on specified investments, would not just impact the major oil producers, but the hundreds of service companies, suppliers and contractors involved in the North Sea.

“The supply chain, which is currently looking for more orders and encountering some difficulties, is particularly at risk,” he said. “The oil operators don’t employ all that many people. The bulk of the employment in developing and running fields is undertaken by the chain. The oil companies themselves are like project managers, essentially, and it is the companies in the chain that have suffered more.”

Asked about the position on the levy that has been adopted by not just Labour, but the SNP, Kemp said the industry had been left far from clear about the future. “The public statements by both Labour and the SNP talk of a pragmatic approach and not abandoning the industry, but these kinds of statements are very general, and increase uncertainty about what they mean in practice,” he said. “The uncertainty engendered by the political debate is not helpful. I think clarification by all parties, including the UK government, would be helpful from an investment point of view."

Others involved in assessing the industry’s health went further in their criticism of the current political climate. Oil and gas analyst Chris Wheaton, a managing director at Stifel, said Labour, like the Conservatives, appear to have approached the oil and gas industry “like a cash machine giving out free cash”, with the view that “it can be taxed without limits and without consequences”. That mindset, he stressed, was short-sighted. “That is not a ‘partnership’,” he said. “It feels like Labour have not yet thought through what the practical consequences of their proposed policy could be in terms of jobs, investment, energy security and emissions.”

Wheaton said if a Labour government went ahead and scrapped the investment allowances, production, investment, jobs and tax income were all likely to fall. He said the firms investing in the North Sea were “smaller independent oil companies”, such as Harbour Energy and Apache, both of which were likely to spend “a lot less” in 2025 compared to this year. He pointed out Harbour, the North Sea’s largest producer, is planning to spend billions purchasing an oil and gas firm primarily based in Norway, where the post-tax return on investment is considerably higher compared to the UK.

Crockett, a former chair of the North Sea Commission’s smart regions group, said such trends would only intensify unless the oil and gas industry was given greater clarity. “The blunt fact is that other countries will be doing far more to promote energy change and work with energy firms than seems likely under Labour or the Conservatives in the UK,” he said.

“One of the problems is that this area has had so little voice in any political decision making, despite the crucial part it plays in the UK economy, and even more particularly, in the Scottish economy. Anywhere else in the world where there’s a giant industry like this, it’s listened to in political quarters. That has never been the case here.”

Some of those fighting for the industry’s future believe a radical solution is required. Crighton told The Scotsman the lack of clarity on the part of the UK government and other parties could be overcome by a “seismic shift in how we draw up long-term energy policy”. He wants to see the creation of a new body, wholly independent of government, tasked with drawing up a “multi-decade strategy” to deliver the energy transition. “Something has to change,” he reasoned.

“Like the Bank of England, which has maintaining monetary and fiscal stability as its central mission, the new body should be charged with developing recommendations which could command cross-party consensus and insulate the sector from political policy shocks in the future.

“If nothing changes, and we get five more years of the same muddled policy, then nothing will change. Discretionary capital will continue to move overseas, the transition will stall, and a world-class supply chain built up over decades will go.”