Course set for industry consultation on investor allowance
With Labour returning to power after a convincing win, the new government’s proposed changes to the fiscal regime, relate to the definition of taxable profits subject to the Energy Profits Levy (EPL), introduced by the previous Conservative government in May 2022. It appears clear that under the new Labour government, the existing EPL, currently set at 35% of taxable profits, will remain until at least March 2029. Labour is widely expected to increase the EPL tax rate by 3% and extend the timeline of the levy “until the next government”. Most importantly, Labour has suggested that it will remove ‘loopholes’ in the definition of taxable profits, potentially removing the EPL investment allowance (IA) currently offering an uplift of 29%. This tax saving lifeline was tagged onto the EPL to help stimulate activity in the UK North Sea despite the introduction of the windfall tax and has seen the value of yet-to-be-developed projects increase and has helped push some over the finish line to project sanction.

Take this IA away and the value of these assets naturally drops, a function of fewer tax saving incentives on the large upfront capital investments required to get these assets to production. Figure 1 below highlights the shift in breakevens and government take for the UK, with the EPL IA removed. Currently for pre-sanctioned finds, the low-cost, low-tax regime is competitive compared to global peers, although this could be pushed into unfavorable territory with “tax loopholes” nulled.

Of even greater concern would be the addition of capital expenditures to the EPL taxable profits calculation in their entirety. While Rystad Energy considers a change of this significance unlikely, a change of this magnitude would severely limit development activity, particularly among independent oil and gas producers, and all but eliminate exploration and appraisal activity.

Rystad Energy expects the new government to enter a period of consultation with the industry and other stakeholders to determine whether and how to adapt the IA, potentially extending the time for these changes to come into effect beyond the autumn Budget to 2025. Activity on the UKCS is likely to weaken while uncertainty around new fiscal terms continues.

Reduced asset and company valuations aside, market sentiment has weakened in an already mature, declining basin. This will continue to push activity away from the UKCS, a trend already under way, with UK independent Harbour Energy recently acquiring international growth projects, US independent APA Corporation ceasing new drilling activity, Neptune Energy selling off its UK assets to Italian major Eni and Serica Energy actively looking to international waters for new opportunities.

Great British Energy
While the oil and gas industry braces for uncertainty and a weakening fiscal regime, Labour’s stated mission to establish GB Energy, a publicly owned investment platform headquartered in Scotland, signals a positive approach toward expanding renewable energy. Rystad Energy expects five years with the Labour party in government would strengthen current policies, including those with an overarching target to achieve net-zero carbon emissions by 2050, and further elevate clean-tech investments over the next government cycle. GB Energy, should it get off the ground, will be able to invest in new innovative technologies and co-invest with industry in the rollout of established technologies, providing additional funding alongside the private sector. The new platform would allocate £600 million ($766 million) annually to local authorities and offer up to £400 million in low-interest loans to communities to develop 8 gigawatts (GW) of small-scale and medium-scale community energy projects.  

Authors: 

Jack Baxter
Senior Analyst, Upstream Research
jack.baxter@rystadenergy.com

Pratheeksha R
Senior Analyst, Renewables & Power Research
pratheeksha.r@rystadenergy.com

Shenglan Niu
Senior Analyst, Downstream Research
shenglan.niu@rystadenergy.com

Aditya Rath
Analyst, Oil Markets Research
aditya.rath@rystadenergy.com

Matt Loffman
Senior Vice President, Supply Chain Research
Matt.Loffman@rystadenergy.com

Patricio Valdivieso
Vice President, Oil Markets Research
patricio.valdivieso@rystadenergy.com

(The data and/or forecasts in this column are Rystad Energy's, and the opinions are of the authors.)