North Sea random tax is to be reduced

The energy profits levy was introduced in May last year when companies began reporting massive profits in response to soaring oil and gas prices following the Russian invasion of Ukraine.

Giants like BP and Shell have announced record profits in recent months. But the industry argued that the levy will encourage companies to invest in oil and gas production outside the UK and force the country to depend on expensive energy imports.

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The levy amounts to a total tax rate of 75 per cent on North Sea oil and gas company profits, although the UK government has also offered a range of generous tax incentives to ensure producers keep investing in new projects. However, this morning it was announced that the levy will fall back to 40% “if prices return to normal levels consistently for an extended period”.

The UK government announced the energy profits levy will remain in place until March 2028 and introduce a new energy security investment mechanism which it said would protect domestic energy supplies and safeguard jobs. It was determined that the mechanism will give the oil and gas sector the confidence to raise capital and invest in new and existing projects to help secure affordable and reliable domestic energy supplies.

Based on projections from the Office for Budget Responsibility, he added that the mechanism would not be triggered before the scheduled end of the levy in March 2028. The levy has raised around £2.8bn so far, helping fund measures aimed at helping people through the cost of living crisis and is expected to raise almost £26bn by the end of its life.

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In addition to the tax incentives provided by the energy profits levy, the UK government has applied for further exploration licenses in the North Sea. That could result in the industry regulator, the North Sea Transition Authority, issuing more than 100 new licenses later this year.

Gareth Davies, MP and Finance Minister, said it would be “beyond irresponsible to turn off the North Sea’s taps overnight”.

He added: “Without oil and gas from UK waters, we would be forced to import even more from overseas, putting our security of supply at risk.”