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When the Labour Party came into power, it vowed to tax the oil and gas industry more. Warnings this might backfire fell on deaf years. Now, banks are refusing to lend to North Sea operators. It may well end with energy shortages.
“To deliver our clean power mission, Labour will work with the private sector to double onshore wind, triple solar power, and quadruple offshore wind by 2030,” Labour said in a manifesto ahead of the elections. In contrast, their plan for oil and gas was an increased squeeze through taxation and regulation.
Indeed, once the Keir Starmer government formed, the squeeze on oil and gas increased. The windfall tax that the previous Tory government had put in place was left in place, with an investment incentive that the Tories had implemented to prevent the industry from upping and leaving getting axed. Labour clearly wanted to have a transition, have it fast, and finance it with oil and gas tax money.
Yet this tax caused a reaction among the industry, and it now appears in the banking sector, too. For starters, North Sea operators warned they may be forced to relocate in order to survive. “The UK is now fiscally more unstable than almost anywhere else on the planet,” the CEO of Serica Energy, one of the biggest regional oil and gas producers, said last month. “That means we are looking for new places to invest our money. And Norway is a place where potentially we could recreate our business model.”
Now, it seems like banks are going to motivate even more energy companies to leave the UK because they have reduced the amount of money they are willing to lend to the industry—because of the windfall profit tax. That’s the same windfall profit tax that the Labour government wants to use as a cash cow for the energy transition, one of whose ultimate aims is to kill the oil and gas industry quite literally.
“The North Sea oil and gas industry, particularly in Scotland, is being starved of financing,” one energy industry insider told the Financial Times last week. “This financial strain extends beyond traditional banks because even insurance companies are beginning to withdraw support, which threatens the viability of many businesses,” David Larssen, CEO of Proserv, which provides offshore operators with subsea control systems, said.
The windfall profit tax was imposed on the energy industry in 2022 amid record profits resulting from the supply uncertainty in oil and gas following the incursion of Russian troops into Ukraine. Originally, the size of that additional levy was 25%, only to be raised next year to 35%. That put oil and gas companies’ total tax burden at a quite sizable 75%.
Yet the Tory government allowed for an exemption from the windfall profit tax in case the company reinvested its profits in more supply. Labour removed that exemption option. It also raised the windfall profit tax to 38%. Now, the state budget stands to lose tens of billions of pounds—and the country stands to lose energy supply security.
According to data from Norwegian investment bank SpareBank 1 Markets, reserve-based lending to oil and gas operators in the UK’s North Sea had fallen by some 40-50% since the introduction of the windfall profit tax. That’s a sort of asset-backed lending, where oil companies get money based on future cash flows, the FT explains. But with future cash flows extremely uncertain, it was only to be expected that such financing would dry up.
“We have recently found it very difficult because people who provide capital are very uncertain about whether they are going to get their money back because of changes in policy,” Robert Fisher, chairman of Ping Petroleum, told the FT.
The ultimate problem with this situation is that when there is no money, energy companies will not work to expand or even maintain production. This means, on the one hand, lower income for the state coffers and, on the other, less supply of oil and gas—while they are still very much needed.
“If the government implements the kind of windfall taxes they are talking about, then you end up with a cliff edge in UK energy production because the industry will be taxed into uncompetitiveness,” Stifel analyst Chris Wheaton told the Financial Times back in August. “That is going to cause a very dramatic decline in investment and therefore production and jobs, and a big hit to energy security.”
It will also cause a dramatic decline in tax revenues from the energy industry, which last year almost hit 10 billion pounds, or $13.3 billion. That’s about to drop precipitously to just about 2 billion pounds in four years if the current tax policies remain in place. Those 2 billion pounds won’t go a very long way in funding a transition, while at the same time, they would make the UK more heavily reliant on energy imports, which is never a good idea when you have your own oil and gas. In that, the UK may be a unique case worth studying by future generations.
