The UK government’s efforts to boost investment in the North Sea by scaling back the windfall tax on oil and gas producers have been dealt a blow as one of the basin’s leading operators blamed the levy as it halted drilling.
Ministers introduced a price floor on the windfall tax on Friday following months of lobbying from the sector, which argued it was deterring investment, and putting jobs and energy security at risk.
However, hours after the announcement Apache, operator of the Forties oilfield for the last 20 years, said it would halt all drilling in the North Sea, blaming the “challenging UK macro environment with its increasingly costly and burdensome tax and regulatory regime”.
The company confirmed that the move would lead to job losses in Aberdeen.
Apache produces about 50,000 barrels of oil equivalent per day, according to analysts Wood Mackenzie, making it the North Sea’s ninth largest operator.
Forties is one of the largest and oldest oilfields in the UK North Sea, making up part of the supply that underpins the Brent crude oil benchmark contract, and the ageing asset requires regular work to maintain production levels.
Apache’s move follows months of disquiet among producers about changes to the tax regime, with Harbour Energy, the North Sea’s largest producer warning it will shift investment to the US.
The Labour party has said it will end new gas and drilling licenses in the North Sea if it wins the general election expected next year.
The tax rate on North Sea oil and gas drillers was raised to 75 per cent last year at the peak of the energy crisis, as the government tried to raise cash to help shield households from soaring wholesale energy prices.
Under the measures announced on Friday, it will now revert to the pre-crisis level of 40 per cent if oil and gas prices fall below their long-term average under the so-called Energy Security Investment Mechanism.
The floor has been set at $71.40 for crude oil and £0.54 a therm for gas. Both would need to average below that level for two consecutive quarters to trigger the reduction in the tax rate.
The move triggered opposition among campaigners, who point out that consumers are still facing high energy bills. Wholesale oil and gas prices have fallen substantially in recent months, but government support for households and businesses has also been reduced.
Georgia Whitaker, climate campaigner at Greenpeace, said the tax “contains more loopholes than a block of swiss cheese”.
But industry figures have also expressed frustration that the government will still capture much of the returns when prices are strong, and say this would still deter investment in a cyclical industry prone to boom and bust.
David Whitehouse, chief executive of trade group Offshore Energies UK said on Friday the price floor was a “step in the right direction” but added that “many more will need to be taken to restore confidence to our sector”.
It comes as a Norway’s state oil company, Equinor, and its partner Ithaca Energy are preparing to decide whether to go ahead with their major new North Sea project, Rosebank.
Gareth Davies, Exchequer Secretary to the Treasury, said it was “important that we secure investment in our own domestic supply,” adding it would be “beyond irresponsible to turn off the North Sea taps overnight”.
After peaking above £6 a therm last summer, UK wholesale gas prices are back to just above 60p a therm, only slightly above the long-term average for the past decade. Oil prices are back to about $75 a barrel — roughly the level they stood at before Russia’s invasion of Ukraine — after hitting $130 a barrel last year.
The Treasury said on Friday it did not expect the price floor to be triggered before the windfall tax’s planned end date in 2028, based on forecasts by the Office for Budget Responsibility, the fiscal watchdog. It said the levy has so far raised around £2.8bn and is expected to raise almost £26bn by March 2028.
The move boosted oil producers’ share prices on Friday. Harbour Energy climbed 1.45 per cent to £2.49. Serica Energy climbed 1.86 per cent to £2.46.
Neivan Boroujerdi, at Wood Mackenzie, said: “I think it’s a step in the right direction and there could be a positive impact on short-term investment. But it does not do anything to remove the long-term uncertainty that has engulfed the sector.”
