By Mark McSherry

Up to £10 billion of North Sea oil and gas pre-tax value could be unlocked from existing assets if the UK government was to implement a fiscal system that encourages investment – and restores trust with the industry – according to a new report by Wood Mackenzie.

The report says North Sea oil and gas output is cumulatively 10% lower since 2022, due to the introduction of the Energy Profits Levy (EPL) and the ongoing regulatory uncertainty “representing £5 billion in lost potential pre-tax cash flow.”

Ahead of the Autumn Budget statement on October 30, the UK government has already announced it will increase the EPL rate by 3% to 38%, taking the UK’s marginal tax rate to 78%.

It has also stated its intention to remove the EPL’s investment allowance, reduce its capital allowance and extend its sunset clause from 2029 to 31 March 2030.

“If, or how much the EPL capital allowance is reduced by, is fundamental to continued investment in the sector,” the report states.

The Wood Mackenzie report addresses three scenarios:

• Current dataset: an estimate of what would happen in the unlikely case that the EPL is unaltered in the Autumn Budget, beyond what is currently known.
• An indefinite EPL: the “catastrophic” scenario of an indefinite EPL with no capital allowances that would lead to UK production halving by 2030.
• Best-case: an upside scenario if a pragmatic fiscal and regulatory consensus on a successor to the EPL is reached quickly and implemented as soon as practically possible.

Fraser McKay, Senior Vice President, Upstream Research at Wood Mackenzie, said: “Operators are fatigued by an ever changing and overly onerous tax burden and are accordingly adjusting the risked value associated with investing in the UK …

“The best-case scenario we have developed is improbably optimistic, but very important to recognise, as it highlights the substantial potential value at risk in the North Sea oil and gas industry, due to the UK government’s fiscal decisions …

“There is still a chance for the UK to realise some or all of this additional value, to reduce its scope 1 and 2 impact, and for stakeholders to channel this cash flow into funding the UK’s energy transition. But the longer the government waits, the fewer growth opportunities there will be, due to decommissioning and the maturity of the UKCS.”