The UK government’s efforts to boost investment in the North Sea by cutting a windfall tax on oil and gas producers have been dealt a blow as one of the basin’s leading operators blamed the tax for halting production.
Ministers on Friday introduced a floor price for a windfall tax after months of lobbying by the sector, which they argued was discouraging investment and threatening jobs and energy security.
However, hours after the announcement, Apache, operator of the Forties oil field for the past 20 years, said it would halt all drilling in the North Sea, blaming the UK’s “challenging macro environment with its increasingly costly and burdensome tax and regulatory regime”.
The company confirmed the move will result in job losses in Aberdeen.
Apache produces about 50,000 barrels of oil equivalent per day, making it the ninth-largest operator in the North Sea, according to analyst Wood Mackenzie.
Forties is one of the largest and oldest oilfields in the UK North Sea, forming part of the supply underlying the benchmark Brent oil contract, and the aging asset requires regular work to maintain production levels.
Apache’s move follows months of concern among producers over changes to the tax regime, with Harbor Energy, the biggest producer in the North Sea, warning it would shift investment to the US.
Labor has announced it will end new licenses for gas and drilling in the North Sea if it wins the general election expected next year.
The tax rate for North Sea oil and gas miners was raised to 75 percent last year at the height of the energy crisis as the government tried to raise cash to help protect households from soaring wholesale energy prices.
Under the measures announced on Friday, they will now return to pre-crisis levels of 40 percent if oil and gas prices fall below their long-term average under the so-called Energy Security Investment Mechanism.
The floor was set at $71.40 for oil and £0.54 per therm for gas. Both would have to average below that level for two consecutive quarters for the tax rate to be reduced.
The move has sparked backlash from campaigners who point out that consumers still face high energy bills. Wholesale oil and gas prices have fallen significantly in recent months, but government support for households and businesses has also been reduced.
Greenpeace climate campaigner Georgia Whitaker said the tax “contains more loopholes than a block of Swiss cheese”.
But industry figures also expressed frustration that the government still gets a large share of revenue when prices are strong, saying it would still discourage investment in a cyclical industry prone to booms and busts.
David Whitehouse, chief executive of trade group Offshore Energies UK, said on Friday that the minimum price was “a step in the right direction”, but added that “much more will need to be done to restore confidence in our sector”.
It comes as Norway’s state oil company Equinor and its partner Ithaca Energy prepare to decide whether to go ahead with their major innovation. North Sea Project, Rosebank.
Gareth Davies, the Chancellor of the Exchequer, said it was “important that we ensure investment in our own domestic supply”, adding that 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 over the last decade. Oil prices have returned to approx $75 per barrel — about the level they were at before the Russian invasion of Ukraine — after hitting $130 a barrel last year.
The Treasury Department said on Friday that, based on forecasts from the Office for Budget Responsibility, the fiscal watchdog, it did not expect the price floor to be triggered before the windfall tax’s planned end date in 2028. It said the levy had so far raised about 2.8 billion GBP and is expected to raise almost GBP 26 billion by March 2028.
The move boosted oil producers’ share prices on Friday. Harbor Energy climbed 1.45 per cent to £2.49. Serica Energy climbed 1.86 per cent to £2.46.
Neivan Boroujerdi of Wood Mackenzie said: “I think this is a step in the right direction and could have a positive impact on short-term investments. But it does nothing to remove the long-term uncertainty that has gripped the sector.”