CAPITAL STRIKE THREAT

Labour's North Sea Windfall Tax Sparks Industry Backlash

By City A.M - Aug 24, 2024, 

• Over 40 energy sector companies have voiced their concerns over Labour's proposed windfall tax increase, warning it could lead to significant job losses.
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• The tax hike, intended to fund green initiatives, has been criticized for potentially hindering investment in both fossil fuels and transition technologies.
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• While the government argues the tax is necessary for the UK's clean energy transition, industry leaders believe it will have a detrimental impact on the economy and energy security.

The government’s plans for North Sea oil and gas are a “blunt response” that could jeopardise hundreds of thousands of jobs not just in the energy sector, several of the industry’s leading figures have warned.

In an open letter to the Treasury, over 40 companies with operations in the North Sea voiced their “grave concern” with the new government’s plans for the Energy Profits Levy, which include raising the headline rate of tax to 78 percent and removing the allowance for investment and exploration.

The signatories—comprising engineering companies like Wood Group, tech firms like 3t, and catering specialists Sodexo—warned that the levy risked jeopardising investment in fledgling transition technologies, such as floating offshore wind and carbon capture technologies.

However, the firms’ main concern was the negative impact the plans would have on jobs, not just in the energy sector but also in industries and communities that support it.

Windfall tax will hit jobs

The North Sea energy industry is believed to support 200,000 jobs, with most of these roles in supporting sectors like catering, transport and infrastructure, Offshore Energies UK – the industry body that choreographed the letter – said.

Entire communities in Aberdeen and much of North East Scotland are dependent on the industry, which is believed to support 30 percent of the city’s jobs.

The letter said: “For our companies, [the tax plans] risk operators – big and small – further scaling back or postponing their investment plans in response. The ramifications will be felt throughout the supply chain, through jobs, and the communities this industry supports, both directly and indirectly.”

But the government has argued its reforms would create “thousands” of jobs in the same part of the UK thanks to offshore workers having the “vital” skills to help build Britain’s renewable capabilities.

GB Energy, the state-owned renewable energy firm that will form the foundations of Labour’s clean energy industrial strategy, will be headquartered in Scotland when it is formally established in the coming months.

The letter also claimed the current plans would widen the country’s energy trade deficit, saying: “The UK spent almost £27bn on imports of crude oil and over £21bn on gas imports last year.

“This is £6bn more than receipts from UK crude oil exports and £17bn more than gas exports. The measures as announced risk both the net import gap for fuels, and the emissions footprint of fuel imports, growing long before the UK can deliver reliable, affordable, alternative energy sources.”

The firms dubbed Labour’s plans a “surprise” despite them having been a core part of the party’s manifesto.

Making Britain a “clean energy superpower” is one of the government’s five core “missions”, which Keir Starmer unveiled in February 2023 – nearly 18 months ago – when his party Party was in opposition.

The government announced the reforms to the energy levy in the run-up to the election, claiming they will help fund approximately £23.7bn in green spending.

The tax was first announced by the previous administration after Russia’s invasion of Ukraine led energy firms’ profits to skyrocket.

It was originally levied at 60 percent, which was then raised to 75 percent, and also contained an allowance for investment and exploration.

But as oil and gas prices have returned to more regular levels, the tax has eaten into the profit of many of the North Sea’s key players; a fact further hampered by the region being one of the world’s most mature, and thus leas profitable, oil fields.

North Sea producers curtail output

On Thursday, Ithaca Energy – one of the region’s biggest players – posted a major dent to profit in its half-year results, which it claimed were in part down to the windfall tax.

And earlier this year, Harbour Energy announced it was cutting 350 UK jobs, blaming the tax after the had said had “all but wiped out” the firm’s profit in 2022.

The letter added: “The Prime Minister has reassured the sector that the North Sea will be managed in a way that does not jeopardise jobs. 

“The Treasury has been tasked with being the most pro-growth in our country’s history, and the Chancellor has committed to ‘working hand-in-hand with business’. Ministers have spoken of working in partnership, of the critical role of the people whose jobs are supported by our offshore energy sector, but we need those commitments to be honoured.”

A spokesman for HM Treasury said: “We are strengthening the previous government’s windfall tax to ensure North Sea oil and gas producers contribute their fair share towards our energy transition.

“Our plans for a new National Wealth Fund and Great British Energy will create thousands of new jobs in the industries of the future.”

By City AM