The Labour government is preparing to announce a shift in its North Sea energy policy, allowing for expanded oil and gas exploration under a revised interpretation of its previous commitments. The changes, set to be unveiled as part of the upcoming Budget, will focus on permitting new drilling operations linked to existing fields – a strategy first discussed at the Labour conference last September.
Relaxation of Exploration Ban
The core of the new North Sea Strategy revolves around interpreting the party’s pledge to halt new exploration more liberally. Rather than an outright ban, the plan will likely permit “tie-back” projects: drilling operations connected to established infrastructure. This approach seeks to sidestep the ban while still extracting resources.
This move is driven by intense lobbying from the oil and gas industry, which argues that current policies – notably the 78% windfall tax – are stifling investment. Operators are increasingly shifting capital to jurisdictions with more favorable tax rates, leading to a sharp decline in North Sea activity.
Impact of Windfall Tax
The Energy Profits Levy (EPL), also known as the windfall tax, is another key pressure point. The industry asserts that the tax is no longer justified given the recent decline in crude oil prices after a spike following the Russian invasion of Ukraine. They propose a “cap and floor” mechanism that would adjust taxation based on market conditions, ensuring stability but also allowing for higher profits when prices rebound.
Robert Gordon University estimates that the current climate is causing approximately 1,000 job losses per month in the region. Without concessions on taxation, industry leaders warn that the “tie-back” allowance will be insufficient to halt the decline.
Industry Criticism and Calls for Further Action
Russell Borthwick, CEO of Aberdeen & Grampian Chamber of Commerce, has openly criticized the UK government’s existing North Sea policy as “badly wrong.” He insists that maintaining the EPL alongside the revised drilling allowances will accelerate job losses and drive companies away from the region. He urges the Chancellor to signal a shift away from the tax by 2026 to prevent further damage.
The Labour government’s move represents a pragmatic adjustment to energy policy amid economic pressures and industry concerns. The combination of expanded drilling permissions and potential tax reforms aims to stabilize investment while still allowing the UK to leverage its North Sea resources. However, the long-term effects on climate goals and sustainability remain a key question.
