Report details key issues UK government faces as it seeks to replace North Sea tax regime

The UK government is preparing to announce its replacement for the Energy Profits Levy (EPL), introduced by the previous Conservative administration in November’s budget.

According to a Sept. 4 Wood Mackenzie report, the government’s priority is a system that delivers fair returns from the UK’s North Sea hydrocarbon resources during periods of high oil and gas prices while remaining simple to administer. 

Wood Mackenzie's analysis has revealed that while the Brent oil price has been consistently below the government's own threshold for application of the levy, it is still being applied to all profits because the gas price is higher than its threshold.

But the new, supposedly fairer mechanism will only take effect after the EPL expires on March 31, 2030. Various UK offshore operators have argued that the new mechanism should replace the EPL immediately.

The government is said to be considering two approaches:

• A revenue-based mechanism that would provide administrative simplicity but risks penalising high-cost operators unfairly.
• A profits-based approach that although fairer, would add significant complexity.

The key factors, the consultants claim, appear to be the thresholds that trigger "unusually high prices", and the tax rate applied.

A well-designed mechanism, they add, could restore the North Sea's fiscal credibility, stimulating investment in one of the world's most operationally challenging, as well as mature, offshore basins.

Only 18% of the UK’s discovered offshore resources remain to be produced, with unit technical costs of up to $35/bbl, nearly twice the cost of operations in comparable countries. UK projects currently being developed are on average just 27 MMboe, around one-third the size of projects in other basins, the consultants added.

And the UK’s pre-tax breakeven prices average $44/bbl compared with $31/bbl globally.

Wood Mackenzie’s research also determined that marginal tax rates of 31-35% in the US Gulf are less than half the current UK figure, and also beneath the 40% threshold that will apply in the UK post-2030 under normal conditions.

While Norway's 78% tax rate matches current UK levels, the sector is dominated by state ownership of hydrocarbon resources and remains substantially less explored than the UK North Sea or US Gulf.

The consultants suggest that future UK price thresholds should be based on historic daily price data over agreed periods, with calculations aligned with existing UK fiscal system components, including ring fence corporation tax and the supplementary charge.

“The UK government's move towards a more flexible windfall revenue or profit-sharing system represents a significant improvement over the current Energy Profits Levy. The UK's cost disadvantage stems from operating in an ultra-mature, heavily explored basin with 90% of remaining resources already onstream or under development. A competitive fiscal regime becomes crucial to offset these inherent challenges and attract continued investment. And for many operators, 2030 will be too late to restore UK competitiveness."

—Graham Kellas, SVP of fiscal research, Wood Mackenzie