Britain’s once-prosperous North Sea oil and gas province survived until 2025, the toughest year since the 1960s, when hydrocarbons were first discovered in the basin.
Oil and gas production from mature fields continued to decline last year, while uncertainties increased as the industry awaited changes to UK government policy that places a huge tax burden on operators without investment incentives or subsidies. Companies active in the UK offshore oil and gas sector have reduced investments and frozen plans amid increased uncertainty.
With reduced investment and the government’s reluctance to grant new licences, exploration in the UK North Sea has fallen to a record low. Due to unpredictable fiscal policies, 2025 became the first year since 1960 without a single exploration well in the British offshore, warned the consulting firm Wood Mackenzie.
The tax on extraordinary profits slows down investment
The UK oil and gas industry received clarity at the end of 2025 on the tax regime it had been waiting for for more than six months.
The government removed most of the uncertainty with November’s fall budget. But it left the windfall tax unchanged until 2030, contrary to industry pleas and warnings that the total tax rate, including windfall tax, of 78% and no incentives or subsidies would essentially tax the industry and its supply chain to death.
In fact, the only certainty the industry received was that the punitive tax, officially known as the Energy Profits Levy (EPL), will remain in place until the end of the decade. For 2025, the tax was triggered by oil prices above $76 per barrel or natural gas prices of 59 pence per therm. Oil prices were mostly below the threshold, but gas prices have remained above 59 pence per therm, triggering the 35% windfall tax.
Last year was terrible for the UK North Sea. The industry sentiment is that the horrible years are not over and an accelerated decline in investment and exploration would kill the industry and increase Britain’s need for oil and gas imports, further exposing one of Europe’s major economies to volatile international oil, gas and LNG markets.
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The windfall tax, first introduced by a Conservative government at the height of the 2022 energy crisis and now extended under the Labor government, would eliminate all non-essential investments in the UK platform as it would compete with friendlier tax jurisdictions, according to WoodMac.
“The government rejected a £50 billion investment for the UK and the opportunity to protect the jobs and industries that keep this country running,” Offshore Energies UK chief executive David Whitehouse said in response to the decision to keep the windfall tax as it is.
“Instead, they have chosen a path that will continue to result in 1,000 job losses each month, more energy imports and contagion in supply chains and our industrial centers,” Whitehouse added.
The Aberdeen & Grampian Chamber of Commerce said: “Lights out for North Sea oil and gas as Chancellor maintains windfall tax.”
Chamber chief executive Russell Borthwick commented that instead of following industry advice, “the UK government has chosen to end production in the North Sea and tax the industry to death within five years. Thousands of jobs will be lost as a direct result of this government’s inaction.”
The tax has led many companies to halt investment in the UK and reduce workforce numbers in recent years.
The latest announcement came from one of the major independent producers, Harbor Energy, which last month said it expects to reduce employee numbers by another 100, on top of the 600 jobs already eliminated from 2023.
Harbor Energy chief executive Linda Cook told the Financial Times in late December that the UK is “the worst tax environment of all the countries in which we operate”.
Due to the tax regime, the UK industry is forced to compete with other jurisdictions with “one arm tied behind its back”, Cook told the Financial Times.
The survival of the fittest mergers
In hostile tax environments, UK North Sea operators are turning to alternative solutions to increase profits and create value for shareholders. Mergers have become the most common of these solutions as the industry consolidates to deal with the punitive tax rate.
Last month, Harbor Energy announced an acquisition in the UK North Sea as the industry seeks to weather the crippling effects of the UK windfall tax.
“This transaction is an important step for Harbor in the UK North Sea, building on the steps we have already taken to maintain our position in the basin given the current fiscal and regulatory challenges,” said Scott Barr, Managing Director of Harbor’s UK Business Unit, commenting on the deal to buy Waldorf Energy Partners Ltd and Waldorf Production Ltd, currently in administration, for $170 million.
Harbor Energy has become the latest UK operator to announce acquisitions, following the launch of Shell and Equinor’s 50/50 joint venture, which combined its UK offshore oil and gas operations into a new company, Adura. In early December, French major TotalEnergies said it would merge its UK upstream business with NEO NEXT to create Britain’s largest independent oil and gas producer, NEO NEXT+.
Analysts expect the consolidation drive to continue, as the industry continues to call on the government to reform the tax regime.
“Restoring investment in the North Sea does not mean abandoning climate commitments – it is necessary to safeguard jobs, stabilize the economy and maintain a bridge to a cleaner energy future,” UK energy and chemicals group Ineos, which halted investment in the UK, said last month.
“How can companies invest in that future if they are being driven to ruin?”
By Tsvetana Paraskova for Oilprice.com
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