The foolishness of the energy windfall tax has now been proven

North Sea oil platform - Andrew Milligan/PA
North Sea oil platform - Andrew Milligan/PA

The impact of windfall taxes on North Sea oil and gas exploration has turned out to be every bit as disastrous as critics predicted. More than 90 per cent of offshore firms are cutting investment, driven away by a raid on profits and the uncertain future caused by political meddling.

Successive governments, in pursuit of “net zero”, have deliberately presided over the decline in North Sea extraction in order to reduce the UK’s carbon emissions while switching to renewables. However, oil and gas are still needed, and were being imported reasonably cheaply until the Ukraine war changed the economics completely.

The surge in prices inevitably pushed up the profits of the energy companies, such that politicians felt compelled to tax them harder. A report from Offshore Energies UK says this has driven away billions of pounds needed to maintain domestic oil and gas production.

The cuts mean the UK’s potential oil and gas resources have been downgraded, with 500 million barrels less likely to be produced – enough to support the nation for six months. This will just make Britain more dependent on imports. Indeed, as domestic production declines in the UK, overall reliance on oil and gas has actually increased.

Even though Labour has denounced the Government for not taxing the sector enough, the overall rate imposed on North Sea operators has almost doubled from 40 per cent to 75 per cent in just 10 months. The windfall tax will remain in place until 2028 – even as prices drop.

Moreover, a Labour government would backdate and raise the tax, remove most allowances and restrict further exploration. The short-sightedness of this approach is breathtaking.