Rachel Reeves looks at early scrapping of windfall tax on UK oil and gas sector

Chancellor Rachel Reeves could scrap a windfall profits levy on the UK oil and gas industry sooner than expected, after Prime Minister Keir Starmer said he wanted to “double down” on North Sea extraction.

Reeves is considering using her Budget to end the energy profits levy in March 2029 — reversing a decision in last October’s Budget to extend it by a year to March 2030 — according to people briefed on her thinking.

But the chancellor, under fierce fiscal pressure in her Budget, is seeking assurances from oil and gas companies that the move would result in new investment and jobs, and ultimately more tax revenues for the exchequer.

Multiple industry sources said the Treasury had been seeking details of investment plans in recent meetings, as Reeves and Starmer look to the North Sea to help boost growth in the British economy.

“There’s a lot of scepticism in the Treasury,” admitted one government official, but another confirmed that, while no decision had been taken, bringing forward the expiry of the windfall tax by a year was “on the table”.

The move would mark a shift from being a government which has sought to focus on the transition to renewable energy, but Reeves is open to the argument that the offshore oil and gas sector needs more time to adapt. 

Labour plans to impose a ban on oil and gas licences being issued for exploration in new fields but has committed to keeping existing fields open for their lifespan.

Offshore Energies UK has claimed that replacing the energy profits levy with a permanent and less onerous tax regime would unlock £40bn in new investments across 90 projects. The current fiscal regime is costing 1,000 jobs a month, the industry body has claimed.

The independent Office for Budget Responsibility estimated last year that Reeves’ planned extension of the energy profits levy until the end of March 2030 would raise about £1bn, although it said there was uncertainty around that figure.

If she reverses that decision, Reeves would try to persuade the OBR to include the prospect of more growth in the North Sea sector in its economic forecasts.

“Oil and gas will be part of the mix for many, many years to come,” Starmer said last week. “I want to double down on that. But also alongside it, we need to take the opportunity for renewables which is a fantastic opportunity for Scotland.”

OEUK has called on Reeves to replace the temporary windfall tax, introduced in 2022 under the last Conservative government after oil and gas prices soared after Russia’s full-scale invasion of Ukraine.

Since it was introduced, Brent oil prices have almost halved to about $65 a barrel. The Treasury is planning to replace the levy with a permanent new tax mechanism based on profits to restore confidence.

“This is a crucial moment for securing the future of the North Sea and the UK’s energy system,” David Whitehouse, OEUK chief executive said. “Decisions made in the coming weeks will determine whether we keep investment and jobs here or lose them overseas.”

The Labour government raised the effective tax rate on upstream oil and gas profits from 75 per cent to 78 per cent at the last budget. 

Smaller oil and gas operators and supply chain companies have been shedding jobs and may relocate investment to more amenable jurisdictions, industry insiders said. 

One described the potential change to the levy as a “fudge” that would please neither side of the energy transition debate. “It’s typical of this government — eventually heading in the right direction but unable to rip off the band-aid,” the person said.

Claims by the industry that the high tax take had driven investment and jobs away from the North Sea were repeated by Donald Trump during his recent visits to the UK.

The Treasury said: “We do not comment on speculation around changes to tax ahead of the Budget.”

Meanwhile, the government said on Wednesday that the UK was on track to meet and outperform legally binding caps on greenhouse gas emissions over five-year periods from 2023 to 2037.

Energy secretary Ed Miliband said Labour’s net-zero delivery plan — electrifying power systems and supporting low-carbon energy sources including nuclear, while making it easier to insulate homes — would make British people “better off”.

The strategy followed recent calls from the Tony Blair Institute for the government to rethink its 2030 clean power target. The think-tank founded by the former premier said Labour should focus on bringing down electricity costs that can become a drag on the economy.