Windfall tax: What does the budget have in store for Scotland's oil and gas industry?

The energy industry will be watching nervously as the first Labour Budget in 15 years is revealed.

The oil and gas sector has already been warned that the windfall tax will increase and be extended from November 1.

However, the industry has been lobbying hard to reverse that decision and for some of the investment allowances to be spared the axe.

The windfall tax was first introduced in 2022 by the then-Chancellor Rishi Sunak.

Its aim was to tax the profits oil and gas firms were making on the back of the war in Ukraine and use that to help households with rising energy bills.

The Energy Profits Levy, as it’s officially known, started off at 25%, then Jeremy Hunt increased it to 35% when he was Chancellor.

Now, Labour plan to increase it by another 3% to 38%, meaning overall taxation levels on upstream oil and gas activity would rise to 78%.

However, the UK Government also want to extend it until March 2030, another year from the timeline set out by the Conservatives last year.

Labour also plans to end some of the investment allowances, and this is a real issue for the sector.

The industry body, Offshore Energies UK say these changes could wipe around £13bn off the value of the sector and therefore the economy.

It’s no surprise that business groups have been urging Rachel Reeves to reverse the proposals.

Ryan Crighton, from Aberdeen and Grampian Chamber of Commerce, said: “Proceeding with a 78% tax rate and doing away with allowances is going to have a huge detrimental impact on the North Sea.

“And its not just people talking about it now, we’ve already seen last week with Harbour Energy announcing that a number of assets are being put up for sale.

“Big investors, big operators are going to vote with their feet if they get a tax regime that makes the North Sea unviable, so it’s incumbent on the Chancellor to listen to the warnings from industry.”

However, the Chancellor has made it clear it has a big blackhole to plug in the public finances.

It also has the newly created, GB Energy that will be headquartered in Aberdeen to fund.

Labour, ahead of the election said the changes to the windfall tax could raise £10.8bn over the parliament.

UK Government figures last month show that the Energy Profits Levy raised £3.6bn between 2023 and 2024.

There is no denying that oil and gas firms have made large global profits recently either.

Shell saw record profits in 2022 of $39.9bn and BP $27.7bn but both have fallen since.

The windfall tax can only be applied to the profits made in the UK and the figures above relate to profits made globally.

The sector also says wholesale prices have fallen, and the industry is no longer seeing a windfall.
However, at the same time consumers are still seeing high energy bills.

The Energy Price Cap has fallen from its peak in January last year, but it still increased again in October and it may rise again come January.

Environmental campaigners are backing the UK Government in its decision to make changes to the windfall tax, indeed some want them to go further.

Rosie Hampton from Friends of the Earth Scotland said: “The windfall tax is a really good first step, oil and gas companies have been allowed to make obscene profits out of the energy crisis and the cost-of-living crisis for years now.

“What we need to see is this windfall tax implemented and then it being ring-fenced to support the energy transition for oil and gas workers.”

The UK Government has consistently said it believes that oil and gas firms should be paying their fair share.

Both sides of this debate will be watching when Rachel Reeves takes to her feet and delivers the Budget on Wednesday.