North Sea shutdown to cost Treasury billions in tax relief

The Treasury faces a multibillion-pound hit from Labour’s North Sea shutdown, BP’s former finance chief has warned.

Brian Gilvary, who sat on the board of BP from 2012 to 2020, said punishing tax rates and a ban on new drilling had prompted many oil and gas operators to halt activity in British waters sooner than expected.

As a result, companies are ripping pipes and platforms out of the sea far earlier than planned. The vast costs of such decommissioning can be claimed back against the tax paid on previous years’ profits, meaning a huge rebate bill for the Treasury.

The latest estimates suggest the rebates, plus foregone tax from North Sea operations, could cost the Treasury around £13bn between now and 2035.

Writing in The Telegraph, Mr Gilvary, who is now chairman of Sir Jim Ratcliffe’s Ineos Energy, said: “Forcing fields to close prematurely does not simply switch off future tax receipts; it also brings forward the point at which those decommissioning tax reliefs crystallise, increasing the near-term pressure on the public finances.”

Mr Gilvary said the decline of the UK oil and gas industry under Labour was “eroding long-term national wealth” and damaging “the fiscal capacity to fund public services”.

The warning comes a week after BP announced plans to exit the North Sea by selling its operations there. Meg O’Neill, the company’s chief executive, has since said the region “doesn’t compete for capital”.

Oil and gas companies face a 78pc levy on their UK profits after Labour increased a windfall tax on the industry when it came to power. The Government has also extended the levy by two years, from 2028 to 2030.

Mr Gilvary said BP’s decision to exit the North Sea was “a tangible warning sign” about the cost of these policies.

He said: “When major operators retreat, the consequences ripple far beyond corporate balance sheets.

“Investment falls, supply chains weaken, and highly skilled jobs, many clustered in Scotland and the North East, begin to disappear. Tax revenues decline, and with them the fiscal capacity to fund public services and the energy transition itself.”

Annual decommissioning costs have already risen from £2bn in 2024, the year of Labour’s election, to £3bn every year from now to at least 2030, according to data from industry regulator the North Sea Transition Authority (NSTA).

Labour’s ‘folly’

The NSTA predicts at least £28bn will be spent on shutting down the North Sea from now to 2035. This implies a total cost to the Treasury of around £13bn over that period.

Ashley Kelty, an oil and gas analyst at investment bank Panmure Liberum, said: “This shows the folly of the drive to shut down the North Sea.

“Another risk that ministers fail to appreciate is that closing down some of the key offshore hubs will leave other fields stranded and also forced to close. It means the basin closes down even faster, with less tax generated and more relief having to be given.”

Andy Burnham, the Prime Minister, has signalled that he will soften Labour’s stance on oil and gas, saying the UK “cannot ignore” North Sea resources.

A key test of his resolve will be on Jackdaw and Rosebank, two large oil and gas projects awaiting approval. A consultation on Jackdaw ends on Monday. It has the potential to deliver around 6pc of the UK’s gas supply, or enough to heat the equivalent of 1.4 million homes, according to operator Adura.

In total, the NSTA estimates it will cost about £48bn to decommission all operations in the North Sea. It suggests the final tax rebate bill for the Treasury will approach £30bn.

Others believe even this is a huge underestimate. A National Audit Office report in 2019 said that total North Sea decommissioning costs could be as high as £77bn, or about £101bn in today’s money.

A government spokesman said: “The North Sea remains a vital national asset, supporting jobs, growth and the UK’s energy security.

“Our focus is on providing stability and supporting North Sea workers and communities as they continue to make a vital contribution to the UK’s economy.”

We must stop paying other countries for energy we can produce ourselves

By Brian Gilvary - Daily Telegraph

The UK is making a strategic error in the North Sea, one that risks undermining energy security, destroying high-value jobs and eroding long-term national wealth.

At the heart of the problem is policy instability. The Energy Profits Levy (EPL), or windfall tax, combined with an effective ban on new drilling, has sent a clear signal to investors: the UK is no longer a reliable place to deploy capital.

Predictably, capital has gone elsewhere.

Nowhere is that more evident than in Norway, where investment in the continental shelf is running at roughly 10 times UK levels.

Even more perversely, Norway is exporting gas to the UK, from the same basin, energy we could in part produce ourselves, while British consumers and taxpayers absorb the cost.

This is not an abstract concern. BP’s decision to scale back and sell North Sea assets is a tangible warning sign. When major operators retreat, the consequences ripple far beyond corporate balance sheets. Investment falls, supply chains weaken, and highly skilled jobs, many clustered in Scotland and the North East, begin to disappear. Tax revenues decline, and with them the fiscal capacity to fund public services and the energy transition itself.

There is a further, often overlooked cost to the Exchequer. Companies can offset a significant proportion of North Sea decommissioning costs against tax, reducing the overall cost of removing platforms and plugging wells.

With the North Sea Transition Authority estimating that around £44bn remains to be spent on decommissioning, the Exchequer faces billions of pounds in tax relief over the coming decades.

Forcing fields to close prematurely does not simply switch off future tax receipts; it also brings forward the point at which those decommissioning tax reliefs crystallise, increasing the near-term pressure on the public finances.

The uncomfortable truth is that UK demand for oil and gas has not vanished. Instead, we are increasingly choosing to import what we could produce domestically, often with a higher carbon footprint. That is not climate leadership; it is carbon leakage combined with economic self-harm.

Union leaders have been blunt about the stakes. Sharon Graham, the general secretary of Unite, has warned that “without a coherent plan for domestic energy, we risk sacrificing tens of thousands of skilled jobs and hollowing out entire industrial communities”. Similarly, the GMB has stressed that “North Sea workers should not be collateral damage in a poorly managed transition” and called for sustained investment in domestic production alongside the growth of renewables.

This is not a fringe view. Even those strongly committed to climate action recognise the need for balance. Sir Tony Blair recently cautioned that “people feel they are being asked to make financial sacrifices and changes in lifestyle when they know the impact on global emissions is minimal”, arguing for a more pragmatic approach that protects economic resilience while pursuing decarbonisation.

The UK still has significant remaining reserves in the North Sea. With the right fiscal framework, these resources can be developed responsibly, supporting jobs, strengthening energy security and generating revenues to fund the transition to cleaner energy systems. The alternative – continued policy volatility and punitive taxation – will accelerate decline without reducing demand.

Reversing course requires two clear steps.

First, the Government should remove or substantially reform the Energy Profits Levy to restore investor confidence and create a stable, predictable fiscal regime.

Second, it should lift restrictions on new drilling, allowing companies to invest in projects that can deliver domestic supply over the coming decades.

This is ultimately a question of choice. The UK can either manage the decline of the North Sea in a way that maximises economic value and energy security, or it can force a premature contraction that benefits competitors, increases imports and weakens the domestic economy.

A credible energy strategy must recognise that oil and gas will remain part of the UK’s energy mix for years to come. The question is not whether we use these resources, but whether we produce them ourselves, or pay others to do it.

[Source: Daily Telegraph]