FACTBOX: New UK government signals taxing times for North Sea oil

A new UK government led by the Labour Party following the results of a general election July 5 opens the way for a significant shift in energy policy.

Incoming Prime Minister Keir Starmer has pledged new taxes on North Sea oil producers and the creation of a national energy company.

The following factbox outlines what to expect on energy from the new administration in Westminster.

Infrastructure

Labour has pledged not to issue any new oil and gas licenses, but nor will it revoke existing licenses.

• Several upstream operators suspended development plans ahead of the election, noticeably the 100 million-barrel Buchan project.
• UK oil production is expected to fall below 600,000 b/d by 2030 from 710,000 b/d in 2023, according to S&P Global Commodities Insights' analysts.
• Industry group Offshore Energies UK sees potential for GBP450 billion of investment in the North Sea to 2040, two-thirds of it in low-carbon energy and one-third in oil and gas.

Labour plans to increase the Energy Profits Levy (EPL) "windfall" tax on North Sea oil and gas producers by three percentage points, and to abolish EPL offsets for upstream investment.

• The EPL takes the current headline tax rate on UK oil and gas production to 75%.
• Labour says it expects the tax measures to raise an extra GBP1.2 billion ($1.5 billion) annually.
• Production from Equinor's 300 million-barrel Rosebank project, due on stream in 2026-27, is expected to fall largely outside the EPL if, as promised, the tax is rescinded at the end of the forthcoming parliament.

On electricity and clean energy, Labour aims to quadruple offshore wind capacity and remove the previous government's de facto ban on onshore wind farms in England and Wales.

• The UK has 14.73 GW of offshore wind in operation. Labour's plan to quadruple capacity by 2030 is aspirational. Commodity Insights analysts forecast installed capacity of 42 GW at most by then, under an ambitious Green Case.
• The UK has 15 GW of onshore wind. Labour plans to have 35 GW by 2030. Commodity Insights forecasts 29 GW under its Green Case.
• Labour's goal of a decarbonized power grid by 2030 is seen as highly unlikely. Natural gas accounted for over 31% of the UK electricity mix in 2023. Commodity Insights only sees this dipping to around 20% by 2030.

Starmer has also proposed using Great British Energy, a publicly owned investment vehicle, to accelerate renewable energy projects and infrastructure as it seeks to deliver a decarbonized power grid by 2030.

• Labour says new nuclear power plants, such as Sizewell C and small modular reactors, have an important role to play in UK energy security.
• Labour also intends to reform electricity markets and set timetables for planning and grid improvements.
• A review of electricity market arrangements, a spatial energy plan and permitting reforms are among key initiatives that remain unresolved under the current government.

Trade flows

The incoming government has pledged GBP1.5 billion to build new gigafactories and reinstate the 2030 ban on the sale of new internal combustion engine cars, accelerating a current 2035 deadline.

• The EU is the largest market for UK vehicle exports. Over 750,000 UK vehicle exports to the EU in 2022 were valued at Eur10.3 billion.
• An accelerated ICE car ban would steepen declines in diesel and gasoline demand from 2030. Commodity Insights forecasts motor gasoline demand to continue rising into 2025, supported by hybrid sales, peaking at 275,890 b/d.
• Battery electric vehicles made up 19% of new UK car registrations in June, according to the UK's Society of Motor Manufacturers and traders, against 50.9% for gasoline cars and 28.3% for hybrids (including plug-ins).

Labour has promised to secure the UK aviation industry's long-term future, including through promoting sustainable aviation fuels.

• An existing SAF mandate stipulates that 2% of UK jet fuel demand should be met by SAF in 2025, rising to 10% in 2030.
• Existing targets require planned SAF capacity to more than double to 1.2 million mt, with the Transport Ministry previously in consultation on investment for new production.
• Labour has yet to confirm support for specific SAF pathways, with current policy capping production from HEFA feedstock -- the main commercially available production method, from 2030.

Prices

Labour has pledged GBP500 million ($630 million) over the course of the next parliament to support green hydrogen production.

• The UK's first electrolytic hydrogen allocation round awarded in December 2023 will support 125 MW of electrolysis at an average strike price of GBP241/MWh, backed by GBP2 billion.
• Platts, part of Commodity Insights, assessed UK autothermal reforming hydrogen production costs with CCS at an average of $2.58/kg in May, the Platts Hydrogen Price Wall shows, well below electrolytic hydrogen pathways around $6-$7/kg.

A further GBP1 billion has been pledged by Labour to accelerate carbon capture and storage.

• Platts assessed UK ETS carbon prices at GBP/46.56/mt ($59.49/mt) on July 4, compared with industry estimates of CCS costs around $130-$150/mt in Europe.
• Platts Industrial Pollutants voluntary carbon credits were assessed at $1.90/mt July 4, down 30% in value year on year.
• Labour supports the introduction of a UK carbon border adjustment mechanism for 2027. This would have cost implications for imports of aluminum, steel and hydrogen. Imports of electricity are not included in current proposals.

The new government is expected to maintain a strategic reserve of gas-fired power stations to guarantee security of supply, noting that oil and gas production in the North Sea "will be with us for decades to come".

• UK gas prices have come down from their record levels in 2022 but are still relatively high. Platts last assessed the UK NBP month-ahead price at 78.2 pence/therm ($9.98/MMBtu) on July 4.
• The Platts Dated Brent benchmark was assessed at $88.96/b July 4, up 17% month on month.