A trade association has issued a warning that the UK may face a £13 billion economic loss as a consequence of increasing the windfall tax on its offshore oil and gas sectors.

Offshore Energies UK highlighted that the proposed tax hike could lead oil and gas firms to scale back their investments in domestic projects, which would adversely affect local suppliers and businesses within their supply chains.

In late July, the Labour Party announced plans to raise the energy profits levy by an additional three percentage points, raising the total tax rate to 78 percent. This extension would keep the levy in place for another year, lasting until March 2030. Additionally, there are plans to remove certain investment incentives associated with the levy, with further details anticipated in the upcoming budget announcement by the Chancellor on October 30.

In its latest efforts to lobby against this legislative change, Offshore Energies UK, which represents over 400 oil and gas firms, warned that while short-term tax revenues may rise, a steep decline in production due to reduced investment could lead to a projected £12 billion drop in tax receipts.

The windfall tax was first imposed in May 2022 following widespread criticism of extraordinary profits reported by Shell and BP, which profited significantly due to the ongoing energy price crisis.

David Whitehouse, CEO of Offshore Energies UK, acknowledged the tough choices that will have to be made in the forthcoming budget. However, he argued that the analysis indicates the energy profits levy may ultimately diminish the sector’s overall contribution to the UK’s economy. He pointed out that UK oil and gas operators have already been paying three times the corporation tax rate compared to other sectors. He emphasized the urgency of addressing the situation to prevent further detrimental impacts.

The organization predicts that the windfall tax increase could see investments in UK projects drop from an anticipated £14.1 billion to just £2.3 billion between 2025 and 2029. They caution that the cancellation or delay of key projects could put approximately 35,000 jobs at risk over the next five years.

In June, Deltic Energy halted its work on the significant Pensacola project, one of the largest discoveries in the southern North Sea in the past decade. The company cited an inability to find investors or secure alternative financing as reasons for the withdrawal, pointing to “deteriorating sentiment” regarding the sector.

Deltic’s exit from the project followed Jersey Oil & Gas’s decision to postpone its development plans in the North Sea amid uncertainties concerning further windfall taxes.