By Ron Bousso and Arunima Kumar
LONDON (Reuters) -The British government will increase a windfall tax on North Sea oil and gas producers to 38% from 35% and extend the levy by one year, finance minister Rachel Reeves announced on Wednesday.
Presenting the first budget under the new Labour government, Reeves said the increase to the windfall tax, known as the Energy Profits Levy, will take effect on Nov. 1.
It brings the headline tax rate on oil and gas activities to 78%, among the highest in the world. Its duration will be extended by a year to March 2030.
The changes also include scrapping the levy’s 29% investment allowance, which lets companies offset tax from capital that is re-invested. Capital allowances on the other taxes will remain unchanged, Reeves said.
The Labour government, elected in July, wants to use the revenue from oil and gas to raise funds for renewable energy projects.
North Sea producers have warned that the higher tax rate could lead to a sharp drop in investments and are exiting from the ageing basin ahead of ahead of new tax increases.
Top British North Sea producer Harbour Energy wants to sell stakes in North Sea oilfields and is reviving plans for a U.S. listing, sources told Reuters last week.
In July, U.S. oil major Exxon Mobil completed its exit from the North Sea region, where it had been present since 1964. Rival Chevron is also preparing to leave the basin.
Smaller operators, including Serica Energy have said they are seeking opportunities overseas.
“Further engagement will be required to ensure a fair fiscal regime for the longer term in support of homegrown oil and gas in a very mature and declining North Sea,” Serica chairman David Latin.
The move is expected to discourage new exploration and development activities in the basin by significantly reducing returns and incentives for companies operating in the sector, said Glenn Kangisser, partner at law firm Haynes Boone, adding that capital spending and employment within the industry may decline substantially.
A 25% windfall tax was first introduced by the previous Conservative government in May 2022 in the wake of soaring energy prices following Russia’s invasion of Ukraine. The tax was subsequently increased to 35% in November 2022, and extended by one year in March 2024.
British oil and gas shares was up 0.16% at 1420 GMT.
(Reporting by Ron Bousso and Arunima KumarEditing by Christina Fincher and William James)
