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Labour’s North Sea Oil Policy Creates Confusion as Government Reverses Campaign Promise
The UK government is sending mixed signals on North Sea oil and gas, allowing new drilling at existing fields while maintaining punishing taxes on producers. What began as a pledge to end new licensing has transformed into a pragmatic but contradictory middle ground that satisfies almost no one.
What Happened
Labour’s recent budget announcement revealed a significant policy shift: the government will permit new oil and gas production on or near existing North Sea fields through a new system called Transitional Energy Certificates. This marks a departure from the party’s 2024 election promise to halt new oil and gas licensing entirely.
Simultaneously, the government maintained its windfall tax regime, disappointing industry operators who hoped for relief. The Energy Profits Levy (EPL) will remain in place until March 2030, with tax burdens potentially reaching 78% for operators when prices exceed government thresholds. The government also removed investment allowances previously available to companies, making North Sea operations even less attractive to investors.
The Industry’s Frustration
Energy producers are caught between two conflicting signals. The easing of licensing restrictions suggests the government recognizes the value of domestic production, yet the maintained and reinforced tax framework actively discourages the investment needed to make new projects viable.
Industry bodies argue this creates an untenable situation. If the levy remains beyond 2026, projects will stall and jobs will disappear, they warn, regardless of how pragmatic licensing policy becomes. Analysis suggests that reforming the EPL in 2026 rather than waiting until 2030 could raise £15.7 billion to £48.6 billion in tax receipts over a decade while preserving 1,000 jobs monthly.
North Sea production has already plummeted from 4.4 million barrels of oil equivalent daily to just 1 million today. Without investment incentives, forecasts suggest further 40% declines by 2030.
Labour’s Strategic Dilemma
The government faces genuine tension between competing priorities. It committed to delivering clean power by 2030 and reducing household energy bills through renewable investment, funded partly by the windfall tax revenues. Energy security has also become urgent following global market shocks and rising import reliance.
Allowing limited North Sea drilling addresses energy independence concerns without abandoning net-zero ambitions. The policy theoretically permits essential domestic supply while preserving tax revenues for clean energy investment. In practice, however, it satisfies neither climate advocates nor energy producers.
What Comes Next
The government has committed £20 million to establish a North Sea Jobs Service to support affected workers and communities. Key decisions on electricity market reforms and grid connection timelines will determine whether renewable deployment can proceed quickly enough to meet 2030 targets.
The fundamental question remains unresolved: can the UK maintain domestic oil and gas production while aggressively transitioning to renewables, or is this attempt to bridge both positions ultimately self-defeating? Labour’s muddled approach suggests the government hasn’t yet answered that question convincingly.
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