Big changes are coming for UK oil and gas companies as the government prepares to overhaul its tax system. The new mechanism will only kick in when prices soar, aiming to balance industry stability with public revenue.
What Happened
The UK government has announced a major shift in how it taxes oil and gas production. The existing Energy Profits Levy will be replaced by a new Oil and Gas Price Mechanism, set to take effect from April 1, 2030—or earlier if oil or gas prices spike above set thresholds.
This new system is designed to be more responsive to market swings, targeting only the revenues generated when prices rise to unusually high levels. It marks a move away from broad windfall taxes toward a more targeted approach.
Why It Matters
The overhaul is intended to create a more predictable environment for investment while ensuring the government benefits when commodity prices surge. The oil and gas sector has long argued that unpredictable taxes discourage long-term projects, especially in a mature basin like the North Sea.
The new mechanism could help sustain jobs, support domestic energy production, and maintain a stable tax base for the UK. Industry leaders say the change is crucial for unlocking billions in new investment and securing the future of offshore energy projects.
Impact on Investment
By linking tax liability directly to market conditions, the government hopes to encourage companies to continue investing in exploration and production. The move could help prevent a sharp decline in North Sea output, which has been forecast to fall without policy intervention.
Key Details
The new Oil and Gas Price Mechanism will impose a 35% tax on revenues generated above established price thresholds. For the 2026-27 financial year, these thresholds are set at $90 per barrel for oil and 90 pence per therm for gas. The figures will be adjusted annually in line with inflation.
The mechanism will only apply when prices exceed these levels, meaning most companies will not pay the tax during periods of normal market conditions. The government says this approach ensures operators benefiting from windfall revenues contribute a fair share to public finances.
How It Works
- The tax is revenue-based, not profit-based.
- It applies only to the portion of revenue above the set thresholds.
- The thresholds will rise each year with inflation, maintaining their real value.
What Comes Next
The government will introduce legislation for the new mechanism in the next available Finance Bill, ensuring a smooth transition from the current levy. The change is expected to provide greater certainty for investors and operators as the UK seeks to balance energy security with its net zero ambitions.
Industry groups are now assessing how the new rules will affect ongoing and future projects, particularly in the North Sea. The move could shape the future of UK energy production for decades to come.
The new tax framework signals a shift toward a more flexible, market-responsive system—one that could help secure the UK’s energy future while adapting to volatile global markets.
