UK oil and gas policy - a global outlier?

We are increasingly seeing very tangible evidence of the impact of current economic policy on the UK energy sector. Considering trends elsewhere, is the UK a global outlier?

Challenges in the UK oil and gas market

The UK government, like many governments around the world, is aiming to achieve net-zero greenhouse gas emissions by 2050. However, unlike many others who are continuing to develop domestic oil and gas, the UK government appears to be pursuing a more aggressive approach by adopting policies that are accelerating the decline of UK domestic production. The 2024 Autumn Budget announcement, changing the Energy Profits Levy (EPL), in addition to a reluctance to grant new drilling licences, is putting tremendous pressure on UK business and making future capital investment unpalatable.

Harbour Energy, the UK’s largest North Sea oil and gas producer, recently announced plans to cut up to 250 jobs in Aberdeen, citing the EPL on oil and gas profits as the main factor in making operations financially unviable. Since the introduction of the EPL, it has cut 600 jobs and its most recent round of redundancies followed reports of a sales process being launched for its stakes in various North Sea assets.

Harbour Energy is not the only North Sea operator to respond negatively to the current UK regulatory environment. In November 2024, Apache announced plans to exit the North Sea, also citing the changes made to the EPL as well as rising emissions control costs.

This loss of investment reinforces what the sector has been unanimously saying for some time; there’s a balancing act to be achieved between transitioning to renewable energy and maintaining economic stability in traditional energy sectors.

The oil and gas operators are not the only organisations feeling the impact. Belmar Engineering, an Aberdeen-based oil and gas service provider, recently announced that after 50 years in business, it will enter into liquidation. Increased international competition, recent losses and falling orders were all referenced as contributing factors, highlighting the cascade effect on businesses in the energy supply chain. Approximately 50 jobs will be lost.

Many UK-based businesses have been reducing their exposure to the North Sea for some time. This has encouraged international expansion, but given the current market conditions in the UK, it is also leaving them with almost no feasible domestic growth options as capital can be better utilised overseas.

If this trend continues, homegrown UK energy firms may choose to relocate overseas entirely, including moving their management, headquarters, or operations to jurisdictions like the UAE, which offer more favourable tax regimes and incentives to attract foreign investment.

The energy transition challenge is further evidenced among larger players such as BP, which has suffered from falling profits and investor confidence, with many attributing this to a recent commitment to cut oil production and focus on renewable energy investments. This has left BP in a vulnerable position, fuelling speculation that it could be a takeover target for Shell or another energy major.

These recent setbacks demonstrate the need for government intervention, and the Industrial Strategy can’t come soon enough. Consistent feedback from across the energy sector continues to fall on deaf ears. Implementing a genuine transition strategy, which consists of upskilling programmes, sustainable investment, cross-industry collaboration and competitive tax policies, would help to future-proof the sector and enable it to play a key role in the UK’s transition to net zero.

Comparison between UK and international strategies in the oil industry

Norway and The Netherlands share the same basin as the UK, however, they appear to be pursuing very different approaches.

Norway is Europe’s largest oil and gas producer and shows no signs of taking its foot off the accelerator, with increased production and development expected in 2025.

The Netherlands recently approved measures to protect domestic gas production, citing both a historic overreliance on imports and the additional carbon emissions associated with extraction, transport and processing when moving gas across continents.

Looking further afield, the United States, Russia and Saudi Arabia, each producing significantly more oil and gas than any other country, do not appear to be pursuing a similar approach to the UK in pursuit of net zero.

When considering the policies and strategies of other countries, it is difficult to see why the UK would sacrifice revenues and growth from such a critical industry when it is known that energy imports will be required long into the future to meet rising domestic energy demand.

Calls for a different approach

It is therefore no surprise that many are calling for a more pragmatic approach to the UK energy transition. Offshore Energies UK (OEUK) recently published their response to the UK government consultation on building the North Sea’s energy future. In their response, they refer to ongoing UK oil and gas production as a critical tool in building out the nation’s supply of renewable energy.

Rather than being heavily reliant on imported energy that is not subject to the EPL, OEUK argues that with the right policies, the UK could meet more than 50% of its required energy demand by 2050, adding £165bn to the UK economy and supporting the transition to clean energy sources.

Recent geopolitical events have also highlighted the strategic importance of domestic energy production. The Russian invasion of Ukraine in 2022 laid bare the West’s overreliance on Russian energy. In this context, the UK should consider its domestic capacity to produce oil and gas in an increasingly volatile world.

Supporting domestic companies through the energy transition

It is important to support domestic energy companies, who may have historically had traditional energy portfolios, in their transition to cleaner sources of energy production. The UK energy engineering’s expertise is transferable and should play a central role in this transition. For example, the UK North Sea has the geological capacity to store over 78 gigatons of carbon dioxide: capacity that will be a critical part of balancing our carbon output going forward.

Existing companies require long-term confidence in government policy to transition into these new markets, but the current environment does not appear to be providing that confidence. Worryingly, alongside announcing the latest round of job cuts, Harbour Energy also announced that it was reviewing the resourcing required to support its Viking carbon capture and storage project due to repeated delays to the government’s Track-2 process.

UK risks falling behind in energy transition strategy

Grant Morrison, Head of Oil and Gas, said: “The UK appears to be increasingly out of step with other major oil and gas producers in its approach to oil and gas within the broader energy transition. Despite repeated and ongoing calls for a more balanced approach to achieving our net-zero ambitions, these seem to fall on deaf ears, even as very tangible examples of the negative impact of the policy seem to be arising on a more regular basis.”

With multiple examples of other countries viewing domestic oil and gas production as an inherent part of their energy transition, continuing down a different path seems to run the very real risk of the UK literally being left ‘out in the cold’.

How we can help your oil and gas business

With extensive experience working with clients in the oil and gas sector across the UK and globally, we are dedicated to supporting businesses in the industry.

Our deep industry knowledge enables our clients to comply with complex regulations, minimise risks, and maximise new opportunities to reach their business goals.

If you would like to discuss the impact for your energy and natural resources business, please contact Grant Morrison.