Sunak’s tax breaks could lead to more than £8bn of North Sea energy projects

More than £8bn of North Sea energy projects could now be given the green light rapidly as fossil fuel firms take advantage of a tax break in Rishi Sunak’s windfall tax, analysts have forecast.

Last month the chancellor introduced the one-off levy on North Sea oil and gas operators who have raked in outsized profits as energy prices have boomed with the aim of raising £5bn to help fund measures to offset rising household bills.

The energy profits levy also offers 91p of tax savings for every £1 of investment made by companies, in a move to encourage firms to reinvest their bumper earnings in the UK and build up domestic energy supplies. The increased tax rate is in place until either prices return to a “historically more normal level” or the end of 2025.

However, campaigners warned ramping up North Sea production risked hindering efforts to tackle climate change. Mike Childs, the head of policy at Friends of the Earth, said: “The financial stimulus offered by the chancellor to encourage more oil and gas exploration means projects teetering on the edge of approval or rejection are now looking more likely.

“If there was ever confusion about whether the UK is a climate leader or laggard this has certainly removed all doubt. The science couldn’t be clearer that new oil and gas is incompatible with a safe and livable planet.”

The broker Shore Capital said the tax breaks offered a “powerful incentive for those existing producers who have so far been hesitant to press the button on development-ready discoveries”.

Analysis shows there are more than £8bn of oilfield projects awaiting a final investment decision in the North Sea. These include the Rosebank field, owned by Norway’s Equinor, which lies 80 miles north-west of the Shetland Islands and could hold more than 300m barrels of recoverable oil. It is estimated it would cost £4.5bn to develop.

Earlier this year Aberdeen’s Ithaca Energy bought Siccar Point, the owner of the £2bn Cambo field off Shetland. Ithaca said the field was a “huge opportunity” and would create thousands of jobs but the project has faced significant opposition from climate activists.

Other potential projects include Orcadian Energy’s Pilot field, which could cost about $900m (£717m) to develop, and Jersey Oil and Gas’s $1.4bn Buchan Redevelopment project.

The oil majors BP and Shell have warned that the tax could affect future decisions on investment. However, the tax breaks could also encourage a short-term fillip in spending.

The Shore Capital analyst Craig Howie said he expects more investment from North Sea players, adding: “We certainly believe that, because carried forward losses cannot be used to offset the levy, new capital expenditure could be the only effective means of mitigating the higher tax burden that has now emerged.”

The Wood MacKenzie North Sea research director Neivan Boroujerdi said: “The move is unlikely to render new or existing projects uneconomic and it could even accelerate ‘ready to go’ developments, such as Rosebank and Cambo. Moving those forward to a final investment decision has been incentivised.”

On Monday, Serica Energy, which produces about 5% of the UK’s gas, reassured investors it could use the investment incentives to reduce its tax bill.

Serica said it plans to spend £60m in the UK this year, including on the North Eigg development in the North Sea. It said this “will offset a large element of the energy profits levy that would otherwise be payable on Serica’s profits this year”. Serica’s shares recovered some of the ground lost since the windfall tax was announced.

The windfall tax, originally a Labour policy idea, remains a contentious topic in Westminster. Speaking in the Commons on Monday, the shadow chancellor, Rachel Reeves, accused the government of using “sleight of hand” to create a “cashback policy” and labelled the investment allowances a “gigantic get-out clause”.

Labour claims a third or more of any revenue from the levy might be handed back in tax breaks. Lucy Frazer, the financial secretary to the Treasury, responded: “We are ensuring that we tax extraordinary profits at the same time as protecting those struggling with the cost of living.”

Meanwhile, Sunak was quizzed by MPs on the Treasury Committee about whether he would expand the levy to include electricity generators. Sunak refused to say whether the scheme would be broadened but said the Treasury was “working urgently” to assess the size of excess profits generators are making.

Oil prices have soared since the start of the year, pushed up by Russia’s invasion of Ukraine, and have risen above $120 a barrel. Shell and BP have enjoyed record profits, with their shares bouncing back above pre-pandemic levels.

Last week, climate experts reacted with anger after the government announced it had given the Jackdaw field, to be developed by Shell, “final regulatory approval”. It is estimated Shell will pay £200m less in windfall tax over the next few years as a result.