UK Budget signals cautious shift in North Sea energy strategy amid industry concerns

The UK government’s recent Budget has signalled a cautious but consequential shift in its approach to the North Sea oil and gas sector, refining industry, and the wider energy transition, emphasising a delicate balancing act between energy security, climate commitments, and fiscal priorities. However, industry stakeholders and unions alike have expressed concerns that the measures announced fall short of providing the certainty and support necessary to sustain long-term investment and a just transition.

The Budget recognised the strategic importance of domestic refining capacity to the UK’s energy security and industrial base, launching a call for evidence on the potential inclusion of refined products within the Carbon Border Adjustment Mechanism (CBAM). Yet, according to Fuels Industry UK, this acknowledgement alone fails to address the sector’s immediate pressures from rising carbon costs. Chief Executive Elizabeth de Jong warned that without urgent interim interventions, such as reallocating unused carbon allowances from recently closed sites to operational refineries, the sector risks further job and capacity losses. She described such measures as simple and effective steps to alleviate cost pressures while policymakers develop longer-term solutions.

On North Sea exploration, the government confirmed a crackdown on new licenses for wholly new fields, maintaining the existing 78% Energy Profits Levy (EPL) on producers, a windfall tax that remains one of the highest fiscal burdens globally and is scheduled to stay in place until 2030 before being replaced by a 35% Oil and Gas Price Mechanism. This decision drew strong criticism from energy companies, with INEOS Energy chairman Brian Gilvary describing the regime as “one of the least competitive fiscal regimes in the world” that will deter investment, stifle production, and increase reliance on imported oil. The EPL was initially introduced during a temporary price surge, which has now abated, yet remains a substantial imposition on sector profitability.

Nevertheless, the Budget introduced the Energy Transition Certificate mechanism to allow some tie-back projects linked to existing fields, supporting a “managed transition” rather than outright expansion of new exploration activities. The government is also consulting on fiscal reforms with a stated aim of securing long-term certainty for existing fields and facilitating a transition aligned with net zero ambitions.

Environmental and labour groups welcomed the government’s overarching direction but criticised the limited financial and worker support offered. Greenpeace highlighted the inadequacy of a £20 million job support package, calling for a fair transition that could generate thousands of new jobs and bolster communities, underscoring the opportunity to align climate leadership with economic security. Unite, the UK’s largest workers’ union, labelled the Budget’s measures as insufficient “tinkering” lacking a coherent plan for just transition pathways, particularly taking into account recent refinery closures and missed opportunities in green fuel production. Unite’s general secretary Sharon Graham emphasised the risks in moving away from oil and gas without securing sustainable alternatives for the workforce.

The government did announce measures to improve transition readiness, including funding to recruit additional planning officers, support for reforms to speed up nuclear energy projects, and investment in the redevelopment of the Grangemouth petrochemical site, an industrial asset with nearly a 150-year history. These initiatives signal attempts to enhance the UK’s industrial and clean energy capabilities but stop short of comprehensive sector-wide support.

The context for these policy choices is a UK energy landscape increasingly aware of the need to reduce reliance on imports while meeting climate targets. The North Sea remains a cornerstone of UK energy and industrial supply chains, supporting over 200,000 skilled jobs and contributing upwards of £25 billion to the economy. It also plays a crucial role in enabling decarbonisation efforts through carbon capture and storage (CCS) expertise, hydrogen production, and offshore wind development.

Industry data from the North Sea Transition Authority points to continued strong capital expenditure, estimated at nearly £6 billion in 2024, signalling ongoing but cautious investment despite fiscal pressures and policy uncertainty. However, analysts warn that the heavy taxation and lack of clearer transition plans risk driving energy companies to redirect capital overseas and impede the development of vital new projects.

An influential report by Offshore Energies UK quantifies the benefits of reforming the windfall tax mechanism, projecting that replacing the EPL with a profit-based mechanism would add £137 billion to the UK economy, support 23,000 jobs by 2030, secure £41 billion in additional energy investment, and unlock £12 billion more in tax revenues by 2050. This proposal would lower headline taxes from 78% to 40%, offering the sector greater predictability and incentives to remain competitive while fostering reinvestment.

As the UK government strives to align the North Sea’s legacy industries with its clean energy superpower ambitions, the immediate months ahead are critical. The evolving policy environment requires decisive action on interim support for refiners, reform of fiscal measures like the EPL, and comprehensive worker transition programmes if the sector is to maintain its contribution to UK energy security and industrial decarbonisation goals. Absent stronger clarity and engagement, there is a risk the downstream and upstream sectors could face further uncertainty, potentially jeopardising the UK’s ability to balance its economic and environmental imperatives in the energy transition era.