Autumn Budget 2025: A low energy budget

The North Sea, once a cornerstone of the global oil and gas sector, has experienced a significant decline in investment in recent years. With a current marginal tax rate of 78% following the introduction of windfall taxes and energy profit levies, the UK's fiscal regime for upstream oil and gas has become one of the least competitive in the world for operators and investors.

Whilst the energy transition remains a policy priority, there continues to be a clear role for domestic oil and gas production in the UK's energy mix, particularly given security of supply considerations and the proximity of North Sea resources.

The Investment Challenge

Although substantial tax reliefs remain available to oil and gas companies, enabling significant development costs to be offset against taxable profits, the reality is that the marginal tax rate is driving investment decisions elsewhere. Capital is flowing to jurisdictions such as the US, Middle East, Brazil, Eastern Mediterranean, Greece, South East Asia and Africa, where fiscal regimes offer greater stability and more attractive returns.

The impact on reserves is stark: at year-end 2024, overall oil and gas reserves as reported by the NSTA decreased compared to year-end 2023, with 400 million barrels of oil equivalent production during the year not being offset by new developments. Only two new field development plans were consented to during 2024, representing a material slowdown in sanctioning activity that should concern policymakers.

The Budget Response

Yesterday's budget arguably fell short of what the sector needed: the ban on new exploration for offshore fields remains in place, and the marginal tax rate will continue at current levels until its scheduled expiry in 2030. This represents a missed opportunity to recalibrate the fiscal regime and signal a more balanced approach to energy policy.

The economic impact on the sector has been substantial and troubling. Between 2013 and the present, employment supported by the oil and gas industry has declined by more than 50%, from 441,000 to 214,000 jobs. Aberdeen has been particularly affected, experiencing one of the slowest growth rates of any major UK city—a direct consequence of policy choices that have undermined investor confidence.

The North Sea Future Plan, whilst well-intentioned, focuses primarily on managing existing oil and gas production and supporting workforce transition into renewable energy roles. It does little to incentivise new upstream investment or arrest the sector's decline.

Looking Forward

Advances in carbon abatement technology and carbon sequestration now enable oil and gas extraction and production to be undertaken with significantly reduced environmental impact. A more nuanced policy approach should be possible—one that balances renewable energy development and energy storage solutions with continued domestic oil and gas production, subject to enhanced sustainability obligations and environmental reporting requirements. The current binary approach risks leaving value in the ground whilst the UK continues to import hydrocarbons from overseas.

For operators, investors and lenders in the sector, the key considerations remain:

• Fiscal stability and the very real risk of further changes to the tax regime beyond 2030
• The consenting environment for field development plans and infrastructure tie-backs
• Workforce planning in the context of the energy transition
• Integration of carbon capture and storage opportunities with existing and future production

The coming months will be critical in determining whether the current policy framework represents a settled position or whether the Government may yet recognise the need for a more pragmatic approach to domestic energy production.