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Labour’s Historic Win: Bold Energy Transition Plans Threaten UK’s Oil and Gas Future

The UK’s Labour Party has just achieved a significant victory, potentially transforming the country’s oil and gas sector. This marks the party’s return to power after 14 years in opposition and signifies a commitment to accelerating the energy transition. However, this shift could jeopardize the UK’s status as a prime destination for energy investment.

When it comes to the energy transition, the UK’s two main parties have similar goals but differ in the scale of their ambitions. Labour, as expected, champions a more aggressive approach. The party’s manifesto outlines plans to make the UK a clean energy superpower. Labour intends to work with the private sector to double onshore wind capacity, triple solar power, and quadruple offshore wind by 2030, while maintaining a reserve of gas-fired power plants for backup. The manifesto also promises a “phased and responsible transition” for the North Sea oil industry. However, industry insiders remain skeptical about the feasibility of these promises.

Both the Conservatives and Labour view the UK’s oil and gas industry as a financial resource to support the energy transition. The windfall profit tax introduced by the Tory government in 2022 was increased from 25% to 35% the following year and extended until 2029. This tax has resulted in a 75% tax burden for oil and gas companies, which many argue is detrimental to investment growth. Serica Energy’s David Latin recently compared the UK’s investment climate to a war zone, suggesting that the uncertainty surrounding the industry deters investors.

Despite these concerns, the Labour government would still rely on the oil and gas industry to fund its transition plans, which are estimated to cost around £24 billion ($30 billion). Labour has also pledged to eliminate what it calls “unjustifiably generous investment allowances” for oil and gas companies, which currently allow for significant tax relief on reinvested profits. Without these allowances, and with a 78% tax burden, investment in the UK’s oil and gas production is likely to decline, pushing companies to seek growth opportunities elsewhere.

Ineos Energy’s CEO, David Bucknall, highlighted this issue before the recent UK vote, predicting that Labour’s tax plans would make investing in the UK uneconomical. Consequently, Ineos is considering expansion in the U.S. and Denmark. The competing tax policies of the Conservatives and Labour have only intensified the pressure on the industry.

In addition to higher taxes, Labour plans to cancel new oil and gas drilling licenses for the North Sea. Without new licenses and facing substantial tax burdens, the future of the UK’s oil and gas industry looks bleak, which could undermine the transition plans.

Labour’s strategy hinges on using the oil and gas sector to finance the transition to clean energy. However, over-taxation risks driving companies out, thereby eliminating the revenue needed for the transition. This could derail Labour’s ambitious energy goals.

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