The report finds that North Sea oil and gas output is cumulatively 10% lower since 2022, due to the introduction of the Energy Profits Levy (EPL) and the ongoing regulatory uncertainty, representing £5 billion in lost potential pre-tax cash flow.

Ahead of the Autumn Budget statement on 30 October, the government has already announced it will increase the EPL rate by 3% to 38%, taking the UK’s marginal tax rate to 78%. It has also stated its intention to remove the EPL’s investment allowance, reduce its capital allowance and extend its sunset clause from 2029 to 31 March 2030.

“If, or how much the EPL capital allowance is reduced by, is fundamental to continued investment in the sector,” the report states.

The new Wood Mackenzie analysis addresses three scenarios:

• Current dataset: an estimate of what would happen in the unlikely case that the EPL is unaltered in the Autumn Budget, beyond what is currently known.
• An indefinite EPL: the catastrophic scenario of an indefinite EPL with no capital allowances that would lead to UK production halving by 2030.
• Best-case: an upside scenario if a pragmatic fiscal and regulatory consensus on a successor to the EPL is reached quickly and implemented as soon as practically possible.

The latter necessitates the primary assumption that a new fiscal regime is established in the H1 2025, tax rates are fair and encourage investment, trust between government and industry is restored, and operators commit to immediately resuming activity.

This would lead to 15% more reserves recovered from existing assets than in the current dataset’s projections, and up to 41% more than in the indefinite EPL case. The direct impact on the gross sector value is similarly significant, even before considering the supply chain and indirect service value-add to the UK economy.

Gross revenue from existing assets would increase by 13%, and pre-tax value would increase by 14%, both discounted at 10%. Compared to the indefinite EPL scenario, the variance is 42% and 38% respectively. In round numbers, this equates to £20 billion of gross revenue and nearly £10 billion of pre-tax value, both discounted at 10%, to share between government and companies, relative to the current data set.

Fraser McKay, Senior Vice President, Upstream Research at Wood Mackenzie, said: “Operators are fatigued by an ever changing and overly onerous tax burden and are accordingly adjusting the risked value associated with investing in the UK.”

He continued: “The best-case scenario we have developed is improbably optimistic, but very important to recognise, as it highlights the substantial potential value at risk in the North Sea oil and gas industry, due to the UK government’s fiscal decisions.”

The report finds that this upside would not only add value but would reduce scope 1 and 2 emissions associated with importing energy. It adds that the average intensity of imported oil and gas on a scope 1 and 2 basis is more than double the 22 kg/boe average from domestic UK production.

Over the next decade, the difference between these scenarios represents an opportunity to save 23 million tonnes of carbon emissions in the current dataset versus an indefinite EPL scenario, and 12 million tonnes in a best-case scenario versus the current dataset.

McKay added: “There is still a chance for the UK to realise some or all of this additional value, to reduce its scope 1 and 2 impact, and for stakeholders to channel this cash flow into funding the UK’s energy transition. But the longer the government waits, the fewer growth opportunities there will be, due to decommissioning and the maturity of the UKCS.”