UK North Sea Oil Struggles to Stay Afloat Amid Declining Investments

The UK North Sea Oil and Gas Sector Faces Unprecedented Challenges

The UK North Sea, once a powerhouse of oil and gas production, endured its toughest year in 2025 since hydrocarbons were first discovered in the region during the 1960s.

Output from aging oil and gas fields continued to fall throughout the year. At the same time, uncertainty grew as the industry braced for potential changes to government policy—policies that have imposed heavy taxes on operators without offering incentives or allowances for investment. In response, companies operating offshore in the UK scaled back spending and put future projects on hold amid the growing unpredictability.

With investment waning and the government hesitant to issue new exploration licenses, drilling activity in the UK North Sea dropped to its lowest level ever. According to consultancy Wood Mackenzie, 2025 marked the first year since 1960 in which not a single exploration well was drilled in British waters, a direct result of erratic fiscal policies.

Impact of the Windfall Tax

After months of anticipation, the UK oil and gas sector finally received clarity on the fiscal regime at the end of 2025. The Autumn Budget, announced in November, eliminated much of the uncertainty but left the windfall tax unchanged through 2030. This decision went against industry appeals, which warned that the combined tax rate of 78%—with no reliefs or incentives—would devastate the sector and its supply chain.

The only certainty provided was that the Energy Profits Levy (EPL), a punitive tax, would remain in place until the decade’s end. For 2025, the levy was triggered if oil prices exceeded $76 per barrel or if natural gas prices surpassed 59 pence per therm. While oil prices mostly stayed below this threshold, gas prices remained high enough to activate the 35% windfall tax on profits.

Last year proved disastrous for the North Sea industry. Many believe the worst is yet to come, with further declines in investment and exploration threatening to cripple the sector. This would force the UK to rely more heavily on imported oil and gas, increasing its exposure to the volatility of global energy markets.

Wood Mackenzie warns that the windfall tax, first introduced by the Conservative government during the 2022 energy crisis and now extended under Labour, will eliminate all but the most essential investment in the UK continental shelf. Companies are increasingly looking to invest in countries with more favorable tax regimes.

“The government turned down £50 billion of investment for the UK and the chance to protect the jobs and industries that keep this country running,” said David Whitehouse, CEO of Offshore Energies UK, in response to the decision to maintain the windfall tax.

Industry Reactions and Consequences

Whitehouse further warned that this approach would result in the continued loss of 1,000 jobs each month, increased reliance on energy imports, and widespread disruption across supply chains and industrial regions.

The Aberdeen & Grampian Chamber of Commerce described the situation as “Lights out for North Sea oil and gas as Chancellor keeps windfall tax.”

Russell Borthwick, the Chamber’s chief executive, criticized the government for ignoring industry advice, stating that the UK is heading for a sudden halt in North Sea production and that thousands of jobs will be lost due to government inaction.

The windfall tax has already led many companies to suspend investments and reduce their workforce. Harbour Energy, one of the largest independent producers, recently announced plans to cut another 100 jobs, adding to the 600 positions already eliminated since 2023.

Linda Cook, CEO of Harbour Energy, told the Financial Times that the UK now offers the least attractive fiscal environment among all the countries in which the company operates. She noted that the current tax regime forces UK operators to compete at a disadvantage compared to other regions.

Industry Consolidation: Mergers as a Survival Strategy

In response to these harsh fiscal conditions, North Sea operators are turning to mergers and acquisitions to maintain profitability and deliver value to shareholders. Consolidation has become a key strategy as companies seek to withstand the impact of high taxes.

Harbour Energy recently announced the acquisition of Waldorf Energy Partners Ltd and Waldorf Production Ltd, both in administration, for $170 million. This move is part of Harbour’s ongoing efforts to strengthen its position in the basin amid ongoing fiscal and regulatory pressures.

Other major deals include the formation of Adura, a 50/50 joint venture between Shell and Equinor, which combined their UK offshore operations. Earlier in December, TotalEnergies announced plans to merge its UK upstream business with NEO NEXT, creating NEO NEXT+, the largest independent oil and gas producer in the UK.

Analysts expect this wave of consolidation to continue, even as the industry urges the government to overhaul the current tax system.

“Reviving investment in the North Sea is not at odds with climate goals; it is essential for protecting jobs, supporting the economy, and ensuring a stable transition to cleaner energy,” stated Ineos, a major energy and chemicals group that has halted UK investments.

“How can companies plan for the future when they are being pushed toward financial ruin?”

By Tsvetana Paraskova for Oilprice.com

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