North Sea Policy Uturn Could Save Billions for the UK

Kemi Badenoch’s latest announcement to overturn existing policies on North Sea oil and gas was met with instant criticism from environmental groups. Recently installed as Conservative leader, Badenoch has proposed reintroducing new licences, supporting exploration for fresh fields, and rolling out a more supportive tax regime for energy firms. Her aim is to stem the tide of companies leaving the North Sea basin and to encourage domestic production. In contrast, Labour’s ban on new licences and its aggressive tax policies on the sector are widely seen across industry as not just ineffective but damaging—for the environment, for jobs, and for Britain’s finances.

Reducing production from the North Sea does not cut demand; it simply increases imports. The UK maintains some of the world’s highest environmental and emissions standards, so importing oil and gas produced under less stringent regulations does nothing to address climate concerns. What’s worse, imports increase overall emissions due to shipping. The much-vaunted windfall tax, initially justified after the Russian invasion of Ukraine caused gas prices to spike, delivered little actual impact on major oil companies like BP and Shell. Instead, it hit smaller independent producers such as Harbour Energy, Ithaca, and Serica—firms less known to the public but crucial to regional employment and the UK’s tax base.

The fallout is already visible. Companies like Harbour Energy have begun shifting operations overseas, shedding hundreds of jobs and endangering thousands more in related supply chains. As North Sea operations contract, not only do direct jobs disappear, but knock-on effects threaten refineries, chemical companies, and myriad suppliers dependent on UK production. Every lost job means reduced corporation tax, PAYE, and VAT receipts—a cascading effect on the UK’s already strained public finances.

The tax implications run deep and are rarely discussed. Less profitable production leads straight to lower tax revenues—an estimated £20bn loss over the life of the North Sea basin, according to investment bank Stifel. The broader impact includes shrinking corporate tax, income tax, and National Insurance contributions as businesses close and jobs vanish. On top of that, a little-recognised quirk of the tax system means as fields shut down sooner, producers shift to reclaiming decommissioning costs from the Treasury. With the industry winding down earlier than expected, annual decommissioning rebates of between £2bn and £3bn will hit public finances a decade ahead of schedule, with these liabilities largely ignored in official forecasts.

The Office for Budget Responsibility has been consistently too bullish, overestimating revenue from the windfall tax by assuming both higher energy prices and stable production levels. The reality is quite different; actual revenues may miss forecasts by as much as £10bn over five years. Every lost pound reduces the pool available to patch the UK’s budget deficit—at a time when a £50bn hole already looms large.

The Conservative policy aims to reverse these losses by supporting new exploration, reopening licensing, providing tax stability, and sustaining jobs. Even incremental increases in North Sea output delay decommissioning costs and maintain vital feedstock supplies to UK refineries and manufacturers. Such support is essential not only for the thousands of jobs directly dependent on the sector, but also for broader economic health. While North Sea oil and gas alone cannot fix Britain’s fiscal woes, a pragmatic approach could cushion the immediate fiscal blow. A policy reversal is overdue and now is the time for Britain to act decisively to safeguard energy security, employment, and tax revenues.