The energy profits levy (EPL) that became a ‘windfall tax’ on North Sea producers has a death sentence, but few should mourn its passing.

Any one-off tax is partly an admission of failure – an acknowledgement that the system in its current form is not working, and excess profits must therefore be clawed back through special measures. A windfall tax on a vital industry that is then extended, and adjusted ad hoc from year to year, is an embarrassment. The EPL is no longer fit for purpose.

Oil and gas firms view the levy as a deeply unfair burden that is strangling North Sea investment and doing permanent damage to the industry. They want it gone, and by 2030, they will get their wish. But there is no going back to a pre-windfall world.

Bombastic warnings that the EPL would lead to massive job losses have proven overblown. Permanently higher taxes on oil and gas are popular with voters and demonstrably possible. That genie is now out of the bottle.

The government is aiming to replace the EPL with a tax mechanism that generates not just revenue, but also predictability and peace of mind.

For an industry faced with two possible alternative mechanisms, it may seem like a case of picking the lesser of two evils. A profit-based model (PBM) would tax ring-fenced profits when average oil and gas prices exceed a threshold. This would struggle to address a major complaint about the EPL – that it does not differentiate between oil and gas.

Price dynamics for oil and gas differ significantly and the outlook for these two commodities has diverged massively in recent years. If a PBM is the way forward, there will either need to be a proxy measure for the different contributions of oil and gas, or the imposition of complicated rules.

Instead, the government would prefer a revenue-based model (RBM) that taxes individual oil and gas transactions when prices are unusually high. This has the advantage of being relatively simple to administer and able to differentiate clearly between oil and gas trades.

But the government also likes the RBM because it is based on revenue rather than profits, preventing companies from hiding behind high capital expenditure and using it to offset taxes. When soaring prices trigger additional taxes under an RBM, the government has no intention of sparing loss-making firms either.

The threat of dry tax charges, liabilities that companies do not have the cash available to pay, may well send a chill down the industry’s collective spine.

There is a compelling argument that such measures would be unfair and distort the market – something the new system is ostensibly supposed to avoid.

A tax mechanism that is predictable could still end up forcing companies to exit productive fields prematurely, accelerate decommissioning, and ultimately lower UK tax revenue. That is in no-one’s interest.

This gets at the heart of the issue. Replacing the EPL with something better is crucial but not straightforward. There are major overarching issues at play.

Should the mechanism focus on raising revenue for government, or also seek to influence the UK’s shift to net zero? The government wants the mechanism to support continued investment in North Sea production, but is that in line with the Paris Agreement’s temperature goals?

When it comes to the technicalities, there are nested layers of complexity. If the government opts for a PBM, how does it define the tax base and the profits that should be ring-fenced? If it chooses an RBM, will the point of tax be the first sale following extraction?

Are two thresholds – one for oil and one for gas – enough, or should different derivative products have separate tax bars? How exactly will the mechanism determine what an ‘unusually high’ price threshold is, and how will that change over time?

Constructing a new mechanism is fraught with challenges that can only be tackled collaboratively. For discussions to be meaningful, they must start now.

On May 7, E-FWD invites you to an Aberdeen breakfast briefing to discuss what comes next for the North Sea’s energy sector.

Expect real talk, sharp insight, and high-level networking – all in one morning.

Join us for two pivotal workshops – your voice matters.

1) What’s next for the North Sea’s fiscal regime?

2) Can electricity reform support Scotland’s offshore wind ambitions?

Be in the room. Join the discussion. Help shape the future of energy.

Aberdeen, Marcliffe Hotel | 🕗 07:30 – 11:30 | 🗓️ May 7, 2025

To attend the event, please register here

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