Examining the effect of the UK oil and gas windfall tax on the economics of new fields in the UKCS province

Abstract

Recent events in the global political economy have led to record high levels of oil and gas prices. In the UK, this has meant (1) a cost-of-living crisis; and (2) a significant increase in profits earned by companies in the upstream UK Continental Shelf (UKCS) sector. To help fund a cost-of-living support scheme for UK households, the UK Government recently introduced a windfall tax on upstream UKCS operations. There have been concerns however that the new tax would downgrade the value of UKCS assets hence diminishing the global competitiveness of the province. In this paper, I develop an optimisation model that fully incorporates all instruments of the new UK windfall taxation regime. The model is then applied to twelve wholly new UKCS fields currently under review by the UK Government for development approval. I show that whilst the new UK windfall tax reduces field economic value for all fields, the extent of the reduction is unlikely to cause premature abandonment of the fields. Consequently, the tax would not significantly injure the global competitiveness of the province. For the UK Government, the windfall tax would raise about $ 1.97 billion in tax revenues from the new fields in question. Finally, I derive the critical oil price levels that should trigger an accelerated phase out of the windfall tax in order to maintain the global competitiveness of the UKCS province should future oil prices slump.