Multiple uncertainties characterize outlook for energy activity on the UK Continental Shelf

Professor Alex Kemp, University of Aberdeen, and Senior Editorial Advisor, World Oil 

The investment outlook throughout the energy sector is always characterized by uncertainty, but this feature is more than usually present on the UK Continental Shelf. This statement applies not only to the upstream oil and gas industry but also to the wider energy sector.   

The ongoing EPL problem. The UK government’s budget on 26th November 2025 did not announce any changes to the Energy Profits Levy (EPL) despite intense lobbying by the industry and other analysts. Given the present fast rate of decline in investment, this lobbying is likely to continue. Given the substantial increase in costs and the fall in oil prices since the EPL was introduced, there will also be requests to modify the floor prices below which the EPL is not payable. 

But, as things stand, there is likely to be an acceleration of the timing of COP dates in mature fields. The overall rate of tax at 78% reduces investment in incremental projects in late field life. But decommissioning costs are not allowed as a deduction for the EPL. In turn, this may have a negative effect on the execution of decommissioning plans. The regulator (North Sea Transition Authority) is currently pressing operators to pursue their decommissioning obligations expeditiously to provide business opportunities for the supply chain companies which are currently experiencing very difficult trading conditions. 

Fig. 1. There may be a chance that the UK officials will grant Transitional Energy Certificates to existing licensees, enabling operators to exploit reserves located in acreage adjacent to existing licenced areas. This would encourage tie-back developments to existing infrastructure. Image: Ithaca Energy.

Limited oil and gas licensing. The UK government has reiterated its opposition to the issue of new licences for oil and gas exploration. However, at the time of the budget, there was a statement indicating that Transitional Energy Certificates could be issued to existing licensees, enabling them to exploit reserves located in acreage adjacent to existing licenced areas. The purpose is to encourage tie-back developments to the existing infrastructure of platforms and pipelines, Fig. 1. Such incremental developments should have relatively low development and operating costs. It is difficult to estimate how important these incremental projects could be. The NSTA indicates a modest addition to overall production.   

Production outlook. The long-term oil and gas production projections to 2050 made by the NSTA, when set alongside the estimates of UK demand for oil and gas made by the Climate Change Commission, indicate a major net requirement for imports of both oil and gas to 2050. This entails a substantial negative effect in the balance of payments with no tax revenues, such as apply to domestic production. In general, these effects should be considered in any overall economic evaluation of licensing policy.   

Impacts downstream. The fall in oil and gas production has already had negative effects on the downstream industry.  Thus, the refinery at Grangemouth has already closed. It will become an import terminal for petroleum products. Further, the ethylene plant at Mossmorran is shortly due to close. In addition, there are doubts about the future of the widely-discussed carbon capture and storage project at St Fergus in Aberdeenshire.  At the time of writing, Storegga, a leading investor in the project, has announced its intension to sell its shares. This project has received the promise of the UK government’s support, which would be the first CCS scheme in Scotland.   

Renewables and electricity. A key feature of the UK government’s energy policy is to encourage the development of renewable energy, particularly wind farms, but also solar and nuclear.  While substantial investment has been made in wind farms, it is by no means sufficient to offset the decline in oil and gas. Substantial financial incentives from the UK government are available for investment in wind farms.  

A main scheme is Contracts for Difference, whereby investors are invited to bid electricity prices, which they are prepared to accept for electricity generated. The government provides a reference price for the electricity. When the strike price is less than the reference price, the investor receives a payment based on the difference. When the strike price exceeds the reference price, the investor pays the difference to the government’s appointed scheme administrator. 

Unfortunately, problems have developed with the scheme. Thus, the cost inflation incurred in recent years relating to investment costs, in particular, has meant that the strike prices were insufficient to reflect these higher costs. Projects have been delayed, and the government has had to agree to higher strike prices, particularly for floating wind schemes in relatively deep waters.  

There are differences of view between investors and the government regarding appropriate reference prices. These are intended to reflect prospective market values. But, unlike the situation with oil and gas, there is no publicly available wholesale price for electricity. Investors have complained that the present scheme is opaque, and the reference prices employed recently do not reflect market realities. 

The investment environment for wind projects also suffers from the effects of the currently inadequate development of the offshore and onshore transmission network necessary to transport the electricity from generation sites to final markets.  This has produced situations where electricity generated cannot all be transported to markets. In this situation, the UK government has instituted a scheme of constraint payments, whereby generators receive monetary payments when they cannot send their electricity to market. 

There is a high degree of seasonality in electricity demand in the UK with peak demand coming at times of very low temperatures. To ensure that the lights do not go off at peak demand times, a scheme of capacity payments exists, whereby generators are paid to keep capacity available to meet peak demand. In the current UK market this capacity is from gas-fired generation.  This has led to the accusation that it is gas prices which are causing high electricity prices.  This ignores the possibility that such peak demand could be met by generation from other primary energy sources if they were competitive.     

Government looks for more tax money. The UK budget has proposed the introduction of (1) a vehicle excise duty for electric vehicles and (2) a road user tax based on miles travelled by electric and hybrid vehicles. This is looking ahead to the need to replace revenue losses in the excise duties on petrol and diesel vehicles. The polluter pays principle would encourage the imposition of higher duties on petrol and diesel vehicles. These have not been increased for 14 years. The recent budget has proposed that only in a few years’ time should they be increased. Increasing the duties on petrol and diesel consumption would, of course, increase the incentives to switch to electric vehicles. 

ALEXANDER G. KEMP is Professor of Petroleum Economics and Director of Aberdeen Centre for Research in Energy Economics and Finance (ACREEF) at the University of Aberdeen. He was formerly Lecturer, Senior Lecturer and Reader. He previously worked for Shell, University of Strathclyde and the University of Nairobi. For many years, Professor Kemp has specialized in petroleum economics research, particularly licensing and taxation issues, publishing over 200 papers and books in this field. He has consulted on petroleum contracts and legislation to many governments, the World Bank, the United Nations, various oil companies, the European Commission, the UK Know-How Fund and the Commonwealth Secretariat. He was a specialist adviser to the UK House of Commons Select Committee on Energy from 1980 to 1992 and also in 2004 and 2009. He is also an editorial adviser to World Oil. From 1993 to 2003, he was a member of the UK government’s Energy Advisory Panel. In May 1999, Professor Kemp was awarded the Alick Buchanan-Smith Memorial Award for personal achievement and contribution to the offshore oil and gas industry.  Professor Kemp was awarded the OBE in 2006 for services to the oil and gas industry. He was a member of the Council of Economic Advisers to the First Minister of the Scottish Government. He has written The Official History of North Sea Oil and Gas, which was published in 2012 in two volumes. In March 2012, Professor Kemp received the Lifetime Achievement Award at SPE’s Offshore Achievements Award ceremony. In October 2022, he was given a Lifetime Achievement for the Advancement of Education for Future Energy Leaders award by Abdullah Bin Hamad Al-Attiyah International Foundation for Energy & Sustainable Development in Doha, Qatar.