The Declining Economics of the North Sea

As the debate over the future of the North Sea intensifies, this briefing examines the declining role of the oil and gas industry in the UK’s energy system and economy; the economics of North Sea oil and gas production, including who benefits; and the role of renewable energy in powering growth today.

In brief

• New drilling will not deliver a meaningful boost to the UK economy, with the most productive and economically valuable days of the North Sea decades behind us.

• UK production is increasingly uncompetitive in a world rapidly transitioning to renewable energy, slowing oil demand growth and downward pressure on oil prices.

• The economic viability of new developments is only possible with massive state support, which enables companies to profit while the UK public shoulders most of the downside risks, including the potential for significant net tax losses to the Treasury.

• Industry profits hide a much bleaker picture for UK oil and gas workers and the communities they support, who have experienced a decade of decline, with jobs supported by the industry more than halving – a loss of nearly 450 jobs a week over ten years – worsening conditions, and rising poverty levels in Aberdeen.

• Clean energy is now powering UK economic growth, with wind surpassing oil and gas capex in the supply chain in 2022. Renewable energy is expected to provide most of the projected  4% annual increase in spending in UK energy supply chains to 2040. 

New drilling will not deliver a meaningful boost to the UK economy

The most productive and economically valuable days of the North Sea are now decades behind us, with production going into decline at the turn of the millennium. This is a matter of geology, not policy. After 50 years of drilling, the UK has burned through over 85% of its economically viable gas reserves.

The rapid decline in the UK’s oil and gas industry is underscored by industry investment data, which shows that oil and gas companies are set to become increasingly minor players in the UK’s energy system. By 2030, oil and gas investment is set to fall to less than a fifth (19%) of overall investment in the UK’s energy transition. By contrast, renewable energy will account for nearly two thirds (63%) of overall investment. Of the £82 billion of future planned investment in renewables, just 10% is set to come from oil and gas companies.  

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Total investment in the different aspects of the energy transition in the UK, 1990 to 2030 

Source: Uplift analysis of Rystad Energy Estimates (2024)

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Recent claims that North Sea oil and gas could become the “cornerstone” of the UK economy (Kemi Badenoch), or that the UK can be “self-sufficient in gas” (Nigel Farage), do not bear contact with the geological or economic reality of the declining basin.

‍UK oil and gas production is uncompetitive

The maturity and geologically challenging nature of the North Sea means that it is now a high cost basin compared to other oil and gas producing regions, with the reserves that are left increasingly small and technically complex to extract. According to one industry figure ‘Britain has among the highest break-even cost and highest cost-per-barrel in the world.”

This matters in a world that is rapidly transitioning to renewable energy. Most forecasters – OPEC and the US Energy Information Administration excepted – project that oil demand will peak this decade and then start to decrease because of the rapid adoption around the world of cheaper, renewable alternatives. The downward pressure this could have on oil prices makes the marginal high-cost North Sea unattractive to investors – and would make its product uncompetitive – in the absence of significant state support to the industry. 

As Lord Browne, former CEO of BP said: “It is hard to believe that finding and developing the very limited oil and gas resources that remain will be economic – or cost less – than buying supplies from the world market if needed.”

Only massive state support has kept the UK industry viable

For the past decade, the UK’s oil and gas tax regime has masked the high cost of North Sea extraction, with successive governments variously cutting taxes to boost profitability and handing out generous tax reliefs to incentivise new production – with developments only made viable because the UK has taken a smaller share of the value of a barrel than other governments. So much so that the UK became one of the most generous tax jurisdictions for offshore oil and gas production in the world. From 2016 to 2020, the government provided over £13 billion in support to the UK oil and gas industry, and in 2020 a third of significant North Sea operators paid negative UK tax, including Shell which collected £100 million from the Treasury. 

When companies made record profits following Russia’s invasion of Ukraine, and the government belatedly introduced a windfall tax, it also doubled the tax relief for investing in new drilling. For a period – until Labour amended the policy – this meant that UK taxpayers were effectively on the hook for almost all of the costs of developing new fields, leaving oil firms to cover just 9 per cent of upfront spending. It is also worth noting that, even with the windfall tax, companies are still reporting negative UK taxes.

Today, UK tax reliefs allow companies to write off 84% of their development costs. But even with the UK public effectively footing most of the bill for new drilling projects, the industry is warning that ‘significant changes’ are needed to the current tax regime and investment allowances if companies are to invest. In other words, by the industry’s own admission, new North Sea drilling isn’t considered commercially viable without even bigger tax giveaways and more state support.

Recognising the need to reform the UK’s oil and gas tax regime, the government has consulted on changes – including  a permanent mechanism to ensure that future windfalls are captured – with these expected to be announced this Autumn.   

Tax breaks guarantee companies profit but present huge public risk

The UK’s generous tax system has made new drilling profitable for companies, even when oil prices drop, but it means the public is left shouldering most of the downside risks, including the potential for significant net tax losses to the Treasury. 

In the case of Rosebank, the largest undeveloped oil field in the North Sea, assuming a base-case scenario with a long-term average oil price of $70 a barrel, Rosebank could result in a net tax loss of over £250 million to the UK Treasury, while the field’s owners, Equinor and Ithaca, would earn £1.5 billion in profit. This is because developers would make most of their investment while the generous tax reliefs are switched on, but would generate most of their profit after 2030, when the windfall tax is no longer in effect. Incidentally, most of the profit from Rosebank would flow to the Norwegian state, Equinor’s majority-owner, which has a national wealth fund worth $1.8 trillion, enriching Norwegians, while people in the UK bear the financial risk. 

The only way for the UK Exchequer to make money from Rosebank is if the oil price stays above $70 for many years. Given that this is above where prices are today, coupled with the forecast slowdown in oil demand growth and subsequent impact on prices, this presents an unacceptable risk to UK taxpayers. 

Industry profits hide a much bleaker picture for UK workers

Despite the worsening economics of the North Sea, it has continued to deliver profits for company executives and shareholders — but not for workers or the communities they support.

Hidden behind the balance sheets, the reality of the North Sea’s decline is stark: in the past decade, jobs supported by the industry have more than halved - from 441,000 jobs in 2013 to just 214,000 in 2023. That’s a loss of nearly 450 jobs a week, despite hundreds of new licences being issued and new fields being consented in that time. The UK’s ‘oil capital’ Aberdeen has had what’s been called a “disastrous decade,” with falling disposable incomes, rising fuel poverty, and growing reliance on food banks. It is now forecast to have the slowest growth of any UK city.

A similar story is told by oil and gas workers. Responding to a recent survey, workers reported salaries that have ‘been stagnant for over a decade’, with staff having ‘taken the brunt of this and the executives still ticked their bonus boxes’.  Workers were being treated “like dirt” and “safety was suffering”, with one describing conditions as ‘the worst they have seen in a decade’. They also talked about the anxiety of being in a declining industry and the threat of redundancy every time there is a “hint of a slowdown”. The survey of more than 400 oil and gas workers, a third of whom live in Aberdeen, revealed nearly three quarters of oil and gas workers are now considering, or actively looking to move out of the industry.

New drilling will not meaningfully boost energy security or lower bills

‍Just as it is evident that new drilling will not stem the long-term decline in jobs, it is equally clear that it will do little to strengthen UK energy security and nothing to lower energy costs.

Most of what is left in the basin is oil, around 80% of which the UK exports, therefore doing very little to contribute to our energy security. The UK has burned most of its gas. According to official projections – even if new North Sea fields are developed – the UK’s reliance on imported gas is set to rise from 55% today to more than two-thirds dependent by 2030, and over 90% dependent on gas imports by 2050. Industry claims to be able to meaningfully boost production are, by its own admission, “considered to be beyond realistic assumptions”, requiring massive tax breaks, sustained high oil prices, and major changes to investor confidence.

More domestic oil and gas production makes no difference to the cost of energy in the UK, meaning it won’t lower energy bills or ease the cost of living crisis. North Sea reserves are owned by oil and gas companies who sell them to the highest bidder at international market prices. 

Clean energy – not oil and gas – is powering UK economic growth

In contrast to the declining oil and gas industry, the net zero sector in the UK, which includes renewable energy, grew by 10% in 2024, three times faster than the overall economy.

UK offshore wind, which already accounts for over a fifth of global capacity, is set to expand sixfold over the next 15 years. After years of missed opportunities, there are now signs of the government using this acceleration to grow domestic offshore wind manufacturing in the UK to ensure that more of the value is captured in the UK, as well as the creation of more clean energy jobs. For example, it has committed £300 million to support UK offshore wind supply chains, as well as allocating National Wealth Fund investment to the port upgrades needed for wind manufacturing. In addition, the expanded Clean Industry Bonus has allocated over £500 million to reward offshore wind developers that target their investment in areas of the UK that need jobs the most.

Clean energy is now expected to provide most of the projected 4% annual increase in spending in UK energy supply chain markets between now and 2040, and has overtaken oil and gas in powering growth, with investment in fixed-bottom wind alone surpassing oil and gas capex in the  supply chain in 2022. And while the fixed-bottom wind industry is expected to grow at a rate of 6% per year in real terms, which will see it pull on the oil and gas supply chain and tighten the supply of everything from vessels to engineering services, floating offshore wind is set to see “massive growth”. Average annual expenditure on floating wind is expected to increase five-fold over the next 15 years, with an estimated total UK spend in 2040 of over £13 billion. 

Renewable energy is not just about freeing the UK from volatile fossil fuel markets, though it will increasingly protect the UK from future shocks like the recent crisis, which required government to spend more than £78 billion across 2022–23 and 2023–24 to protect people against unaffordable gas price spikes. Nor is it just about tackling climate change and its impacts, the costs of which are expected to be significant within the UK, not to mention the compounding effects of climate impacts around the world. It is also about powering growth, including exports, and building industries that could generate thousands of new, skilled UK jobs – which will now come from renewable energy industries, not more oil and gas drilling. 

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Uplift media contact: Holly McElhone: holly.mc@upliftuk.org; 07360651711