Is it time for a North Sea rethink?

Energy Bill

The prime minister laid out his plan to shield “working people” from the economic fallout of the Iran war, with support worth about £50m for households hit by higher heating oil costs.

Conflict in the Middle East has choked off supplies of oil and gas from the region and driven up prices. Oil prices have risen above $100 a barrel and are not far off the Ukraine peak – $130 a barrel in March 2022; gas prices are much further below their Ukraine peak though – gas futures reached £6.40 a therm in August 2022 while the peak so far has been around £1.74 a therm.

However, attacks by Iran on the Qatar gas field have rattled markets and policymakers, as Qatar supplies 20% of global exports of LNG – a proportion similar to that supplied by Russia ahead of the Ukraine war.

The hostilities have reignited calls for the government to rethink its position on domestic production in the North Sea. Starmer’s Labour government has pledged not to issue new oil and gas exploration licences in the North Sea, while allowing existing fields to continue operating for the remainder of their lifespan, but with an effective tax rate of 78% until 2030 under the current Energy Profits Levy.

The result has been falling production, plummeting investment, no new wells for the first time since the 1960s and estimates of 1,000 job losses per month.

On 1 March, the Financial Times reported that eight former UK energy ministers called for the government to re-think current policy, arguing it is worsening energy security while doing little to cut global carbon emissions. The cross-party group included former Conservative energy secretary Amber Rudd, who is on the board of Centrica, which owns British Gas, and Lord John Hutton, a former Labour business and energy secretary. In a letter to the prime minister, they said: “Energy security is national security. Without urgent reform we will become increasingly reliant on imported liquefied natural gas.” They have called for the government to end the windfall tax on the oil and gas sector and to drop the ban on new exploration licences in the North Sea.

Russell Borthwick, chief executive of Aberdeen & Grampian Chamber of Commerce, said: “The past few weeks have underlined why the UK must create the conditions for greater activity in the North Sea – producing more of the oil and gas we need from our own waters rather than relying on costly, higher-emission imports during a period of geopolitical instability.” He noted that Britain’s offshore energy industry is ready to invest £50bn in new projects by 2050, if the conditions are right. Borthwick called for ministers to scrap the Energy Profits Levy and implement the new Oil and Gas Price Mechanism in order to “protect employment, unlock investment and strengthen energy security”. With this call, a balance would need to be struck between a loss of revenue in the short-term against a promise of more revenue from higher production levels in future years arising from more investment and exploration.

He also added to the clamour for Starmer to “end the regulatory limbo holding up Jackdaw and Rosebank and approve both projects without delay”. In January 2025, a court ruled that consent for these projects had been granted unlawfully, without sufficient consideration of environmental impact from burning the extracted fossil fuels. Borthwick noted that the projects represent £8bn of UK investment, support around 3,000 supply chain jobs and could heat millions of homes as older fields decline.

National Security

Oil and gas remain significant in the UK’s overall energy mix, between them accounting for around 70% of UK energy demand over the year to Q3 2025, with 18% from renewables and 10% from nuclear (these percentages do move around year to year). About a third of the UK’s gas needs were met from UK gas production in the year to Q3 2025, with a further 47% coming from Norway, and 13% from the US. The UK does export some of the gas it produces, but total UK indigenous gas production would only have met two thirds of UK gas needs in the year to Q3 2025. UK government and Climate Change Committee modelling shows that fossil fuels will remain part of the UK energy system for several decades, with a gradual phase-down to near-zero by 2050.

Despite Borthwick’s calls for new North Sea licences, these may not come on stream particularly quickly nor, when they do, meaningfully impact prices. According to the North Sea Transition Authority estimates, the average time from granting a new UK oil and gas licence to initial production has been approximately five years. While some projects may be fast-tracked to start sooner, this period involves essential steps including exploration, appraisal, and development planning.

Nonetheless, many others agree that we should revisit our approach to North Sea licenses … and not just those suspicious of the benefits of the green transition. Dale Vince, the arch-environmentalist who funded Just Stop Oil and founder of Ecotricity, believes Britain should extract more gas from the North Sea. So too does Greg Jackson, chief executive of Octopus Energy. Even the Liberal Democrats agree that this is the right way forward, mainly for energy security reasons.

Tim Leunig, chief economist at Nesta, explained in a recent column for The Observer: “Whatever the outcome, having only three suppliers [of gas] makes us vulnerable. We should look again at our own gas.

“The principal rationale is that the UK taxes North Sea gas … being a producer as well as a consumer is a form of insurance.

“There is, however, a second benefit. If Qatar is out of the picture, we will be very reliant on America for gas. President Trump is a man of deals – and access to US gas would be a great bargaining chip for him … Being able to keep the lights on and our houses warm without relying on the goodwill of the US is a sensible strategic aim.”

Marginal Gains

Those who believe more drilling in the North Sea will be the panacea for rising domestic energy bills may be disappointed to read the latest research from Oxford University’s Smith School of Enterprise & Environment.

The research found that a UK powered fully by renewable energy could save all households up to £441 a year on their energy bills. In comparison, maximising oil and gas extraction from the North Sea would save households a modest £16 – £82 per year – and only if the tax revenues collected were distributed to households to offset their energy bills.

Oil and gas prices are determined on international markets, meaning domestic production capacity has minimal impact on that element of consumer costs. These prices fluctuate based on global demand, supply, and supplier competition, meaning countries like the UK to pay global rates despite having local resources.

Conclusion

Despite the government’s previous tough stance on more North Sea oil and gas activity, Rachel Reeves seems to have softened that view in the face of a looming energy crisis. The chancellor has recently indicated support for increasing oil and gas production amid growing speculation that the government could shift towards a more supportive fiscal regime for the North Sea.

She said: “There is an important role for oil and gas, especially at the moment … You see countries like Canada and Norway increasing their production, and every country’s got to play their part in ensuring that those energy supplies are there when we need them.”

Her comments were made just weeks after she told oil and gas operators she wants to end the Energy Profits Levy next year – three years earlier than planned – although that change has yet to be confirmed.

Replacing the levy with the proposed Oil and Gas Price Mechanism may well unlock investment and stabilise the UK’s energy supply in the short term.

As the Oxford study shows, any hopes that more oil and gas extraction will directly help slash rising energy prices may be overdone. But with the UK expected to need fossil fuels for many decades to come, it makes sense for us both to use our own supplies and gain tax revenue which can be used to offset costs elsewhere, and continue on our pathway to net zero.