UK North Sea Oil Merges Its Way Through Decline

Core Insights - The UK's offshore sector is undergoing significant consolidation driven by a stringent fiscal regime, particularly the Energy Profits Levy (EPL), which has raised the marginal tax rate on upstream revenues to 78% [1][3] Group 1: Consolidation Trends - Mergers and acquisitions have become prevalent in the UK offshore sector, with Harbour Energy planning to acquire Waldorf Petroleum, and TotalEnergies merging its North Sea assets with Neo Next [2] - The consolidation has resulted in the concentration of over 500,000 barrels of oil equivalent per day (boe/d) production into fewer operators, as companies respond to high tax rates and declining output [2][9] - The UK North Sea's production has decreased from 1.1 million b/d in 2020 to approximately 474,000 b/d by September 2025, with no new field approvals granted for two consecutive years [2][8] Group 2: Fiscal Impact - The EPL initially raised around £7 billion in the 2022-23 fiscal year, but revenues have since dropped to an estimated £2-2.5 billion by the fiscal year 2024-25 due to reduced activity [3] - The consolidation of oil companies is seen as a strategy to offset the high tax burden against accumulated losses, attracting political scrutiny regarding potential tax liabilities [3] Group 3: Investment Environment - Investment in new supply has stalled, with the UK North Sea's production declining faster than expected and no new field developments approved in 2024 or 2025 [4] - The government's North Sea Future Plan aims to manage existing fields while halting the issuance of new exploration licenses, contrasting with investment encouragement seen in other countries [4][7] Group 4: Employment Concerns - Job losses in the oil and gas sector could reach a rate of 1,000 per month by 2030, with the offshore workforce contracting by about one third since 2014 [5] Group 5: Future Outlook - The consolidation strategy in the UK is primarily defensive, aimed at managing regulatory risks and tax liabilities rather than fostering growth [10] - Lower oil and gas prices could provide a narrow window for relief from the EPL, but the conditions for replacing it with the Oil and Gas Price Mechanism (OGPM) are challenging to meet [11]