The main thoroughfare of Aberdeen was deserted last Wednesday evening as the Scottish football team faced off against Switzerland in the Euros. In the wood-panelled Grill pub on Union Street, John Chambers kept one eye on the game while casting his mind back to his eight years spent working on a North Sea rig. “It was great fun, we had a laugh and made a lot of money in the process,” he said, pausing to sip his Guinness.
Originally from Belfast, Chambers is one of many who travelled to Aberdeen to ride the wave of the oil boom — eventually working as a caterer and living in a four-man room. “I always put my name down for two weeks on, two weeks off … three would have been a bit much,” he said, before groaning as Switzerland equalised.
Aberdeen, the heart of the UK’s North Sea industry, is at a crossroads. A fissure has opened between those who are keen to wring the last drop of oil and gas out of the North Sea and those who, like the Labour Party, want to curtail its output in the race to net zero. With tensions rising, what does the future hold for the region?
Since oil and gas deposits were first exploited in the 1970s, the UK Continental Shelf (UKCS) has transformed Britain, with home-grown gas piped into our homes for heating and burned in power stations to generate electricity. But since the early 2000s, it has declined: now we are a net importer of gas, and this is likely to continue into the middle of the century even as we race to decarbonise. The Climate Change Committee, an advisory body, expects that Britain’s oil use will fall by 85 per cent by 2050 and gas by 70 per cent.
Labour’s manifesto concedes that “oil and gas production in the North Sea will be with us for decades to come”, but it wants to focus on creating greener jobs. Rachel Reeves, the shadow chancellor, says Scotland and the North Sea can be a “global leader” in the “industries of the future”. Shadow energy secretary Ed Miliband wants to use windfall taxes on oil producers to fund this transition.
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That has sent a chill through the industry. While North Sea deposits are now smaller and more costly to tap, they are still worth exploiting, according to David Latin, chairman of the London-listed Serica Energy. “It’s about eking out a bit more. It can still be valuable,” he said.
Energy insecurity
The industry argues that abandoning North Sea oil and gas will make the UK reliant on energy imports, leaving it at the mercy of market forces. After Russia’s invasion of Ukraine, for example, gas prices shot up to ruinous levels.
“It makes absolutely no sense to prematurely end oil and gas in the UKCS simply to rely on even more imports from overseas,” said Sir Ian Wood, founder of the eponymous Wood Group. His comments were echoed by Sir Jim Ratcliffe, founder of the chemicals producer Ineos, at The Times CEO Summit last week: “If we shut down the North Sea, what is that accomplishing? Because we’ll just have to import our energy.”
Gilad Myerson, who until last month was executive chair of North Sea explorer Ithaca Energy, said there were “four considerations” in the debate: “Job creation, prosperity, energy security and emissions. You lose on all four counts when you’re importing energy.”
However, this argument is disputed by some, who point out that much of the UK’s oil and gas is sold on international markets. “Some of it might come back to the UK, but it will be sold based on the international price,” said Joshua Emden, senior research fellow at the Institute for Public Policy Research (IPPR) think tank. “It doesn’t help energy security because we’re buying it at the same price as anyone else.”
The tax threat
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In 2022, following the surge in gas prices in the wake of the invasion of Ukraine, the government introduced a windfall tax that raised corporation tax on oil and gas operators to 75 per cent. Last year it extended the levy until 2028, even though many in the industry argue that the windfall is over. The levy is already having a chilling effect, with the number of wells drilled falling by half in the year to date compared to 2023, according to trade body Offshore Energies UK (OEUK).
Despite this, Labour plans to hike the top rate to 78 per cent, on a par with Norway. But many in the industry point out that because Norway’s basin produces more barrels, its operating costs are lower. “You can’t treat the industry like a piggy bank,” said Chris Wheaton, an analyst at the investment bank Stifel. “Production decline is already kicking in.” With that decline comes a corresponding fall in tax revenues, which could threaten Labour’s plans to fund green jobs.
Among the complaints made privately by oil companies is that Labour has misunderstood its target with the windfall tax, which it says will hit the “oil and gas giants”. In fact, Wheaton argues, the big producers, such as BP and Shell, make up just 30 per cent of North Sea output. In recent years, many fields have been sold to smaller, independent producers.
The second plank of Labour’s proposals is the removal of investment allowances that encourage explorers to develop new wells. This policy has incensed some producers, which argue that it will force them to walk away.
“If Labour do what they said they might do, I find it hard to imagine that we will make significant investments because other places will be more attractive,” said Latin of Serica.
No licence to drill
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Labour has also pledged not to license new oil and gas fields, preferring instead to spur investment in offshore wind, carbon capture and storage, and hydrogen. It says the only way to lower bills and provide energy security is “a sprint for cheap, clean, home-grown power — not through more expensive, insecure oil and gas”.
The party’s position has won support from Lord (John) Browne, the former boss of BP, who argued that it would shore up the UK’s net-zero ambitions. And it is aligned with the Climate Change Committee, which told parliament last year that the race to net zero “does not … justify the development of new North Sea fields”. A Supreme Court ruling last week may also have a bearing: in a landmark case, it said that future fossil-fuel projects in the UK must take into account the environmental impact of the emissions produced by burning those products.
Labour’s stance has angered its union allies, however. Unite, which represents workers in the offshore oil industry, is campaigning against the policy and wants the party to explain how it plans to safeguard jobs. “Labour needs to pull back from this irresponsible policy,” Sharon Graham, Unite’s general secretary, said last month.
The Conservatives, by contrast, want to allow new oil and gas licences every year — although plans to make this law fell victim to the snap election. A source close to the party said: “We need to have a churn of new licences in order to keep production up as best we can.”
The SNP, meanwhile, has adopted a stance somewhere between Labour and the Tories, saying “decisions must be made on a rigorously evidence-led, case-by-case basis”.
Jobs of the future
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Labour is hoping to win over Scottish voters with plans for 53,000 new “clean energy jobs”, helping oil workers to flip to careers with a brighter future. There is good reason to believe this can happen, according to a report last week from OEUK, which believes that 90 per cent of skills in oil and gas production are transferable.
David Whitehouse, OEUK’s chief executive, said that new, floating wind turbines — expected over the next decade, and aimed at being cheaper than conventional wind farms set in the sea bed — would have a large overlap with offshore oil. “When you move into floating wind, you’re getting into a next level of complexity such as marine architecture, which is fundamentally what the oil and gas sector has done.”
But others warn that a rapid drop-off in North Sea production would create another headache — the costs of decommissioning oil operations. The well has to be plugged, the pipes and power set-up removed and the materials disposed of.
The transition from oil and gas to renewables is already in motion at the Port of Aberdeen. Founded in 1136, the port claims to be the UK’s oldest business. It makes 65 per cent of its revenues servicing offshore oil rigs. The vessels bobbing in the harbour look like the very rigs they repair, with towering cranes, webs of thick cables, helipads and tank-sized robotic arms.
Bob Sanguinetti, the port’s chief executive, hopes those boats will eventually service offshore wind farms in the same way. Until then, he fears “knee-jerk” policies on oil and gas will force the port to cut jobs. “The huge political uncertainty from the election does not fill potential investors with confidence,” he said.
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But after eight centuries, Sanguinetti is confident that the port will rise to the challenge. “We are very proud of our heritage but we are not complacent. We don’t sit on our hands.”
What the parties say
Labour: Wants to raise corporation tax on oil and gas companies from 75 per cent to 78 per cent. Would end investment allowances that encourage new wells and ban new licences for existing ones.
Conservatives: Want to legislate for a new licensing round every year. It will keep the current windfall tax until 2029 and keep the investment allowances.
SNP: Says decisions on new licences must be made on a “rigorously evidence-led, case-by-case basis, through a robust climate compatibility assessment”.
Liberal Democrats: Calling for a “proper, one-off windfall tax on the super-profits of oil and
gas producers and traders”.
Greens: Would raise the windfall tax, ban new oil and gas licences, end all subsidies to the industry and introduce a carbon tax on all fossil fuels.
Reform: Wants to fast-track new licences for North Sea gas and oil.
