I keep hearing that the UK has little oil and gas but actually we still have quite a lot. The problem is how we access it. Long term we are moving away from it completely but in the short term 20-40 years we should make sure that the UK Nation benefits from it.

History of oil and gas exploration in the UK North Sea

Oil and gas exploration in the United Kingdom began in earnest after the passage of the Continental Shelf Act 1964, which established the UK’s legal rights over offshore resources and enabled licensing in the North Sea. Major discoveries in the late 1960s and early 1970s, such as the Forties and Brent fields, transformed the UK into a significant oil producer. During this early phase, the fiscal regime was relatively straightforward, relying on corporation tax and royalties, which allowed rapid development of large, economically attractive fields in relatively shallow waters.

By the mid-1970s, rising oil prices prompted the government to increase its share of revenues. The Oil Taxation Act 1975 introduced Petroleum Revenue Tax (PRT), a field-based tax on profits, significantly increasing the government take. This was reinforced by subsequent measures such as the Petroleum Revenue Tax Act 1980. At this stage, high tax rates did not deter investment because the fields being developed were large, highly productive, and relatively low-cost. As a result, the UK successfully captured substantial economic rent from its hydrocarbon resources.

The collapse in oil prices in the mid-1980s fundamentally altered the economics of the basin. Many remaining fields were smaller, more technically challenging, and often located in deeper or harsher environments. In response, the government introduced a series of tax relief measures to encourage continued investment. The Petroleum Royalties (Relief) Act 1983 removed royalties for new offshore developments, while the Advance Petroleum Revenue Tax Act 1986 improved company cash flow by allowing earlier recovery of tax payments. Further reforms under the Petroleum Royalties (Relief) and Continental Shelf Act 1989 abolished royalties for many gas fields. These changes were critical in enabling the development of marginal and higher-cost fields, including those in deeper offshore areas such as west of Shetland, where costs and risks were significantly greater.

By the 2000s, the UK Continental Shelf had become a mature basin, with declining production and a shift toward smaller, more complex reserves. Governments responded by introducing supplementary charges on profits, beginning in 2002 and increasing in subsequent years, particularly when oil prices were high. Although intended to capture additional revenue, these repeated changes created a perception of fiscal instability. At the same time, the industry faced rising costs associated with technically demanding projects, including deepwater and high-pressure, high-temperature developments, which required long investment horizons and substantial capital expenditure.

As the basin aged further, decommissioning became a major issue. The UK introduced tax relief mechanisms to ensure that companies could afford to dismantle infrastructure safely. In some cases, these reliefs resulted in net tax repayments to operators, reflecting the high cost of decommissioning relative to declining revenues. While necessary, this phase marked a transition away from growth toward managing the end of field life, with limited impact on encouraging new exploration, particularly in high-cost deepwater areas.

A decisive shift occurred after 2022 with the introduction of the Energy Profits Levy in response to high global energy prices. This windfall tax, combined with existing taxes, pushed the marginal tax rate on UK oil and gas profits to approximately 75–78 percent. Although the policy included investment allowances intended to offset some of the burden, the overall effect was to significantly reduce post-tax returns on new projects. Deepwater developments, which are capital-intensive and carry higher technical and financial risks, are particularly sensitive to such high tax rates because they depend on long-term, stable fiscal conditions to achieve acceptable returns.

The cumulative effect of these changes has been to erode the economic viability of deepwater drilling in the UK. High marginal tax rates reduce the internal rate of return on new developments, while frequent policy changes increase uncertainty and discourage long-term investment. Although no single policy explicitly banned deepwater exploration, the combination of elevated taxation, reduced fiscal incentives, and increased political and regulatory risk has made such projects comparatively unattractive on a global scale. As a result, investment has shifted away from the UK Continental Shelf toward regions with more stable and competitive fiscal regimes.

Today, the UK oil and gas sector is widely regarded as a late-life basin in managed decline. Policy emphasis has shifted toward maximizing recovery from existing fields, handling decommissioning obligations, and supporting the transition to renewable energy, particularly offshore wind. In this context, the fiscal regime especially recent windfall taxes has played a central role in effectively eliminating the economic case for new deepwater exploration, even without an explicit prohibition.

How do we increase the National Benefit from the Resources

Norwegian model in oil and gas may be the way forward.

The Norwegian model of oil and gas management is widely regarded as one of the most structured and stable petroleum fiscal systems in the world. Developed following major discoveries in the late 1960s, it governs activity on the Norwegian Continental Shelf with a combination of high taxation, strong state participation, and long-term policy consistency. Rather than prioritising rapid extraction or short-term revenues, the model is designed to maximise the total long-term value of petroleum resources for the state and society.

A defining feature of the system is its high but predictable tax regime. Oil and gas companies operating in Norway are subject to a combined tax rate of around 78 percent, which includes corporation tax and a special petroleum tax. While this headline rate appears high, it is offset by highly favourable treatment of investment. Companies are allowed to deduct capital expenditure quickly and, in some cases, immediately, which significantly improves project cash flow and reduces the effective tax burden on new developments. This ensures that commercially viable projects remain attractive even under a high nominal tax rate.

Another central component is the government’s role in sharing financial risk, particularly during the exploration phase. Norway operates a system under which companies can receive refunds for a large portion of their exploration costs, even if they are not yet generating taxable profits. This mechanism lowers barriers to entry and encourages a diverse range of companies to participate in exploration activities. By absorbing part of the downside risk, the state helps sustain drilling activity in both mature and frontier areas, increasing the likelihood of new discoveries.

State participation is also a cornerstone of the Norwegian model. The government maintains direct financial interests in many oil and gas projects and has historically held significant ownership stakes in key operators. This allows the state not only to collect taxes but also to benefit directly from project profits. In addition, state involvement enables coordinated development of infrastructure, such as pipelines and processing facilities, which can reduce costs and improve overall efficiency across the sector.

Equally important is the emphasis on regulatory and fiscal stability. The Norwegian system is characterised by consistent rules that change only gradually and with clear communication. This predictability reduces uncertainty for investors and allows companies to plan projects with long time horizons, which is essential in offshore environments where developments can take a decade or more from discovery to production. As a result, investors apply lower risk premiums to Norwegian projects, improving their economic viability.

Finally, the Norwegian model is closely linked to broader national economic policy through the management of petroleum revenues. Income generated from oil and gas is channelled into the Government Pension Fund Global, which invests globally to preserve wealth for future generations. This approach prevents overheating of the domestic economy and ensures that resource revenues provide long-term societal benefits rather than short-term fiscal gains.

In summary, the Norwegian model is not defined solely by high taxes, but by the balance it achieves between taxation, investment incentives, state participation, and stability. Its effectiveness lies in aligning the interests of the state and industry while maintaining a long-term perspective on resource management.