Authored by Irina Slav via OilPrice.com,

Labour’s proposed policies aim to accelerate the UK’s energy transition while relying heavily on the taxation of oil and gas profits to fund these initiatives.

Potential tax increases and a phase-out of new oil and gas drilling licenses could discourage investment and lead to a decline in the UK’s energy sector.

Labour’s plans could have broader implications for the country’s overall economy and its reputation as an energy investment destination.

The UK’s Labour Party just scored a massive victory that could have huge implications for the country’s oil and gas sector. This will be the party’s return to power after 14 years as opposition. It will also be a double-down on the energy transition. And it may end the country’s reputation as an energy investment destination.

When it comes to the energy transition, the two main parties in the UK don’t really differ much—except in the scale of their commitments to replacing oil, gas, and coal with wind, solar, and EVs. Labour, unsurprisingly, is the more ambitious transition champion. And now it will get a chance to try the policies it said in a manifesto that would turn the country into a clean energy superpower.

“To deliver our clean power mission, Labour will work with the private sector to double onshore wind, triple solar power, and quadruple offshore wind by 2030,” the party said in its manifesto, adding that it would keep a reserve of gas-fired power plants as backup and ensure a “phased and responsible transition” for the North Sea oil industry.

Yet according to those active in the North Sea, what the manifesto says and what it would actually deliver, are two very different things.

Both the Conservatives and Labour see the UK’s oil and gas industry as a source of money to be spent on the transition. The windfall profit tax that the Tory government introduced in 2022 in response to the huge profits energy companies were making was only the start. A year later, the levy was raised from the original 25% to 35%. This tax was then, earlier this year, extended until 2029.

With the windfall profit tax, oil and gas companies’ tax burden comes in at 75%—a rate that most industries would agree is not really conducive to investment growth. Indeed, it is not. In fact, the chairman of one British energy company that has worked in the North Sea for years compared the investment climate in the country to that in a war zone.

“We had no idea what was going to happen during the civil war in Libya but we did at least know that when the war ended, whoever was victorious was going to want the oil,” Serica Energy’s David Latin said a week ago, as quoted by The Telegraph.

“In the UK there’s this cloud hanging over the industry that no one wants us anymore.”

In this, Latin is not entirely accurate. The Labour government may not want the oil and gas industry, but it would need it in order to be able to fund its transition plans for the next term of parliament. Those would cost close to 24 billion pounds, which is equal to some $30 billion, and oil and gas industry taxes would constitute a leading source of income.

Not only this, but Labour has vowed to do away with what it has called “the unjustifiably generous investment allowances” for oil and gas companies. These probably refer to a relief mechanism provided by the Sunak government, which allowed companies reinvesting their profits in oil and gas production to claim tax relief at the rate of 91% of every pound they reinvest. With no relief and a 78% tax burden, there will hardly be any energy companies investing in future oil and gas production in the UK. Instead, they are looking elsewhere for growth.

Investing in the UK could soon become uneconomical, said the chief executive of Ineos Energy days before the UK vote.

David Bucknall based his prediction on the Labour Party’s tax plans and said that because of those plans, Ineos was looking to expand in the U.S. and Denmark.

The Conservatives and Labour were trying to outdo each other “in how much pain you can put into the industry”, he said, as quoted by the Daily Mail, adding that “If you take away investment allowances and pile on windfall taxes, it’s very easy to make things uneconomic.”

On top of the higher tax burden, the Labour plan also involves canceling the issuance of new oil and gas drilling licenses for the North Sea.

With no new licenses available and a prohibitively large tax bill on profits with no relief in sight, it would be a miracle if there is a functioning oil and gas industry in the UK in five years.

This would be a problem for transition plans.

Essentially, Labour plans for the energy industry are to use oil and gas producers as cash cows to fund the transition away from oil and gas. But over-taxation would either kill or force companies to relocate—meaning the cash cow would disappear. And so would the cash it was previously generating for transition plans.