Conservative leader Kemi Badenoch, shadow energy secretary Claire Coutinho, and Reform UK’s Nigel Farage have all been vocal in calling on the government to reopen North Sea oil and gas drilling. Coutinho claimed on social media that Labour is turning down £25 billion in tax revenue by blocking new licences. Badenoch put it more bluntly: drilling in the North Sea is the answer to the energy crisis.
Intuitively, the argument has appeal. The North Sea genuinely was a fiscal goldmine for the UK. Since commercial production began in the 1970s, revenues peaked at over £12 billion in 1984-85, representing more than 3% of GDP. They hit a fresh cash high of £12.4 billion in 2008-09, and surged again to £9 billion in 2022-23 as the Ukraine war drove up energy prices and the then-Conservative government introduced the Energy Profits Levy. Over fifty years, the North Sea contributed well over £300 billion to the Treasury. The claim that North Sea oil built British prosperity is not wrong.
The problem is that this is the North Sea of fifty years ago, not today’s.
The basin was once rich enough that drilling almost anywhere yielded results and the tax base was enormous. Today it is an ageing basin with around 90% of its reserves already extracted. Production stands at roughly a fifth of its 2000 peak and continues to fall. The Office for Budget Responsibility projects that North Sea tax revenues will drop from around £6 billion in 2024-25 to just £100 million by 2030-31. That trajectory was locked in long before Labour took office.
More paradoxically, issuing new licences would actually reduce tax revenues in the short term. This follows from a fiscal mechanism that rarely gets mentioned. Under the current UK regime, oil and gas companies enjoy up to 91% tax relief on new investment, across ring-fence corporation tax, the supplementary charge, and the investment allowances within the Energy Profits Levy. Every new licence triggers large upfront capital expenditure that can be immediately offset against tax liabilities. New licences generate more tax deductions, not more tax receipts.
The long-term picture is worse still. When a field reaches the end of its life, the operator must decommission it — a costly process. The North Sea Transition Authority estimates the total decommissioning bill for existing UK infrastructure at £41 billion. Under UK tax law, companies can carry back decommissioning costs almost indefinitely against past profits, triggering repayments to the Treasury. HMRC estimates the total cost to the public purse at around £11.7 billion in present value terms. The profits go to private companies; the closure bill falls on taxpayers. Analysis of proposed new fields such as Rosebank suggests that once all tax reliefs and decommissioning liabilities are factored in, the net fiscal benefit to the UK could be negative.
On energy bills, the Conservative and Reform argument is equally unconvincing. Once extracted, oil and gas are sold at international market prices. North Sea output is far too small to move global prices. Even Coutinho herself, when she was Energy Secretary in 2023, admitted that new licences would not necessarily bring energy bills down.
Addressing the energy crisis is not a question of squeezing more supply from an exhausted basin. The more durable answer lies in reducing demand for oil and gas in the first place. Solar and wind power are not priced by events in the Middle East. The more households switch from gas boilers to heat pumps, and from petrol cars to electric vehicles, the less exposed the country becomes to volatile fossil fuel markets. Drilling in the North Sea would not lower bills, would reduce tax revenues in the short term, and would ultimately transfer decommissioning liabilities onto the public. The question worth asking is not whether to drill — but why.
