UK Oil & Gas: The New Regulatory Landscape

The United Kingdom's oil and gas sector is undergoing a significant transformation, driven by evolving financial requirements, ambitious environmental targets, and a commitment to long-term energy security. Recent legislative updates and policy shifts are reshaping the operational and fiscal landscape for companies across the North Sea, demanding a clear understanding of the new rules of engagement. These changes aim to foster a more sustainable and accountable industry, ensuring that the sector not only contributes to the UK's energy needs but also aligns with its broader climate objectives.

A New Funding Model for the North Sea Transition Authority

A pivotal change coming into effect from April 2025 is the introduction of a new levy designed to cover the operational costs of the Oil and Gas Authority (OGA), now more formally known as the North Sea Transition Authority (NSTA). This move signifies a strategic shift in how the NSTA, the primary regulator for the UK's oil and gas industry, funds its essential oversight activities.

Previously, a portion of the NSTA's costs was recovered through specific service fees. However, the bulk of its funding will now come directly from the industry it regulates. This is enabled by the Energy Act 2016, which grants the government the power to recover the NSTA's expenses from those who benefit most from its services – the offshore petroleum license holders.

Who Pays and How Much?

The new levy applies to all companies holding offshore petroleum licenses across the UK and its adjacent waters. To ensure fairness and proportionality, the levy structure incorporates different rates:

• A production levy for companies with active production licenses.
• A non-production levy for those not currently engaged in active production.
• Discounted rates are available for small-scale operators, often referred to as "micro-enterprises," based on their revenue and staff size. This tiered approach aims to mitigate undue financial burden on smaller players in the sector.

New Fees for Control Changes

In addition to the annual levy, the new regulations introduce specific fees related to changes in the control of licensees. This applies to both petroleum and carbon storage licenses. This measure is crucial for the NSTA to maintain robust governance and financial stability within the sector, allowing it to monitor and approve any potential shifts in company ownership or control. The Energy Act 2023 has, in fact, formally amended the model clauses of both existing and new licences, mandating licensees to provide the NSTA with three months' notice of a proposed change in control and secure approval before the transaction proceeds.

UK's Evolving Fiscal Framework: Taxation and Windfall Taxes

The UK's oil and gas sector operates under a distinct taxation regime, designed to capture value from the extraction of petroleum resources. This framework has seen recent adjustments, notably the extension of the Energy Profit Levy (EPL), often referred to as a "windfall tax."

The overall tax burden on upstream oil and gas activities in the UK is currently substantial, with a headline rate of 78%. This comprises four main components:

A notable change in Q1 2024 was the extension of the EPL. Originally set to expire earlier, it is now intended to remain in place until the end of March 2030. While some investment allowances (like the main 29% allowance for capital expenditure) were abolished for expenditure incurred after November 2024, an allowance for capital expenditure on decarbonisation of upstream operations remains, albeit reduced from 80% to 66% from the same date. The government has also indicated it will consult on a successor regime to the EPL for responding to future price shocks.

Decommissioning: A Shared and Secured Responsibility

As the UK North Sea matures, the issue of decommissioning offshore installations and pipelines is becoming increasingly prominent. Operators' expenditure in this area is on the rise, with significant increases expected over the coming years. The regulatory framework, primarily under Part IV of the Petroleum Act, ensures that the financial burden of decommissioning does not fall on the UK taxpayer.

Decommissioning obligations are triggered when the Secretary of State issues a "section 29 notice" to the field operator and licensees, requiring them to submit a decommissioning programme. Once approved, these parties are jointly and severally liable for carrying out the programme. Crucially, the "claw-back" power under section 34 of the Petroleum Act extends this liability to anyone who was previously liable for a section 29 notice, including former licensees, until the notice is formally withdrawn. This robust mechanism encourages the provision of adequate financial security.

To provide certainty for companies, the Decommissioning Relief Deed regime allows the government to sign contracts ensuring tax relief for decommissioning costs. Furthermore, in line with broader decarbonisation efforts, the concept of "Change of Use Relief" has emerged. This allows for arrangements where original infrastructure owners might be relieved of some decommissioning liability if their assets are repurposed for carbon transport and storage (CCUS), aligning with the government's push for CCUS development.

Steering Towards Net Zero: Decarbonisation and New Energies

The UK's commitment to a Net Zero Target by 2050 has profoundly impacted the oil and gas industry. The NSTA's legally binding OGA Strategy (revised in February 2021) now mandates licensees not only to maximise economic recovery of petroleum but also to take appropriate steps to assist the Secretary of State in meeting the Net Zero Target. This includes reducing greenhouse gas (GHG) emissions from operations (e.g., flaring, venting, power generation) and supporting carbon capture and storage projects.

Further strengthening this commitment, the government introduced a "Climate Compatibility Checkpoint" for all future oil and gas licensing rounds. This ensures that new licenses align with wider climate objectives. In early 2024, the NSTA published its OGA Plan, detailing how relevant parties can meet their obligations to reduce UKCS greenhouse gas emissions.

Hydrogen and Carbon Capture, Usage & Storage (CCUS)

Clean hydrogen is a cornerstone of the UK's Net Zero Strategy, with ambitious targets for low-carbon hydrogen production capacity. The Energy Act 2023 provides the statutory framework for low-carbon hydrogen, and the government is actively developing business models and a regulatory framework to support its growth. Similarly, CCUS is seen as vital for decarbonising gas-fired electricity generation and hard-to-abate industrial sectors. The government is advancing its CCUS programme, with specific "Track-1" and "Track-2" clusters identified for development, supported by new licensing regimes and business models under the Energy Act 2023.

UK Oil and Gas Production Landscape

The UK has been a net importer of both natural gas (since 2004) and crude oil in recent years. In 2023, UK natural gas production was 34.5 billion cubic metres, a decrease of 9.6% from 2022, while crude oil production fell to an all-time low of 34 million tonnes. Despite declining domestic production, the UK Continental Shelf (UKCS) is estimated to still hold significant undiscovered reserves.

The UK's energy requirements in 2023 were met by natural gas (36%) and oil (39%). Imports remain crucial, with Norway being the largest source for both gas (57% of total imports) and crude oil (over a third of all crude imports). The UK also boasts the second-largest LNG regasification infrastructure in Europe, with facilities like Grain LNG, South Hook LNG, and Dragon LNG playing a vital role in gas supply.

Accessing Critical Infrastructure: Third-Party Access (TPA)

Ensuring fair and non-discriminatory access to essential oil and gas infrastructure is a key regulatory principle in the UK. The Third-Party Access (TPA) regime, primarily governed by the Energy Act 2011 for upstream infrastructure and the Gas Act 1995 for downstream facilities, facilitates this.

Owners of upstream pipelines and processing facilities are required to annually publish their main commercial conditions for access. If a party seeking access cannot agree terms directly with the owner, they can apply to the NSTA (or Ofgem for downstream assets) for a notice granting access rights. The NSTA can even issue an access notice on its own initiative if an agreement seems unlikely. While parties are generally free to negotiate terms and tariffs, the regulator retains the power to intervene and determine fair access conditions, including cost allocation for interconnections or capacity expansions.

The Infrastructure Code of Practice, though voluntary, provides a framework for seeking and negotiating access to offshore infrastructure, aiming to streamline and facilitate timely resolution of access requests. The Gas Act also imposes duties on Gas Transporters to maintain efficient pipeline systems and comply with reasonable requests for connection and conveyance, ensuring competition in the gas supply market.

Frequently Asked Questions (FAQs)

What is the North Sea Transition Authority (NSTA)?

The NSTA, formerly known as the Oil and Gas Authority (OGA), is the independent regulator for the UK's oil and gas industry. It is responsible for licensing, regulatory oversight, and ensuring the maximum economic recovery of petroleum while also supporting the UK's net zero targets by reducing emissions from operations.

Why is the new levy being introduced for offshore petroleum license holders?

The levy, effective from April 2025, is being introduced to make the NSTA self-sustaining. It allows the government to recover the NSTA's operational costs directly from the companies that benefit from its regulatory services, rather than relying on general taxation.

How does the Energy Profit Levy (EPL) affect oil and gas companies?

The EPL is a "windfall tax" on the profits of oil and gas companies operating in the UK and UKCS. It was extended in Q1 2024 and is now intended to run until March 2030. While some investment allowances have been adjusted, it aims to capture additional revenue during periods of high commodity prices, contributing to the overall 78% headline tax rate for upstream activities.

What are the UK's policies regarding new oil and gas exploration licences?

The UK government has introduced a "Climate Compatibility Checkpoint" for all future oil and gas licensing rounds, ensuring they align with net-zero emissions targets. While existing licenses are generally not revoked, the current Labour Government has pledged not to grant new exploration licenses, signalling a shift towards a "phased and responsible transition" in the North Sea.

What are the key initiatives for decarbonising the oil and gas sector?

Key initiatives include the NSTA's OGA Strategy, which mandates emission reductions from operations, and the development of large-scale carbon capture, usage, and storage (CCUS) projects. The UK is also heavily investing in low-carbon hydrogen production, with the Energy Act 2023 providing the statutory and business model framework for these new energy technologies.

What is Third-Party Access (TPA) in the context of pipelines?

TPA refers to the right of a third party to access existing oil and natural gas transportation pipelines and associated infrastructure. This regime, overseen by the NSTA and Ofgem, ensures fair and non-discriminatory access to essential infrastructure, allowing new users to transport oil or gas even if they don't own the pipeline, with regulators having powers to resolve disputes over terms and costs.

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