By Matthew Webb, Head of Economics, Xodus Group
When the Energy Profits Levy (EPL) was first introduced in May 2022, it was set to finish in less than five weeks from now, at the end of 2025. What the oil and gas industry wouldn’t give for that now.
In the intervening years, profits in the North Sea have dwindled, tax receipts have fallen by 48% and companies have turned the focus of their investment to other jurisdictions. At the same time the EPL has been steadily and consistently uprated and extended, with a headline tax rate of 78% and investment allowances removed.
With the Autumn Budget now behind us, it seems 2025 will be the first year the EPL hasn’t been tinkered with, much to the dismay of the industry. Instead, the government has introduced a new Oil and Gas Price Mechanism (OGPM), designed to supersede the EPL when it finishes in 2030.
This decision, aimed at providing some stability and certainty in the fiscal regime, will create a permanent mechanism to charge an additional tax on windfall profits.
Tax base
There are several crucial differences between the OGPM and the EPL, with the former ironing out many of the issues with the latter.
The EPL is taxed on ring fenced company profits and, while interest payments and decommissioning expenditure are not deductible, other costs are.
The OGPM is a revenue-based tax applying to all revenue realized above price thresholds. This mechanism makes it simpler to tax oil and gas separately from one another but leaves companies more exposed to cost inflation risk.
Measurement
Unlike the EPL, the OGPM also only applies to the share of revenues that are above the price triggers, calculated on a transaction-by-transaction basis. This process is designed to more accurately reflect the ‘windfall’ revenues a company receives and for many businesses who are required to hedge significant portions of their production for their financing arrangements, this will be welcome.
Price Triggers
Under the EPL, the tax is permanently removed if for two consecutive quarters both the average market oil price is below $74.21/barrel (24-25 financial year) and the average market gas price is below 57p/therm (24-25 financial year), referred to as the Energy Security Investment Mechanism (ESIM).
As oil prices slipped below this threshold last year, this has begun to feel particularly unfair for producers. When the EPL legislation was written it was assumed that oil and gas prices would move in lockstep with one another, the reality is that commodity price changes driven by geopolitical events don’t.
Under the OGPM the commodity price triggers are instead thresholds above which revenue is subject to the tax. As this is conducted on a transaction-by-transaction basis it has the added benefit of separating the windfall definition by commodity, enabling it to only apply to gas or oil.
At $90/bbl for oil and 90p/therm for gas, increasing in line with CPI, the OGPM thresholds are also much higher than the floors set by the ESIM, meaning it will not influence investment decisions in the same way as the EPL.
Nearer to the intended policy
If the government now accepts that a revenue-based, transaction-level mechanism with realistic commodity triggers is a more accurate and equitable way to capture genuine windfalls, the obvious question is why industry must wait and endure further uncertainty before it takes effect.
The EPL has long outlived the market conditions that justified its creation, yet companies are still required to make multi-year investment decisions under a tax that no longer bears any meaningful relationship to profitability.
Introducing the OGPM immediately would provide much-needed stability at a point when the basin’s competitiveness is under acute pressure.
Investors are not demanding a free pass; they are asking for coherence and predictability. The government has now set out a mechanism that better reflects both. Why wait?
“Join the companies that smart energy professionals follow – because when you’re featured on OGV, the industry pays attention.”
