Labour’s “proper” windfall tax on oil and gas will cost the country more than it will make, an industry body has warned.

Offshore Energies UK (OEUK) say the strengthened Energy Profits Levy (EPL) will “generate a loss in economic value of around £13 billion compared to the economic contribution generated under the current windfall tax regime.”

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Details of the changes to the levy were confirmed in a Commons statement by Chancellor Rachel Reeves in July.

The tax will now be extended one year to 31 March 2030, and increase by three percentage points to 38% from 1 November 2024, effectively pushing the headline rate on upstream oil and gas activities up to 78%.

Crucially, the new Labour government are also due to scrap the existing investment allowance which gave oil and gas producers 91p in tax relief for every £1 they invest scrapped.

OEUK say the changes will see investments in UK projects by oil and gas producers fall from an expected £14.1bn to just £2.3bn between 2025 and 2029.

Modelling by the group showed that while the expected tax take from the sector would increase in the short term, there would be a rapid fall in production triggered by the loss of investment/

This, they say, would result in a £12bn decrease in tax receipts.

David Whitehouse, OEUK chief executive, said: “The Prime Minister has said that the budget will be painful. This industry recognises that difficult decisions will need to be made.

“This is a Government that has made economic growth its main priority and yet our analysis shows that its policy will ultimately reduce this sector’s contribution to the UK economy.

“This paper shows that proposals to go further will trigger an accelerated decline of domestic production, and a corresponding reduction in taxes paid, jobs supported and wider economic value generated.

“With an industrial strategy built in partnership with Government, the UK can leverage the strengths of its offshore energy industry, put homegrown innovation and technology at the heart of its net zero ambitions, and ensure the UK is globally attractive for energy investment.

“For more than two years UK oil and gas operators have paid three times the rate of corporation tax of any other sector in the economy.”

The report warns that projects being cancelled or deferred as a result of the increase could place 35,000 jobs at risk over the period.

It also says the loss of economic value in the sector would impact UK supply chain companies, and that the country would risk losing capability and infrastructure to other parts of the world.

Mr Whitehouse called on the UK Government to work with the sector to find a way to manage offshore energy while protecting jobs.

“Time is running out to mitigate damage that has already been done and to avoid further escalation,” he said.

“The Prime Minister promised to manage the North Sea in a manner that does not jeopardise jobs. We now need an honest conversation on how we can do this and need Government to work with the sector at pace.”

The SNP’s Westminster leader, Stephen Flynn told The Herald: “Labour’s decision to treat Scotland’s world class energy sector as little more than a cash cow could be catastrophic for industry, the energy transition and our economy.”

The Aberdeen South MP added; “If you don’t have investment you don’t have jobs and you don't have a net zero future - in the real world outside of Westminster it really is that simple.

“Labour look as if they have created a worst of all worlds scenario where you starve industry of investment, lose the jobs of those who can deliver net zero, put at risk energy security and don’t bring down bills - whilst at the same time fail to invest the money required to truly capitalise on Scotland's green energy potential."

Scottish Conservative energy spokesman Douglas Lumsden said: “This report sends a clear message that Labour’s abandonment of the North Sea oil and gas industry will decimate both our local economy and our energy security.

“Labour’s shortsighted and unfounded sanctions of increasing the windfall tax, ending the investment allowance and opposing all new oil and gas licences means tens of thousands of skilled jobs are now hanging in the balance.

“OEUK is absolutely right to hit out at Labour’s economically and environmentally illiterate proposals, which will result in companies walking away from Scotland and taking their investments elsewhere.”

A Treasury spokesperson said: “We are committed to maintaining a constructive dialogue with the oil and gas sector to finalise changes to strengthen the windfall tax, ensuring a phased and responsible transition for the North Sea.

“Our plans for a new National Wealth Fund and Great British Energy will unlock investment and create thousands of new jobs in the industries of the future.”