Labour/Oil drilling ban: opposition’s plan encourages the wrong flows

A promise to end oil and gas exploration in the UK North Sea should not ease open the production taps. Ironically, that will probably be the immediate result of Labour leader Sir Keir Starmer’s landmark speech on energy policy on Monday.

Labour plans to end the issuance of new oil and gas licences if it gains power. It will not, though, revoke any permits issued before the next general election. Such a move would have caused a legal headache for a newly elected government.

The clarity should give oil explorers the confidence to press ahead in the coming months with large new projects in advanced planning stages. These include the 300mn-barrel Rosebank oil project west of the Shetland islands, led by Norway’s Equinor. But for the longer term, Labour’s proposed ban offers yet another reason for oil and gas investors to do some exploration of their own — outside of UK territory.

Shares in UK-focused oil and gas producers such as Harbour Energy, Serica and Ithaca have fallen dramatically in the 13 months since the UK’s windfall tax was introduced. Valuations trail well behind multiyear averages. Shares in Serica Energy trade at half its already cheap five-year average of 5 times.

The windfall levy, first introduced in May 2022, has raised UK producers’ aggregate tax rate from 40 to 75 per cent. The introduction this month of a complex floor for the levy has hardly improved the mood. Apache of the US is halting UK North Sea drilling despite the recent amendments. Job losses could follow in Aberdeen. Harbour, the UK’s biggest oil and gas producer, already had sought investment opportunities abroad.

True, more companies withdrawing from the UK could create an opportunity for those left behind. Asset valuations are cheap against oil and gas reserves. They may stay so. Labour has previously talked about backdating the levy to the start of 2022, although there was no such mention on Monday.

Many UK-focused companies rely on squeezing more barrels out of existing fields. They often do this by drilling new wells close to assets. These sort of “brownfield” projects could be affected by a new licence ban.

Labour’s stance only increases uncertainty and the chance that oil company cash flows leave the UK altogether, rather than into the cleaner sources of energy the party would prefer.