Europe has been heavily dependent on North Sea infrastructure for several decades. Although this mainly includes oil and gas, the North Sea also provides wave and wind energy, fishing opportunities, and hosts a lot of telecommunications infrastructure.

Recognising this area’s inherent importance, European nations have significantly ramped up North Sea exploration and drilling in the last several years, with a number of projects lined up for the next few years.

The UK, the Netherlands, Denmark, Germany and Norway are the five European countries leading this race to make the most of the North Sea, of which they all share a coastline. 

Following the Russia-Ukraine conflict and Europe’s resulting sanctions on Russian oil and gas, the North Sea and its energy resources have become all the more critical for the continent. Europe has had to scramble to find other energy suppliers in a hurry, to replace Russian supplies. This has also led to Norway significantly increasing its own oil and gas production.

The critical Nord Stream gas pipelines were damaged in a suspected sabotage attempt by Russian players during the Russia-Ukraine war. These pipelines were key for Europe’s gas supplies from Russia and have prompted six European countries, namely Belgium, Norway, Germany, Denmark, Britain and the Netherlands to come together to attempt to protect North Sea infrastructure.

Denmark’s Climate, Energy and Utilities Minister Lars Aagard said, as reported by Associated Press: “The North Sea has the potential to become the cradle of a renewable and secure energy supply in Europe, while supporting the road to a fossil free future.”

Referring to the above six countries’ pledge to protect vital infrastructure, he said: “They must stand united and coordinated in our efforts to protect critical infrastructure across borders. This understanding is an important step in that direction.”

However, in the last few months, North Sea oil drilling and exploration has declined, with several oil and gas giants such as Shell winding up their operations due to increasingly harsher tax regimes.

The UK and other countries, including Norway, have also come under increased pressure from environmental groups to decrease existing drilling and restrict the issuing of new exploration and drilling licences.

Is North Sea oil and gas seeing its twilight years?

North Sea oil and gas drilling could be significantly reduced, as some of the UK’s biggest oil and gas companies grow increasingly disgruntled with the higher taxes imposed. Back in 2022, the UK government introduced the Energy Profits Levy, a windfall tax on oil and gas companies.

This was mainly done in response to energy giants such as Shell and BP seeing bumper profits during the Russia-Ukraine war, as energy prices soared because of both disrupted supplies and an increasing energy insecurity.

However, this tax, combined with other existing levies, has meant that oil and gas companies now see their profits being taxed at around 75%. Some North Sea oil companies, such as EnQuest, have also seen their total taxation rate soar above 100%.

This is due to the windfall tax being ringfenced solely around oil and gas extraction profits. However, the tax overlooks the expenses companies may see in other operations. This means they may face losses in other departments but still be forced to pay high taxes on the profits from their oil and gas branch.

This in turn severely limits companies’ ability to use the profits from oil and gas to cushion the blows from other departments, thus dealing a blow to the entire firm.

In its full-year 2023 report, EnQuest said: “As expected, the windfall levy has impacted access to capital across the sector, with the most significant on enQuest being the reduced borrowing base within the group’s reserve bank lending facility.

“Clearly, a volatile fiscal regime imposes significant challenges on any business and the extension of the levy to 2029 announced in the Spring Budget represented the fourth amendment to UK sector taxation in the last two years.”

Furthermore, the upcoming elections have led to more anxiety for energy companies, as the next government is expected to impose even harsher measures. This may include higher windfall taxes, with the possibility of it being backdated as well. Speculations of all new licensing potentially being stopped are also rife.

Gilad Myerson, executive director of Ithaca Energy, said, as reported by the Daily Telegraph: “These changes to fiscal policies were designed to boost taxes, but in reality will cost the economy more as fields shut early, reducing tax payments and driving up decommissioning costs.”

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Although these measures have been welcomed by climate activists, they have also seen significant backlash from others. Major oil and gas companies have started winding up North Sea operations. Shell is rethinking its £25 billion (€29.2 billion) investment in Britain.

Shell has also revealed it is thinking of quitting London to move to New York, as it feels undervalued by investors in the UK. In part, this is also due to oil and gas companies still being significantly more welcomed in the US than in Europe.

If it does end up moving, it would be a major blow for the London stock market, which has seen several other companies such as Arm Holdings, Flutter Entertainment, CRH and Smurfit Kappa flee to the US in recent months.

The UK’s biggest oil and gas company, Harbour Energy, has also revealed it is pausing its UK investments, mainly due to the disproportionate tax burden.

As well as causing individual companies’ grievances, these harsher laws are also likely to cause significant damage to Europe’s economy, if more energy companies start to leave. This could be in the form of lost tax revenue, as well as job losses.

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Several energy companies are also instrumental in making the transition from fossil fuels to renewable energy, which means that Europe could potentially lag here as well. In turn, this would lead to greater energy dependence on foreign players, and prompt more energy imports.

North Sea oil drilling protests have soared lately

North Sea oil protests have significantly increased over the last few years, with protesters in Norway, the UK, Germany, Sweden, the Netherlands and Denmark blocking access to North Sea infrastructure, such as roads, ports and refineries.

This is mainly because of claims that the countries are not reducing their fossil fuel usage and exploration enough to meet the Paris Agreement and net zero goals coming up at the end of the decade.

In the UK, protesters also call for new drilling in the North Sea to be severely limited, because it does not bring sufficient benefits for the economy or for consumers. There are also increasing complaints of the price of North Sea oil drilled by Britain being too controlled by foreign players.

Professor Gavin Bridge, Fellow of the Durham Energy Institute at Durham University said, according to the Energy & Climate Intelligence Unit: “The reality is very little of the oil pumped from the North Sea is refined and sold on British soil, and even then, the price is largely dictated by international markets.

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“The notion that more drilling on the continental shelf boosts our energy security, doesn’t stand up to scrutiny. Most of the oil is extracted by private or foreign state-owned companies over which the Government has little control.”

Truls Gulowsen, head of the Norwegian arm of the environmental group Friends of the Earth said regarding Norway’s oil and gas choices, as reported by The Guardian: “Despite having all the tools in the world to ensure a just transition, our government’s choice is to continue to be Europe’s most aggressive oil and gas explorer. This is completely out of place, and totally unaligned with the Paris agreement and our climate responsibility.”

Despite such calls for a faster transition to renewables, it is crucial that renewable infrastructures are put in place first. Without that, speeding up the green transition could have ugly consequences in the near-term for European countries.