The Government has confirmed the details of the new Oil and Gas Price Mechanism (OGPM), a permanent windfall tax that applies when the Energy Profits Levy (EPL) ends. In addition, the Government is introducing legislation to confirm that Decommissioning Relief Deed (DRD) claims cannot be made in respect of EPL.
EPL
EPL was introduced in May 2022 in response to high oil and gas prices. Although initially introduced at a 25 percent rate for three years, the rate has been increased to 38 percent and extended to 2030 unless the Energy Security Investment Mechanism (ESIM) applies.
Current price forecasts suggest that oil and gas prices are expected to be close to triggering the ESIM price floor within the next few years. If average oil and gas prices fall under the ESIM thresholds, the EPL will end immediately and the new OGPM will come into effect. If the ESIM is not triggered, OGPM will apply from 2030.
At this point, the headline upstream tax rate will return to 40 percent in the permanent regime, alongside the OGPM.
OGPM
The OGPM will apply an additional tax rate of 35 percent on sales of hydrocarbons above price thresholds of $90 per barrel for oil and 90 pence per therm for gas (to be adjusted annually in line with Consumer Price Index (CPI) inflation).
The tax will apply on a transaction-by-transaction basis to any disposal of oil or gas with a disposal value above the thresholds. Natural Gas Liquids (NGL) will be treated as oil for the purposes of OGPM.
The Government acknowledges the implementation challenges, notably tracking hedging outcomes, and will consult with industry to balance administrative feasibility and achieving policy intent.
OGPM has no end date and will be administered to the extent possible alongside corporation tax. The Government intends to legislate for the OGPM in Finance Bill 2026-27.
Comment
Although appearing initially a simple tax measure, we expect that there will be a necessary period of consultation to ensure the legislation captures the complexities of the sector.
We expect that the OGPM will not meet the requirements to be treated as an IAS 12 matter; and as such will be accounted for above the line.
DRDs and EPL
Legislation is to be introduced, with effect from 26 November 2025 to confirm that no payment under a DRD can arise in relation to EPL for decommissioning expenditure.
The DRD is a private contract between HM Treasury and oil and gas companies that, in effect, guarantees a minimum level of tax relief for decommissioning expenditure. It is not clear how the new legislation can impact the application of a contractual claim under DRDs and we expect that companies who are considering such claims will examine the legal basis further.
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