LONDON (Realist English). Tax advantages and high energy prices will drive further consolidation of oil and gas fields in the UK sector of the North Sea following a series of deals concluded this year, Reuters reports, citing 11 industry analysts and bankers.
A record year for deals
According to LSEG data, merger and acquisition (M&A) volume in the oil and gas sector involving UK targets or buyers has reached $19.6 billion** since the start of the year. This exceeds the **$16.5 billion figure for all of 2025 and makes 2026 the most active year at least since 2022, when Russia’s full-scale invasion of Ukraine triggered the previous energy crisis.
The rise in oil and gas prices to multi-year highs, caused by disruptions from the US and Israeli war with Iran, has provided the industry with a huge cash inflow. However, these same price spikes have increased inflation, which has raised the appetite for scale to justify production in the mature North Sea basin, which the UK government regards as a reliable domestic source of supply.
Tax regime as a driver of consolidation
The key factor pushing companies to merge remains the tax regime. The Energy Profits Levy (EPL), introduced by the previous Conservative government and increased under Labour, has raised the total tax rate on UK oil and gas production to 78%.
“We have seen significant consolidation driven by tax considerations in recent years,” noted Greig Aitken, Director of Corporate Research at Wood Mackenzie. According to Tony White of consultancy MKI, “there is still logic for two North Sea players to merge so that the enlarged company can benefit from both tax credits and operational synergies.”
Bankers and analysts note that UK taxes provide an additional incentive to maximise efficiency. As Reuters explains, companies with tax losses can merge with those that pay taxes, allowing one to be offset against the other. According to estimates by the Office for Budget Responsibility (OBR), M&A deals already completed have reduced tax bills by £1.3 billion in the period from the current year to 2031–2032, and the Treasury is expected to lose a further £800 million from mergers not yet completed.
Major players and changing strategy
Major oil companies have been leaving the ageing North Sea for years, focusing on more promising projects in other regions. Shell chose to manage remaining assets through partnerships, including the creation of the Adura joint venture with Norway’s Equinor. BP, the last major with a significant own business in the North Sea, is working on an exit from the region; it was previously reported that the company was exploring the sale of its UK offshore assets for almost £2 billion.
James McCormack of investment bank Cavendish describes the UK North Sea as “an increasingly concentrated market when it comes to credible buyers with the balance sheet, tax capacity and decommissioning capabilities to complete material deals.” A September report by Cavendish notes: “Companies that can offer diversification, liquidity and capital for growth attract premium valuations, while sub-scale operators face growing pressure to merge, seek capital in deeper markets or accept takeover offers.”
Policy uncertainty and prospects
In addition to unpredictable energy prices, investment decisions are complicated by uncertainty over government policy. The government says it is committed to achieving net zero by 2050, but has approved the development of the Jackdaw gas field in the North Sea. In its autumn budget statement, it confirmed a long-term commitment to retaining oil and gas in the energy mix, although it did not announce new measures for the industry.
In the budget presented on 28 October, Chancellor of the Exchequer John Healey confirmed that the EPL will remain in force until 1 April 2030 or will end earlier if a price threshold is triggered. A permanent price-activated tax mechanism will replace the EPL once it expires. The OBR expects prices could trigger its termination in September 2029, two years later than projected in March.
The industry association Offshore Energies UK (OEUK) has called for the early introduction of a new Oil and Gas Revenue Levy (OGRL) as a permanent successor to the EPL as early as 2027. According to OEUK estimates, decisive action to remove tax and regulatory barriers could attract £50 billion of investment in domestic production and deliver almost £15 billion in additional tax revenue and 1.3 billion barrels of additional production.
M&A activity in the UK energy sector has reached a record level not only because of high oil prices but also largely because of the tax regime, which makes scale critical for survival.
Mergers allow companies to use accumulated tax losses and improve efficiency, but the OBR already notes that this consolidation reduces tax revenues to the budget. The government’s decision to keep the EPL until 2030, despite industry calls for an earlier transition to the OGRL, creates tension: it provides short-term revenue but may discourage investment in production.
The coming months will show whether the wave of deals continues amid persistently high prices and policy uncertainty, or whether companies prefer to wait, assessing the balance between tax optimisation and the long-term value of assets in a mature basin.
