Last week, BP, formerly known as British Petroleum, announced plans to sell its oil and natural gas business in the North Sea. The news was another sign that BP, which once rivaled oil and gas giants ExxonMobil and Chevron, can no longer be considered a globally significant energy company.
Today, BP has a stock market capitalization of around $114 billion, while Exxon Mobil is valued at about $600 billion and Chevron at nearly $400 billion. Over the past 30 years, BP’s share price has remained largely stagnant, while the two American energy giants have each appreciated more than fourfold since the mid-1990s. This begs a question: why is BP exiting its home waters in the North Sea, where it has operated since 1964?
The answer is straightforward. BP is a shadow of its former self because of poor management decisions and destructive tax and regulatory policies imposed by successive British governments.
Over the past two decades, BP executives have made three strategic mistakes. First, the company invested heavily in oil and natural gas assets in Russia. When Russia invaded Ukraine, BP was forced to dispose of those assets at well below their market value. Second, management failed to exercise adequate oversight of its offshore drilling operations in the Gulf of Mexico. That failure led directly to the Deepwater Horizon disaster, which ultimately cost the company more than $65 billion.
The third mistake was only partly BP’s fault. The company bowed to political pressure from politicians and activist investors who demanded that it pivot away from oil and natural gas and become a green energy company. That strategy cost BP billions of pounds in unnecessary spending while producing disappointing financial returns. Only last year did management acknowledge the failure of that strategy, announcing a complete reversal and a renewed focus on its core business of producing oil and natural gas.
Regardless of management’s mistakes, the single-biggest factor behind the decline of this former icon of the British economy has been the confiscatory tax policies imposed by successive British governments. BP pays an effective 78% tax rate on profits generated from oil and natural gas production in the North Sea. That is among the highest tax rates on oil and gas production anywhere in the world.
In the United States, mainstream economists recognize that corporate taxes are among the most damaging taxes for long-term economic growth because they reduce investment and destroy capital formation. Capital is scarce, and economies that discourage investment inevitably experience slower growth. One reason the British economy has underperformed the U.S. for so long is its punitive tax regime and persistently high marginal tax rates.
The disastrous impact of Britain’s 78% tax rate is illustrated by the strong performance of Exxon Mobil and Chevron. Those companies generally face combined federal, state, and local corporate tax rates of roughly 25% to 30% on U.S. profits. As a result, they retain substantially more capital to reinvest and generate strong compounded returns for shareholders.
On July 20, Andy Burnham, the former mayor of Manchester, became prime minister. In his first days in office, he pledged to tackle the nation’s cost-of-living crisis, including high energy costs. He has told President Donald Trump that he will adopt a more pragmatic approach to North Sea drilling than his predecessor, Keir Starmer.
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One of the most effective ways Burnham could fulfill that promise would be to reduce taxes on oil and natural gas production in the North Sea. Substantial reserves remain in the British sector of the basin. By lowering taxes and providing greater regulatory and permitting certainty, the government could encourage BP to remain committed to the North Sea while attracting additional investment from other producers.
Greater domestic production would strengthen Britain’s energy security, support economic growth, and help lower energy costs for British households.
James Rogan is a former diplomat who later worked in law and finance for over 30 years. Today, he writes a daily note on markets, economics, politics, and social issues. He can be reached at [email protected].