Industry body Offshore Energies UK (OEUK) said companies have been “finding it harder to justify and fund investments” in UK operations since the Energy Profits Levy (EPL) was introduced in May last year.

Chancellor Jeremy Hunt increased that levy to 35 per cent in January, taking the overall tax rate for oil and gas production in the UK to 75 per.

The Government said companies like BP and Shell have recorded “extraordinary profits” – as prices spiked when demand rose after the Covid pandemic and the war in Ukraine disrupted supplies – and they must now “pay their fair share”.

The levy is due to remain in place until March 2028, but the OEUK said it should be scrapped when prices oil and gas drop and replaced with "a system which draws investment".

The organisation, which represents around 400 members, said the tax rise has affected production and hampered plans to decommission old platforms in the North Sea.

In a new report, it said companies are expected to spend £2.2bn on decommissioning work this year – around 12 per cent of their total expenditure in the UK – as they are shutting down 210 wells and 253km of pipeline, but also removing 8,208 tonnes of subsea infrastructure.

Ricky Thomson, the OEUK Decommissioning Manager, said it has become “extremely difficult” to complete projects as the windfall tax has created “fiscal uncertainty” for companies which are also struggling with inflation and supply chain issues.

“We need to make sure we have a stable fiscal regime so that we can definitely complete these works,” he added.

Under the old system, oil and gas firms were able to significantly reduce the amount of tax they pay by factoring in losses and spending on decommissioning work.

Shell and BP paid no corporation tax or production levies on North Sea operations between 2018 and 2020, and claimed almost £400m of tax relief, according to analysis by The Observer.

But the Government said oil and gas firms have coughed up more than £2.8bn in EPL payments so far and the tax is due to raise almost £26bn by March 2028.

The levy does include an “investment allowance” to incentivise production, allowing companies to claim £91.40 in tax relief for every £100 they spent. But the OEUK said that allowance does not cover decommissioning work.

BP has stated it spent £755m on tax payments in the UK in the first half of the year, including £358m on EPL payments.

Centrica, which owns British Gas, has stated it spent about £1bn on tax in 2022, after recording £3.3bn in profit, and that includes around £54m on EPL.

Shell said it spent around £1.7bn on tax payments in the UK and EU in the last three months of 2022 – the most profitable year in its 115-year history.

Oil and gas companies urging Downing Street to axe windfall tax