Oil and gas firms may be offered a relaxation of windfall tax penalties under new measures to boost energy security.

The UK Governmen is expected to allow energy companies to pay less tax as the price of oil and gas falls.

It is likely to mean that if energy prices fell below a specified normal long-term level, the 35% windfall tax would not be applied.

Trade body Offshore Energies UK has been pressing ministers to agree that “when prices drop, it is fair that the windfall tax should fall away”.

The UK government introduced a windfall tax on oil and gas firms last year under pressure to ease the surge in energy bills for households and businesses.

The windfall tax – officially the energy profits levy – is applied to profits which have been gained from pent-up demand after the Covid restrictions were lifted and then from Russia’s invasion of Ukraine.

Gas prices are now falling, and oil prices are off their highs after surging beyond $100 a barrel.

Offshore Energies UK, the industry body, has said the windfall tax has deterred investors in the UK Continental Shelf. Last week it reported that the UK spent £117 billion on imported oil and gas in 2022. It said that if the lack of investment is not addressed, the UK will continue to see imports of oil and gas increase, with value lost to the UK economy and skilled jobs exported overseas.

Commenting on the expected tax relief, David Whitehouse, chief executive of OEUK, said: “If this tax is changed, as conditions and prices have changed, that would be a positive move that would go some way to start rebuilding confidence.”

Energy Security Secretary Grant Shapps, is expected to announce on Thursday that new measures will focus on bringing down wholesale electricity prices in the UK and reducing energy bills for consumers and businesses.

The Financial Times reported that ahead of this, ministers have been holding talks with energy firms about adjusting the windfall tax if oil and gas prices dropped below a certain level.

Ryan Crighton, policy and marketing director at Aberdeen & Grampian Chamber of Commerce said: “It looks like the UK Government has heeded our call to “wake-up” to the damage being done by the windfall tax.

“We have spent 2023 lobbying hard for a price floor mechanism to be added to the Energy Profits Levy. It would appear that the Prime Minister will be in the North-east next week to announce just that.

“It is bonkers to suggest that the levy, in its current form, should remain. The Treasury’s North Sea tax take has risen from £381m per month in February 2022, when Russia invaded Ukraine, to £1.8bn today – yet the oil price is actually lower than it was, making the effective tax rate of 75% totally unviable.”

He added: “Support for the Acorn Project may also be part of the announcement next week, which would be a double-win for our region.

“If we could make it a hat-trick by persuading the new first minister to bin the Scottish Government’s pointless presumption against future oil and gas exploration, then we might be at the start of a prosperous few years for Aberdeen and Aberdeenshire.

“We need our oil and gas sector to fuel and fund our energy transition. Creating an adverse investment environment helps nobody.”