Windfall tax ‘not needed as oil price already normal’
A plan to scrap the windfall tax on oil and gas companies if the price falls has drawn criticism from a business leader who says it has already fallen back to levels before the energy crisis.
The Treasury said the energy profits levy, which puts a marginal tax rate of 75% on North Sea oil and gas production, will fall back to its pre-crisis 40%, but only when prices return to normal levels for a sustained period.
This means $71.40 per barrel for oil and £0.54 per therm for gas, for two consecutive quarters. It doesn’t expect that to be a consistent level for five years.
A senior figure at Aberdeen & Grampian Chamber of Commerce said the price had already fallen to these levels and there was no need for this “ill-thought-through tax”.
Policy director Ryan Crighton said: “Prices have already returned to historically normal levels, so there are no windfall profits to tax.
“The changes announced today will do little to reverse the worrying trends we are seeing as it’s highly unlikely the oil price will fall below the floor of $72 for a six-month period any time soon.”
The levy was put in place to tax extraordinary profits made by industry following record high prices of oil and gas driven by Vladimir Putin’s invasion of Ukraine. It has raised around £2.8 billion to date and is expected to raise almost £26bn by March 2028 while total revenues from taxes on oil and gas companies will hit £50bn over the next five years.
The government said the levy is helping to fund the measures to help with the cost of living, such as the Energy Price Guarantee.
While the levy included an investment allowance to encourage firms to continue to invest in oil and gas extraction in the UK, industry has warned that companies are cutting back on investment.
The Treasury admits this puts the long-term future of the UK’s domestic supply at risk, meaning the UK would be forced to import more from abroad at a time when reliable and affordable energy is a focus for families and businesses.
In response, the Government has today announced an Energy Security Investment Mechanism to give the oil and gas sector certainty to raise capital and invest in new and existing projects.
It says this secures affordable and reliable domestic energy supply and protects some of the 215,000 British jobs the sector supports.
Based on the independent Office for Budget Responsibly (OBR) forecast the Energy Security Investment Mechanism won’t be triggered before the tax’s planned end date in March 2028.
Gareth Davies, Exchequer Secretary to the Treasury, said: “It is right that we recover excess profits resulting from Putin’s war and use the money to help people with their energy bills. Thanks to the revenue raised from windfall taxes on energy profits, we will have helped save the typical household £1,500 on their energy bill by July.
“While we stepped into help, never again can our energy supplies be at the whim of petrostate despots like Putin. That’s why it’s so important that we secure investment in our own domestic supply, protecting the tens of thousands of British jobs that come with it.
“It would be beyond irresponsible to turn off the North Sea taps overnight. Without oil and gas from British waters, we would be forced to import even more from overseas, putting our security of supply at risk.”
Mr Crighton at Aberdeen & Grampian Chamber of Commerce added: “The introduction of a price floor is a welcome step in the right direction, but if the UK Government is serious about unlocking the investment trapped by its current fiscal regime, then the finish line is still some way off.
“Since it was put in place a year ago, and then further increased, this ill-thought-through tax raid has achieved little other than to shatter confidence in the sector, cost jobs, caused investment to be cancelled or driven overseas and further threatens our ability to deliver energy transition. Today’s intervention tells us that the UK government clearly now recognises their mistake.”
“A punitive tax rate of 75% – one of the highest in the world – remains an ongoing threat to a world leading sector that was once the jewel in the UK’s industrial crown. That rate needs revised downwards urgently.
“We urge government to work with the industry and re-think the terms of the changes being made to EPL, as in their current form, they will make no material difference.
“Get the fiscal conditions right however and the prize could be billions of pounds worth of investment and thousands of new jobs being created in the North Sea.”
Andy Mayer, energy analyst at the free market think tank the Institute of Economic Affairs, said: “While any relief of windfall taxes is welcome, this effort is too little, too late. Even with these changes, the windfall tax will continue to make Britain less competitive and destroy investment.
“The Government has defined ‘windfall’ profits as anything above a 20 year average. Whatever ‘windfall’ means to most people, it is clearly not ‘a little bit more than normal’. This sets a precedent for ‘good year’ taxes across the economy, while offering no corresponding lower rates for hard times.
“The government’s assault on the North Sea last year gave the Labour opposition permission to adopt the policies of the hard left, proposing to ban all new drilling. The UK remains a very poor investment prospect until this changes.”
OEUK Chief Executive David Whitehouse said: “We’ve always been clear that when the windfall conditions go, the windfall tax should go.
“This is a step in the right direction, but many more will need to be taken to restore confidence to our sector. We will now work closely with government and lenders to understand the detail of the measure and its effectiveness at unlocking investment.
“Enabling continued UK energy production now and in future depends on a predictable and fair fiscal environment. The UK must be competitive if we are to be successful in the global race for energy investment.
“As we build the future there is no simple choice between oil and gas or renewables. The reality is we need both. In the mid-2030s, oil and gas will still provide 50% of our energy needs.
“By investing in homegrown production, we avoid costlier, less secure and higher carbon imports while supporting an industry we need to make cleaner, more affordable energy in the UK, for the UK. Our sector is expanding into renewable energy, supported by a world class supply chain.
“We will continue to work closely with government and all parties on the journey to restore sector confidence.”
The UK government said it is taking concrete steps to accelerate home-grown sources of energy to reduce the UK’s reliance on foreign imports.
In October 2022, the industry regulator the North Sea Transition Authority (NSTA) opened applications for oil and gas licences to explore and potentially develop 898 blocks and part-blocks in the North Sea which may lead to over 100 licences being awarded from later this year.
Today the Government has also published the terms of reference for the oil and gas fiscal regime review that was announced at the Autumn Statement.
The review will focus on how the tax regime can support the country’s energy security and our net-zero commitments, while ensuring the country retains a fair return in exchange for the use of its resources when responding to any future price shocks.
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