Windfall tax to stop if oil prices fall further, government says

The windfall tax on North Sea oil and gas production profits will continue until 2028 unless oil prices fall to historically normal levels for six months.

The UK government has announced it will remove the 75 per cent windfall tax on oil and gas companies if the average price of oil falls to or below $71.40 per barrel for two consecutive quarters, and the average price of gas falls to under 54p.

On Friday morning, Brent crude oil was trading at $75.38 per barrel. UK gas prices were at around 64p per therm.

The windfall tax was put in place last year, as an attempt to mitigate soaring inflation and prices that have caused a cost-of-living crisis for many of the UK’s most impoverished households. In that time, it has raised £2.8bn to fund energy support schemes, and is expected to raise almost £26bn by March 2028.

If the tax stops, North Sea oil and gas operators will return to making 40 per cent profits.

Despite the tax, the rise in oil prices led to fossil fuel extractors such as BP and Shell reporting massive rises in profits in 2022.

However, the latest Offshore Energies UK’s (OEUK) Business Outlook report found that the inflation and the windfall tax led to nine out of 10 North Sea operators cutting back investment in recent months.

In April, the UK’s largest oil and gas producer Harbour said it would shed 350 UK onshore jobs as a result of the tax, while French company TotalEnergies also plans to reduce its investment in North Sea oil extraction by a quarter.

“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 government said.

“This puts the long-term future of the UK’s domestic supply at risk, meaning we would be forced to import more from abroad at a time when reliable and affordable energy is a focus for families and businesses.”

The UK Treasury said it would be “irresponsible to turn off the North Sea taps overnight”.

“It is right that we recover excess profits resulting from Putin’s war and use the money to help people with their energy bills,” said Gareth Davies, exchequer secretary to the Treasury. “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.”

The announcement has been welcomed by industry and some politicians, but faced criticism from campaigners.

“We’ve always been clear that when the windfall conditions go, the windfall tax should go,” OEUK’s chief executive David Whitehouse said. “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.”

Simon Francis, the coordinator of the End Fuel Poverty Coalition, said the idea was “premature”.

“Energy bills are predicted to remain high and levels of household energy debt are still surging,” he said. “Any talk of reducing or ending the windfall tax while millions still struggle through the energy bills crisis is premature.”

Greenpeace UK climate campaigner Georgia Whitaker said: “The government’s windfall tax on oil and gas companies already contains more loopholes than a block of Swiss cheese. And now they want to scrap it altogether.”

Opposition parties also criticised the government’s move to scrap the windfall tax if oil and gas prices fall, with the Liberal Democrats branding it one of the Prime Minister’s “biggest personal failures”.

“The families and businesses still suffering so much from high energy bills will not forget the failure of the Conservatives to tax the windfall profits of the oil and gas companies properly,” said Lib Dem leader Sir Ed Davey. “This out-of-touch government has shown yet again that it doesn’t care about people struggling just to get by, or the small business clinging on.

“This energy tax failure ranks as one of Rishi Sunak’s biggest personal failures as Chancellor and Prime Minister.”

A Labour spokesperson added: “It’s right that as oil and gas producers are making historically high profits that they are asked to contribute more. We need a proper windfall tax on the enormous profits of oil and gas giants to help with easing the cost of living crisis.

“We will look at the detail of this change. Of course if the windfalls of war disappear then we’ll look at what the right long-term tax position should be for the North Sea.”

A No 10 spokesperson told journalists: “You’ll remember that the energy profits levy was introduced last year to respond to exceptionally high prices that meant that oil and gas companies were benefiting from extraordinary profits.

“To protect domestic energy supply and safeguard thousands of jobs reliant on that sector, we’ve introduced the energy security investment mechanism, and that means that if oil and gas prices consistently fall back to normal levels before March 2028, which is when it would end anyway, the energy profits levy would be switched off.”

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Original Source: https://eandt.theiet.org/content/articles/2023/06/windfall-tax-to-stop-if-oil-prices-fall-further-government-says/

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