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UK windfall tax could end if energy prices fall
14/6/2023
News
The UK government has announced that the Energy Profits Levy, which puts a marginal tax rate of 75% on North Sea oil and gas production, will remain in place until March 2028 while oil and gas prices remain higher than historic norms, but will fall back to 40% when prices ‘consistently return to normal levels for a sustained period’.
The windfall tax was introduced in May 2022 in response to the extraordinary profits made by the sector following Russia’s invasion of Ukraine and to help fund the government’s cost-of-living support package for households and businesses struggling to cope with rocketing energy prices.
Originally set at 25%, the rate increased to 35% from January 2023. Oil and gas companies operating in the North Sea already pay 30% corporation tax on their profits and a supplementary 10% rate on top of that, which combined with the windfall tax, brings the overall tax rate faced by oil and gas companies to 75%.
The levy has raised around £2.8bn to date and is expected to raise almost £26bn by March 2028.
The windfall tax rate will only return to 40% if both average oil and gas prices fall to, or below, $71.40/b for oil and £0.54/therm for gas, for two consecutive quarters (ie six months), says the UK government.
The oil and gas sector has been calling for a reduction in the windfall tax, warning that it has been causing companies to pull back investment in the UK North Sea, with TotalEnergies, for example, saying it would cut its planned 2023 North Sea investment by a quarter, some £100mn, due to the tax.
Offshore Energies UK (OEUK) welcomed the latest government announcement but warned that the oil and gas industry ‘still faces considerable challenges to safeguard the jobs of its 200,000 strong skilled workforce, ensure the UK’s homegrown energy security and power the transition to net zero and beyond with homegrown oil and gas rather than imports’.
OEUK 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.’
However, environmental campaigners were not impressed, with Greenpeace UK’s Georgia Whitaker, stating: ‘Irrespective of what happens to the price of oil and gas, the tax these companies pay should be higher, permanently. This cash should be used to help insulate homes and transition the UK to cheap, clean energy, not fill the bank balances of already wealthy shareholders.’
Environmental lobbyists have long called for a stop to new oil and gas developments in a bid to tackle the effects of climate change. But some industry observers believe scrapping of the windfall tax could see renewed interest in developing UK oil and gas reserves, including the Rosebank and Cambo fields west of Shetland that have yet to secure final investment decisions.
Meanwhile, a number of oil companies have been dialling back commitments to reduce their oil and gas activities, with Shell’s new CEO Wael Sawan recently announcing that oil and gas would remind central to the company for years to come and that rather than reducing output it would keep production steady or even slightly increase it into 2030.
