North Sea oil and gas producers on Tuesday rejected calls for the British government to levy a windfall tax on their profits to offset the impending rise in household energy bills, pointing out that it is already taking higher revenues from the industry.
A one-off windfall tax on the sector is one of several options to be considered by the Treasury as ministers come under increasing pressure to address a looming cost of living crisis. The opposition Labor Party said at the weekend that such a levy could partial fund its proposed cuts of around £ 200 on all household energy bills this year.
Household budgets will come under severe tension in April with the limit limiting energy bills for more than 15 million households that will jump by more than £ 700 to £ 2,000. This will coincide with a sharp rise in national insurance and income taxes with inflation at its highest in a decade.
But OGUK, the trading body representing foreign oil and gas operators, slammed back, claiming the treasury was already benefiting from rising gas prices “without any need for a windfall tax”.
OGUK has calculated that the industry will pay an extra £ 3 billion in taxes in the two years from April 2021 due to high commodity prices. That comes on top of an expected £ 2bn already taken into account in the government’s forecasts, the group said, making a total industry contribution of £ 5bn.
“The British Treasury is already benefiting significantly from this [gas] price increases, ”said Jenny Stanning, director of external relations at OGUK, although she acknowledged that the actual outcome would depend on commodity price fluctuations.
Government officials have confirmed that OGUK’s calculation was broadly in line with revised estimates from the Office for Budget Responsibility, the UK fiscal watchdog.
But analysts said that despite the setback, the industry would struggle to make a convincing argument in the light of public opinion. Many oil and gas producers are expected to reveal strong financial results following rising gas prices at about the same time that energy regulator Ofgem is expected to confirm the sharp rise in the domestic energy price limit on 7 February.
Oil-sized Shell will announce its earnings on February 3rd. While rival BP – whose CEO Bernard Looney recently boasted that high oil and gas prices have turned his company into a “cash machine” – should report on 8 February.
“They [oil and gas producers] are the main beneficiaries of [elevated gas prices] and the main people who will suffer from it are old-age pensioners and several other people who need help with their heating bills, ”said Graham Kellas, senior vice president of global fiscal research at consulting firm Wood Mackenzie. “They are not going to get much sympathy.”
Successive governments have a long history of manipulating tax rates on the oil and gas sector to make the most of the rise in commodity prices, analysts said.
“What the British Government did – and it’s whether it was Tory or Labor – [is] they manipulated the tax rates and the allowances [for the UK North Sea] on a fairly regular basis and this is usually in response to significant changes in the [oil or gas] price environment, ”Kellas said.
A mechanism for a “windfall tax” already exists: the “supplementary levy” is levied in addition to corporate tax on producers’ UK activities. The supplementary charge is 10 percent. But in 2011, it was raised by then-Tory chancellor George Osborne to 32 percent from 20 percent to pull in extra revenue as he tried to cash in on high oil prices.
The sector also pays higher corporate taxes of 30 percent compared to standard 19 percent rate.
Nevertheless, compared to tax regimes for fossil fuel extraction elsewhere in the world, the British North Sea enjoys one of the most favorable, with benefits that include a reduction in the petroleum income tax rate to zero in 2016 and allowing companies to use it to cover losses and decommissioning costs.
Operators said the favorable regime is necessary given the age of the bowl, which makes it more expensive to exploit remaining reserves.
They also argue that further tax increases will simply stifle investment in the North Sea, where production peaked at the end of the last century and is now in long-term decline. This will affect their ability to maintain dwindling domestic supplies, making the UK, which already imports more than 50 percent of its gas, even more dependent on countries such as Russia and Qatar.
Mica Flegg, CEO of Serica Energy, which accounts for 5 per cent of UK gas production, warned that a windfall tax could “make it harder” for companies like his to continue to “make the significant level of investment in which we are planning the next few years – this could lead to further shortages and price volatility as a result. ”
Analysts admit that investment in the North Sea has survived previous tax increases, no matter how much the industry has complained. But Derek Leith, global oil and gas tax leader at EY, suggested that the warning could be well-founded this time around given the changing attitude towards the sector.
Oil and gas producers are finding it more difficult to attract investment as banks and institutional shareholders tighten their environmental, social and corporate governance criteria. “Are you going to increase that investor uncertainty even more? [through the introduction of a windfall tax] to the detriment of [domestic] production?” Leith said.