North Sea oil and gas producers try to head off windfall tax

North Sea oil and gas producers on Tuesday rebuffed calls for the UK government to levy a windfall tax on their profits to offset the impending rise in household energy bills pointing out it is already reaping higher receipts from the industry.

A one-off windfall tax on the sector is one of several options being considered by the Treasury as ministers come under mounting pressure to address a looming cost of living crisis. The opposition Labour party at the weekend said such a levy could partly fund its proposed cuts of about £200 to all household energy bills this year.

Household budgets will come under severe strain in April with the cap that limits energy bills for more than 15m households set to jump by more than £700 to £2,000. This will coincide with a big rise in national insurance and income tax with inflation at its highest in a decade.

But OGUK, the trade body representing offshore oil and gas operators, has hit back, claiming the Treasury is already benefiting from surging gas prices “without any need for a windfall tax”.

OGUK has calculated the industry will pay an extra £3bn in tax in the two years from April 2021 because of high commodity prices. This comes on top of an expected £2bn already factored into government forecasts, the group said, making a total of contribution from the industry of £5bn.

“The UK Treasury is already gaining significantly from these [gas] price rises,” said Jenny Stanning, external relations director at OGUK, although she admitted the actual outcome would depend on commodity price fluctuations.

Government officials 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 pushback, the industry would struggle to make a convincing argument in the face of public opinion. Many oil and gas producers are expected to unveil strong financial results off the back of soaring gas prices at around the same time that the energy regulator Ofgem is expected to confirm the sharp rise in the domestic energy price cap on February 7.

Oil major Shell will publish its earnings on February 3. While rival BP — whose chief executive Bernard Looney recently boasted that high oil and gas prices had turned his company into a “cash machine” — is due to report on February 8.

“They [oil and gas producers] are the main beneficiaries of [elevated gas prices] and the main people who are going to suffer from it are old age pensioners and various other people who need help with their heating bills,” said Graham Kellas, senior vice-president of global fiscal research at the consultancy Wood Mackenzie. “They’re not going to get very much sympathy.”

Successive governments have a long history of manipulating tax rates on the oil and gas sector to make the most of commodity price booms, analysts said.

“What the UK government has done — and this is whether it has been Tory or Labour — [is] they have manipulated the tax rates and the allowances [for the UK North Sea] on a pretty frequent basis and it is normally as a response to significant changes in the [oil or gas] price environment,” said Kellas.

A mechanism for a “windfall tax” already exists: the “supplementary charge” is levied on producers’ British activities on top of corporation tax. The supplementary levy is 10 per cent. But in 2011 it was raised to 32 per cent from 20 per cent by the then Tory chancellor George Osborne to pull in extra revenue as he sought to cash in on high oil prices.

The sector also pays higher corporation tax of 30 per cent compared to standard 19 per cent rate.

Nevertheless, compared with tax regimes for fossil fuel extraction elsewhere in the world, the UK North Sea enjoys one of the most favourable, with upsides including a reduction in the petroleum revenue tax rate to zero in 2016 and allowing companies to use it to reclaim some losses and decommissioning costs.

An oil rig in the UK sector of the North Sea © PA Wire/PA Images

Operators said the favourable regime was necessary given the basin’s age, which makes it more expensive to extract remaining reserves.

They also argue further tax increases would merely stifle investment in the North Sea, where production peaked at the end of last century and is now in long-term decline. This would affect their ability to maintain dwindling domestic supplies, leaving the UK, which already imports more than 50 per cent of its gas, even more dependent on countries such as Russia and Qatar.

Mitch Flegg, chief executive of Serica Energy, which accounts for 5 per cent of UK gas production, warned that a windfall tax could “make it more difficult” for companies like his to continue “making the significant level of investment we’re planning in the next few years — that may lead to further shortages and price volatility as a result.”

Analysts concede that investment in the North Sea has survived previous tax increases, however much the industry has complained. But Derek Leith global oil and gas tax leader at EY, suggested that the warning this time could be well-founded given the changing attitude towards the sector.

Oil and gas producers are finding it harder to attract investment as banks and institutional shareholders tighten up 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.

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