Yahoo Finance North Sea producers accuse Hunt of ‘pointless’ overhaul to windfall tax
Ministers are facing a backlash over “pointless” changes made to the oil and gas windfall tax, with North Sea firms warning jobs and investment are still at risk.
Oil producer Apache on Friday revealed plans to layoff British workers and suspend drilling in the North Sea, blaming the “challenging UK macro environment with its increasingly costly and burdensome tax and regulatory regime”.
The announcement came hours after the Treasury confirmed it would add a “floor” to the energy profits levy, triggered when oil and gas prices dip below certain levels for at least six months.
This would take the effective tax rate on oil and gas production – which North Sea companies say is killing off investment – down from the current 75pc level, to 40pc.
Gareth Davies, the Exchequer Secretary, claimed the changes would give the industry “certainty to invest in domestic energy”.
But the shake-up was met with a backlash from industry bosses, who said it would make no difference.
One oil executive, asked about the changes announced on Friday, replied: “You don’t print expletives do you?
“What’s the point of it? [It] won’t encourage banks to finance or companies to invest.”
Ryan Crighton, policy director at Aberdeen & Grampian Chamber of Commerce, said: “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.
“We urge the Government to work with the industry and re-think the terms of the changes being made, as in their current form they will make no material difference.”
However, a Treasury source pushed back against suggestions the policy would be changed again, arguing that the tax’s floor had been set at a “fair” level.
“As long as there are windfall profits, there will be a windfall tax,” the source added. “We think we have got the balance right.”
Under the changes, the windfall tax will be eased if oil and gas prices fall below their 20-year average for at least two consecutive quarters.
The thresholds will be set at $71.40 for crude oil and 54 pence per therm for gas.
However, both price thresholds need to be triggered at the same time for the tax rate to drop, while the Treasury said it did not expect the requirements to be met before the tax is phased out in 2028 anyway.
Brent crude oil was trading at $76 per barrel on Friday, while UK natural gas was priced at 60 pence per therm.
Analysts at Stifel said that while the oil price was expected to dip below the Treasury’s new threshold in 2024, according to market predictions, natural gas was not expected to do so at any point.
They said it was therefore “hard to see the price floor trigger conditions being met”.
Oil and gas companies have previously warned that without significant change, the windfall tax will cause job losses and stunt investment.
Harbour Energy, the biggest North Sea producer, blamed the windfall tax for its decision to axe 350 jobs in April, while French giant TotalEnergies responded by vowing to slash investment in the North Sea by 25pc this year.
A particular problem industry lobbyists have pointed to is the tax’s impact on oil and gas financing, particularly for smaller, independent producers.
Banks offer loans to North Sea firms based on the value of their discovered reserves, which are directly affected by higher levels of tax.
In a note to clients, analysts at Stifel said the changes to the windfall tax would improve the situation – but only slightly, with lending capacity falling by 30-40pc instead of 50pc.
“We also note that this is now the tenth change to UK energy industry taxation since 2002, which underlines the complete lack of stability and certainty that is required for investment,” they added.
Industry insiders said they would now lobby for the tax’s floor level to be raised, or for the oil and gas thresholds to be made separate.
Mr Crighton said prices had “already returned to historically normal levels, so there are no windfall profits to tax”, adding that it was unlikely the oil price would dip below $72 per barrel for six months “any time soon”.
He added: “A punitive tax rate of 75pc – 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 to be revised downwards urgently.”
Gareth Davies MP - Exchequer Secretary to the Treasury
We need to be realistic about oil and gas. The transition to net zero cannot happen overnight, and we will need North Sea oil and gas for years to come. We can’t just turn off the taps like some are suggesting and hope for the best.
Labour’s ill-conceived proposal to ban new licences for oil and gas extraction in the North Sea puts our energy security at risk.
It also puts hundreds of thousands of jobs at risk, with Offshore Energies UK estimating there are around 215,000 UK jobs that are reliant on the oil and gas sector.
And our forecasts suggest that blocking North Sea oil and gas investment would mean the UK’s dependence on imports would rise from 50 per cent today to 80 per cent by 2033.
Given the painful lessons we learnt last winter about the importance of domestic energy supply, these are chilling figures which hammer home just how vital investment in domestic energy supplies are.
This government’s view is we should focus on energy resilience, not weakness and dependency which seems to be the Labour Party’s policy – putting ideology ahead of jobs, investment, and our national security.
That’s why I announced the Energy Security Investment Mechanism to give the oil and gas sector certainty to invest in domestic energy, while protecting some of the hundreds of thousands of British jobs the sector supports.
Back in May 2022, we introduced the Energy Profits Levy, a windfall tax which brings the headline tax rate on profits from North Sea oil and gas firms’ UK production to 75pc – one of the highest tax rates for oil and gas production globally – helping to cut the typical household energy bill by around half this winter.
The levy has raised around £2.8bn to date and is expected to raise almost £26bn by March 2028 – 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, we have heard from industry that companies are cutting back on investment.
This puts the long-term future of the UK’s domestic supply at risk. That could force us to import more from foreign countries – and precious British jobs would be lost.
But this change will give the oil and gas sector certainty to raise capital and invest in new and existing projects, securing affordable and reliable domestic energy supply.
It will mean the levy will remain in place for the next five years as planned while oil and gas prices remain higher than historic norms – but if prices fall to historically normal levels, the tax rate for oil and gas companies will return to 40pc, the rate before the Energy Profits Levy was introduced.
That rate is still significantly higher than the main rate of corporation tax at 25pc which is paid by every other UK business.
Meeting oil and gas firms yesterday in Aberdeen, I was clear this will only happen if both average oil and gas prices fall to, or below, $71.40 per barrel for oil and £0.54 per therm for gas, for two consecutive quarters.
Based on the independent OBR’s forecast the Energy Security Investment Mechanism won’t be triggered until before the tax’s planned end date in March 2028.
We will continue ensuring that oil and gas companies pay their fair share, but it’s also important that the Government supports jobs, supply chains and the country’s energy security.
The Energy Security Investment Mechanism does just that.
It should give operators and lenders the confidence they need to keep investing in the UK’s domestic energy reserves, whilst being clear that while prices remain high, we will continue to tax extraordinary profits.
But we will not leave British oil and gas workers behind in our transition to clean, cheap, home-grown energy.
We will harness the skills, capabilities and pent-up private investment potential of the oil and gas sector to power new clean technologies like hydrogen and carbon capture – key to growing our economy – not take Britain’s oil and gas industry out at the knees.
Because at the end of the day, the only people that benefit from Keir Starmer’s energy policy are dictators and petrostate autocrats like Vladimir Putin.
