Offshore Energies UK (OEUK) responded to the levy by saying that supporting consumers through the current cost of living crisis is essential, but “damaging the UK energy industry with new taxes is no way to do it.”
“The new taxes imposed on the UK’s offshore oil and gas operators are a backward step by a government which, just weeks ago, pledged to build a greener and more energy-independent nation,” said OEUK.
“The Energy Profits Levy, announced today, will discourage UK offshore energy investments, meaning declines in oil and gas exploration and production, and so force an increase in imports.”
OEUK chief executive Deirdre Michie said the £5 billion in new taxes this year are in addition to the £7.8 billion the UK offshore oil and gas operators are already due to pay this year.
Michie said: “This is a disappointing and worrying development for industry, the shockwaves of which will be felt in offshore energy jobs and communities, and by consumers, for years to come.
“In April we welcomed the government’s British Energy Security Strategy, which pledged ‘Secure, clean and affordable British energy for the long term’. We thought long-term meant years or decades, but it seems to have meant just a few weeks.
“The strategy’s focus was on attracting investment to build a greener energy system to reduce dependence on imports. These new taxes will achieve the exact opposite of what the government promised in April.
“They will drive away investors and so reduce UK energy production. That means less oil, less gas, and less renewables. It also makes it much harder for the UK to reach net zero by 2050.”
“It’s essential to help consumers through this cost-of-living crisis but damaging the energy industry through sudden new taxes is the wrong approach.
“The short-term gain is small, but the long-term pain will be huge. In just a few years the UK will be even more reliant on other countries for its energy and consumers will still face rising bills.
“Right now, the key task is to prevent a flood of investment formerly earmarked for UK energy projects now being diverted to other countries.
“We need Downing Street and the Treasury to work with us to avoid the UK being starved of the tens of billions of pounds of investment needed to build the energy systems and energy security that will protect UK consumers from more crises like this one.”
Jamie Maddock, energy analyst at Quilter Cheviot: “It is a politically attractive policy, and in a year where energy producers are making huge profits the calls grew too loud to ignore.
“Sunak decided not to include renewable energy firms within the scope of the tax, leaving the burden on oil and gas producers.
“While a 25% levy may seem extreme, it comes with a generous opportunity to offset these charges with extra tax relief on investment.
“The government were clearly afraid these firms would abandon their investments in the energy transition and renewable space so felt compelled to offer a carrot to go along with the stick.
“However, despite the attractive tax breaks for investment, it is unlikely to meaningfully incentivise a change in attitude towards investing in UK energy.
“These companies are already feeling pressure from shareholders to continue with the transition to a cleaner world regardless of the tax environment of the day and they are beginning to see their role in a net zero world more clearly by the day.
“We would expect the level of investment to remain consistent even after today’s announcements.
“What will become interesting is for how long this windfall tax will remain in place.
“Sunak said it will phase out when prices reach more normal levels, but fails to define what that is or who will determine what is acceptable.
“Clearly inflationary pressures are here for a longer period than first expected and geopolitical events mean the price of oil and gas is likely to remain raised well beyond this year.
“If these companies continue to benefit from higher prices over the next two to three years just how temporary will this windfall tax be? As is often the case, it will all depend on the political mood of the day.”
James Lynch, fixed income investment manager at Aegon Asset Management: “Today, the Chancellor has announced new measures to help with the cost-of-living crisis which amount to £15.3bn of new spending.
“The government will raise £5bn from an energy profits levy and £10bn will be courtesy of the Treasury.
“However, there is an incentive to invest for the oil and gas companies as there will be an 80% investment allowance against this tax.
“The Chancellor was clear any support for cost of living should be ‘timely, targeted and temporary’, so these measures do not add to the inflationary problem but rather help the most vulnerable at the most difficult of times.
“The political pressure to do more is always there.
“By announcing these measures before the next round of Ofgem increases in October (potentially another 50% rise on energy bills), there will inevitably be more pressure again in the Autumn, perhaps to go further and include more blunt measures such as VAT cuts.”
Alison Williams, Global Head of Data at customer data science firm DunnHumby and member of the UK Trade and Business Commission: “While it is right that the Chancellor acts to help people struggling to pay their energy bills, this is a short term intervention for a crisis many expect to extend past 2023 and so Ministers must tackle the causes of rising costs rather than solely treating the symptoms.
“Earlier this year we heard how new barriers to trade are increasing prices across the UK including by hiking the cost of school shoes by five to ten pounds, so while there is much that the government cannot control in this cost of living crisis, they can reduce red tape for British importers and exporters that is artificially increasing prices further.”
Hannah Essex, Co-Executive Director of the British Chambers of Commerce: “The sheer scale of the cost-of living crisis facing the British public means the Government is absolutely right to provide additional support to those worst affected.
“For business, the toxic mix of inflation, raw material costs and supply chain disruption is the flip-side of the coin to the problems facing consumers.
“Unless steps are also taken to ease business costs, they will likely feed into the inflationary pressure on the economy and quickly eat into the financial support announced today.
“A reduction in VAT to 5% on businesses’ energy bills would directly alleviate some of this pressure to raise prices.
“The Treasury must urgently consider the actions set out in our call for an Emergency Budget which would provide a way to break the inflationary cycle.
“If we can ease the pressure on businesses then they can keep a lid on the price rises. Firms will then have the breathing space they need to raise productivity and strengthen the economy.
“But a change of course is needed now. If the government does not act quickly then rising costs will put our economy in a stranglehold.”
Susannah Streeter, senior investment and markets analyst, Hargreaves Lansdown: “As Chancellor Rishi Sunak perfected his U-turn on a windfall tax, the share prices of BP and Shell also looped lower, before climbing back up, as investors shrugged off its impact given that it is expected to be a short lived hit.
“It may mean dividends are pushed lower temporarily, but given that tax will reduce if companies invest more, it’s likely to mean an acceleration of investment by BP and Shell, a strategy which will be welcomed by many investors who see environmental progress and not just shareholder pay-outs as crucial for their long term growth prospects.
“A chunk of profit may still be scooped from the oil and gas majors but the levy will still represent just the cream on the top of fat volumes of cash being generated by energy giants due to the higher price of oil.
“A barrel of Brent crude, the international benchmark, has edged higher to just shy of $115 dollars. It is up by around 50% since the start of the year pushed higher by the outbreak of war in Ukraine.
“Putting hundreds of pounds back in the purses of hard pressed consumers has also helped lift shares in retailers, which have been sliding over the feared repercussions of the cost-of-living crisis.
“Ocado, Next and B&M European Value Retail and Primark owner Associated British Foods climbed sharply amid hopes that shoppers will keep spending briskly, now that household incomes won’t take such a battering.
“It’s not clear exactly what range the normal pricing will be for the windfall tax to be blown away but a lower oil price would see the levy being lifted. However for now the price is set to stay elevated due to significant supply concerns.
“The US has banned Russian energy imports and the UK will phase them out by the end of 2022.
“An EU crude embargo on Russian oil is inching closer amid ongoing discussions about concessions to Hungary, a country which is heavily reliant on the imports.
“If a ban is slapped on, European countries would look elsewhere in the world for their needs.
“OPEC+, the cartel of oil producing nations has been hesitant about turning on the taps more fully adding to the squeeze in supplies, partly due to production capacity issues.
“The wariness among energy firms about investing in fossil fuels as pressure mounts for the transition to greener energy appears to be acting as a cap on money flowing into production.
“Meanwhile demand is staying buoyant, despite ongoing concerns over China’s zero-Covid policy leading to a drop in consumption.
“Recent data for mid- May has shown a fall in U.S. crude and gasoline inventories. This comes just as demand for oil is expected to rise in the coming weeks as the so-called driving season in the US revs up and millions of Americans are set to release pent-up demand for travelling and head off on trips over the summer.
“Slowing economies however could pull down the price of oil. The UK is forecast to enter recession by the end of the year and US economic growth is also expected to cool off which could lower demand for crude.”