The UK Government’s windfall tax on North Sea oil and gas producers will not be applied if energy prices drop below certain levels for six months in a row, the UK Treasury said on Friday.
The energy profit levy (EPL) was introduced in May 2022 after a spike in energy prices amid Russia’s invasion of Ukraine.
The levy was raised from an initial 25% rate to 35% in November, raising the overall tax burden to 75%. The Treasury said the move has raised £2.8 billion so far.
Under Friday’s proposal the windfall tax would be removed, reducing the tax burden to 40%, if average oil and gas prices fall to or below $71.40 a barrel for oil and £0.54 per therm for gas for two consecutive quarters.
However, the Treasury said independent forecasts by the Office for Budget Responsibility suggest the price floor mechanism is unlikely to be triggered before the windfall tax’s planned end date in March 2028.
Benchmark Brent crude oil prices have fallen from a peak of about $139 a barrel in March 2022 in the wake of Russia’s invasion of Ukraine to a current level of about $75 a barrel.
British wholesale gas prices soared in March 2022 to record highs of around £6 per therm, but the benchmark front-month British gas price is currently trading around £0.63. It last traded below £0.54 in April 2021.
The North Sea Transition Authority (NSTA) estimates that from output of about 4.4 million barrels of oil equivalent per day (boed) — more than Iraq — at the start of the new millennium, the UK North Sea now produces about 1.3 million boed and is currently on course for a decline to less than 200,000 boed by 2050.
The Treasury said in a statement: “Put in place to tax extraordinary profits made by industry following record high prices of oil and gas driven by Putin’s invasion of Ukraine, the levy has raised around £2.8 billion to date and is expected to raise almost £26 billion 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, industry has warned that companies are cutting back on investment. This puts the long-term future of the UK’s domestic supply at risk, meaning we would be forced to import more from abroad at a time when reliable and affordable energy is a focus for families and businesses.
“In response to this, the Government has today announced an Energy Security Investment Mechanism to give the oil and gas sector certainty to raise capital and invest in new and existing projects, securing affordable and reliable domestic energy supply and protecting some of the 215,000 British jobs the sector supports.
“It will mean that if prices fall to historically normal levels for a sustained period the tax rate for oil and gas companies will return to 40%, the rate before the Energy Profits Levy was introduced. Based on the independent Office for Budget Responsibility’s forecast the Energy Security Investment Mechanism won’t be triggered until before the tax’s planned end date in March 2028.
“In light of Putin’s weaponisation of energy, the UK government is taking concrete steps to accelerate home-grown sources of energy to reduce the UK’s reliance on foreign imports.
“In October 2022, the industry regulator the North Sea Transition Authority (NSTA) opened applications for oil and gas licences to explore and potentially develop 898 blocks and part-blocks in the North Sea which may lead to over 100 licences being awarded from later this year.”
Gareth Davies MP, Exchequer Secretary to the Treasury, said: “It is right that we recover excess profits resulting from Putin’s war and use the money to help people with their energy bills. Thanks to the revenue raised from windfall taxes on energy profits, we will have helped save the typical household £1,500 on their energy bill by July.
“While we stepped into help, never again can our energy supplies be at the whim of petrostate despots like Putin. That’s why it’s so important that we secure investment in our own domestic supply, protecting the tens of thousands of British jobs that come with it.
“It would be beyond irresponsible to turn off the North Sea taps overnight. Without oil and gas from British waters, we would be forced to import even more from overseas, putting our security of supply at risk.”
REACTION:
Russell Borthwick, chief executive at Aberdeen & Grampian Chamber of Commerce: “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 are pleased that the Chancellor has listened to an industry that directly employs over 200,000 people in the UK – a quarter of them in the North-east of Scotland – and currently provides the domestic energy security to keep the lights on.
“Since it was put in place a year ago, and then further increased, this ill-thought-through tax raid has achieved little other than to shatter confidence in the sector, cost jobs, caused investment to be cancelled or driven overseas and further threatens our ability to deliver energy transition.
“Today’s intervention tells us that the UK government clearly now recognises their mistake.
“Prices have already returned to historically normal levels, so there are no windfall profits to tax. The changes announced today will do little to reverse the worrying trends we are seeing as it’s highly unlikely the oil price will fall below the floor for a six-month period any time soon.
“A punitive tax rate of 75% – 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 revised downwards urgently.
“We urge government to work with the industry and re-think the terms of the changes being made to EPL, as in their current form, they will make no material difference.
“Get the fiscal conditions right however and the prize could be billions of pounds worth of investment and thousands of new jobs being created in the North Sea.”
OEUK chief executive David Whitehouse: “We’ve always been clear that when the windfall conditions go, the windfall tax should go.
“This is a step in the right direction, but many more will need to be taken to restore confidence to our sector. We will now work closely with government and lenders to understand the detail of the measure and its effectiveness at unlocking investment.
“Enabling continued UK energy production now and in future depends on a predictable and fair fiscal environment. The UK must be competitive if we are to be successful in the global race for energy investment.
“We are proud to make a huge contribution. In 2022/23 alone we will add over £20bn to the UK economy overall. We provide over 200,000 good, skilled jobs across the length and breadth of the UK.
“As we build the future there is no simple choice between oil and gas or renewables. The reality is we need both. In the mid-2030s, oil and gas will still provide 50% of our energy needs.
“By investing in homegrown production, we avoid costlier, less secure and higher carbon imports while supporting an industry we need to make cleaner, more affordable energy in the UK, for the UK. Our sector is expanding into renewable energy, supported by a world class supply chain.
“We will continue to work closely with government and all parties on the journey to restore sector confidence.”