UK hits oil and gas companies with 25% windfall tax

The UK government has introduced a US $6.3 billion tax on the profits of British oil and gas companies, alongside a $18.9 billion package of support for households to meet soaring energy bills and cost of living.

UK Finance Minister Rishi Sunak unveiled the so-called windfall tax of 25% on the profits of energy producers such as bp and Shell on Thursday. The levy will be phased out once oil and gas prices fall back to more normal levels, he said.

“The oil and gas sector is making extraordinary profits, not as the result of recent changes, risk-taking or innovation or efficiency, but as the result of surging global commodity prices,” Sunak said in a speech to parliament.

“We will introduce a temporary and targeted energy profits levy but we have built into the new levy a new investment allowance that means companies will have a new and significant incentive to reinvest their profits,” Sunak added.

The move is intended to provide each UK household a 400 pound discount on their energy bill and more for lower income households, and is the second emergency policy intervention in the UK to help with rising costs this year.

According to Sunak, the tax would raise $6.30 billion in the next 12 months and be phased out as oil and gas prices return to normal. He also said there would be a new Investment Allowance that would nearly double the tax relief available for companies on their investments.

Shares in British oil majors such as bp and Shell recovered strongly by more than 1% after touching session lows on Thursday.

“We have consistently emphasised the importance of a stable environment for long-term investment,” a Shell spokesperson said in a statement, and called the investment-linked tax relief measure a “critical principle” of the levy.

bp's profits for the first three months of this year have more than doubled after oil and gas prices soared, with the energy giant reporting a profit of $6.2 billion compared to $2.6 billion in the same period last year.

Shell similarly made $9.13 billion in the first three months of the year, nearly triple the profit it announced for the same period last year, but pulling out of Russian oil and gas due to the Ukraine conflict cost the company $3.9 billion.

UK Prime Minister Boris Johnson had earlier termed the windfall taxes a deterrent to investment.

The Financial Times reported earlier this week that the UK government would also likely target the profits of major electricity generating companies such as EDF and RWE – but Sunak indicated on Thursday that more time was needed to introduce a plan for the power sector.

On Tuesday, the head of the UK’s energy regulator said he expected the annual bills for millions of households to jump 40% to hit about $3,500 from October.