UK’s Path to Curbing Oil Windfall Tax Slated by Industry

image is BloomburgMedia_RVYBLXT0G1KW01_09-06-2023_10-22-05_638218656000000000.jpg

Mobile offshore drilling units stand in the Port of Cromarty Firth in Cromarty, U.K., on Wednesday, March 22, 2017. Even as oil production declined in the North Sea over the last 15 years, economic activity has been buoyed by offshore windmills. Photographer: Chris Ratcliffe/Bloomberg

The UK Treasury announced a plan to ease a windfall tax on the profits of UK oil and gas companies, but the measure was quickly criticized as insufficient to boost investment in the North Sea.

The tax rate, which has been at 75% for the companies since last year, will return to 40% if average energy prices fall to $71.40 a barrel for oil and 54 pence a therm for gas for two consecutive quarters.

The government said it is aiming to secure energy supply and protect jobs, but it acknowledged that the measure is unlikely to kick in before 2028, when the windfall tax is due to end anyway — and by which time a new government is due to be office. 

The Conservative administration reluctantly enacted the tax last year with energy prices soaring and the opposition Labour Party surging in the polls, buoyed in part by calls for clawing back company profits. It has has already raised £2.8 billion ($3.5 billion), useful revenue at a time when the UK faces a growing hole in public finances due to rising borrowing costs.

Oil and gas prices have already fallen significantly from last year’s highs. Representatives of the North Sea fossil fuel industry warned that the threshold to remove the windfall tax is too low to make a difference for investment. 

“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 canceled or driven overseas,” said  Ryan Crighton, policy director at Aberdeen & Grampian Chamber of Commerce. “The changes announced today will do little to reverse the worrying trends we are seeing.”

Most crucially, the windfall tax has made it much harder for developers to access debt to finance new investment. The change to the windfall measure may not be enough to help ease the flow of cash.

“This is a first step, but more will be needed to restore confidence to invest in the North Sea,” said Chris Wheaton, analyst at Stifel. “It should improve the situation in terms of access to debt capital, but banks may still view the UK as too risky to lend into.”

The potential softening of the tax illustrates the government’s desire to spur investment and boost economic growth, while making the country less dependent on imports of oil and gas. The levy was introduced in May 2022 in response to soaring prices exacerbated by Russia’s invasion of Ukraine, and amid political pressure to grab funds from companies and use them to help households. 

Reducing it is politically tricky, with Labour pledging to block new North Sea oil and gas exploration and calling for an extension of the current tax.



(Updates throughout)

©2023 Bloomberg L.P.

By Alex Wickham, Joe Mayes , William Mathis


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