North Sea windfall tax hits undermine UK’s energy security goals
Two of the UK’s largest North Sea oil and gas operators confirmed huge hits from the windfall tax in their latest trading updates last week, reflecting that companies are still being bludgeoned by the levy long after oil and gas prices started to ease this year.
Last Wednesday, Ithaca Energy reported a £175m blow directly from the windfall tax over the first six months of trading, eating into its earnings.
A day later, Harbour Energy revealed it suffered a billion dollar swing into the red, bearing the brunt of a £312.1m tax blow from a combination of the energy profit levy and the special corporation tax rate.
This follows Office for Budget Responsibility (OBR) calculating the Energy Profits Levy (EPL) brought in £5.1bn for the 2022/23 financial year.
However, the context for bringing in the windfall tax, to harness record profits to fund support packages for households and businesses amid a cost of living crisis, is starting to fade.
The price cap for energy bills has dropped to below £2,000 per year, less than half its peak, reflecting the fact gas prices have eased from a record near £8 per therm last summer to well below £1 per therm this year.
Oil prices have also stabilised at around $80-90 per barrel – down from last year’s 14-year peak of $139 per barrel.
Following the budget in March, the OBR downgraded its forecasts for the amount of money it expects the EPL and corporation taxes to take over the latest two years of trading.
It dropped its forecasts from £35.6bn to £21.4bn – a 40 per cent nosedive – exposing the reality commodity prices are lower than expected.
Yet, the windfall tax, hiked to 35 per cent under Chancellor Jeremy Hunt, will remain in play until 2028 alongside the 40 per cent special corporation tax.
This effective 75 per cent tax rate has led to both producers reiterating that they will reduce investments in the UK.
Most recently, Ithaca opted against proceeding with further drilling at its Harriet field due to the UK’s unfavourable investment climate, prepared to take a £257m blow from impairment charges.
The company has warned investors it would also need to pursue more merger opportunities to consolidate its position “until the fiscal is regime is improved.”
Harbour is committed to developing Viking and Acorn CO2 capture and storage (CCS) projects in the UK but it is is still looking to diversify operations from domestic waters.
As it stands, 85 per cent of its operations are based in the UK, but it has confirmed fresh developments in Mexico and Indonesia.
So far, government attempts to sweeten the sentiment of North Sea oil and gas producers has not succeeded, with the introduced price floor for the EPL unlikely to kick in before its conclusion, while the consultation of the tax regime underway only refers to the investment climate from 2028.
Harbour even confirmed in its results price floor in the windfall tax will have “no material effect on the company,” which has also slashed jobs in the UK and opted against participation in the latest oil and gas licensing round.
Meanwhile, pledges for over 100 new licences are unlikely to be triggered for a decade, if at all.
These decisions are more than a mere strop, with domestic oil and gas exploration considered an essential component of the government’s supply security strategy.
As the government gears up to return from recess, it is clear more will have to be done if it wants to win over a sceptical industry and bolster future domestic oil and gas output.