EU Fossil Fuel Windfall Bark Worse Than Bite

BofA Global Research analysts believe the EU’s latest declaration of intending to claw back EUR 23 billion [$23 billion] in ‘solidarity contributions’ from its fossil fuel industry is limited by the lack of ‘excess’ oil and gas earnings generated on European soil, a new report from the company has outlined.

“Not surprisingly, the EU’s definition of ‘excess earnings’ is said to start at more than 20 percent above average 2019-21 levels, when Brent oil prices averaged less than $60 per barrel,” BofA Global Research analysts stated in the report.

“But even if successfully clawed back from Big Oil alone, we calculate these EUR 23 billion ‘solidarity contributions’ would account for less than four percent of market cap. We reiterate as top picks Equinor, Shell, TTE and Harbour Energy offering significant upside from exposure to higher-for-longer LNG and TTF prices,” the analysts added.

In the report, BofA Global Research analysts highlighted that European gas storage levels at 84.5 percent already exceed mandatory 80 percent October targets “thanks to record summer gas prices cutting demand and diverting LNG away from Asia to Europe”.

The analysts noted in the report that “this may well have emboldened Europe’s policymakers to shift their energy trilemma priority from security of supply to affordability as they now attempt to claw back ‘excess earnings’ in order to alleviate energy price inflation”.

On September 14, the European Commission (EC) proposed a temporary solidarity contribution on excess profits generated from activities in the oil, gas, coal and refinery sectors which are not covered by a proposed inframarginal revenue cap.

The EC highlighted on its website that the proposed Council Regulation on a solidarity contribution of the fossil sector requires a qualified majority vote in the Council to be approved. The solidarity contributions of the fossil sector would be applied for one year after entering into force, the European Commission outlines on its site. 

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