Windfall Tax Branded a Backward Step

Windfall Tax Branded a Backward Step
The industry has called for an Energy Summit involving Downing Street, the Chancellor and leaders from the UK's offshore energy operators and supply chains.

The new taxes imposed on the UK’s offshore oil and gas operators are a backward step.

That’s according to industry body Offshore Energies UK (OEUK), which said that the Energy Profits Levy announced on Thursday will discourage UK offshore energy investments, meaning declines in oil and gas exploration and production, and so force an increase in imports.

In a statement posted on OEUK’s website, the organization’s chief executive, Deirdre Michie, said investor confidence depended on taxes being predictable, so the introduction of a new one, without any formal consultation, would also undermine investment in offshore wind and other low-carbon energies.

OEUK highlighted in the statement that the government had opposed calls for a windfall tax and added that Thursday’s announcement had disappointed the industry, undermined trust and created long-lasting uncertainty over future investment. OEUK, which said the new tax could undermine investments for years ahead, revealed that it would review the proposals in full, including the impact of the new investment allowance. The industry body also revealed that the industry has called for an ‘Energy Summit’ involving Downing Street, the Chancellor and leaders from the UK’s offshore energy operators and supply chains.

“This is a disappointing and worrying development for industry, the shockwaves of which will be felt in offshore energy jobs and communities, and by consumers, for years to come,” Michie said in the OEUK statement.

“In April we welcomed the government’s British Energy Security Strategy, which pledged ‘Secure, clean and affordable British energy for the long term’. We thought long-term meant years or decades, but it seems to have meant just a few weeks,” Michie added in the statement.

“The strategy’s focus was on attracting investment to build a greener energy system to reduce dependence on imports. These new taxes will achieve the exact opposite of what the government promised in April. They will drive away investors and so reduce UK energy production. That means less oil, less gas, and less renewables. It also makes it much harder for the UK to reach net zero by 2050,” Michie continued.

The OEUK chief executive noted that it’s essential to help consumers through the cost-of-living crisis but added that damaging the energy industry through sudden new taxes is the wrong approach.

“The short-term gain is small, but the long-term pain will be huge. In just a few years the UK will be even more reliant on other countries for its energy and consumers will still face rising bills,” Michie said.

“Right now, the key task is to prevent a flood of investment formerly earmarked for UK energy projects now being diverted to other countries,” Michie added.

“We need Downing Street and the Treasury to work with us to avoid the UK being starved of the tens of billions of pounds of investment needed to build the energy systems and energy security that will protect UK consumers from more crises like this one,” Michie went on to say.

On May 26, HM Treasury (HMT) announced a new, temporary energy profits levy on oil and gas firms, which it said will raise around $6.28 billion (GBP 5 billion) over the next year to help with cost of living. The new levy will be charged on oil and gas company profits at a rate of 25 percent and will be phased out if oil and gas prices return to historically more normal levels, HMT outlined.

HMT also announced a new investment allowance to encourage firms to invest in oil and gas extraction in the UK. The new investment allowance is similar in style to a “super-deduction” and incentivizes companies to invest through saving them $1.14 (91 pence) for every $1.25 (GBP 1) they invest, HMT highlighted. This nearly doubles the tax relief available and means the more a company invests, the less tax they will pay, HMT noted.

We know that people are facing challenges with the cost of living and that is why … I’m stepping in with further support to help with rising energy bills,” Rishi Sunak, the chancellor of the exchequer, said in HMT’s May 26 announcement.

“We have a collective responsibility to help those who are paying the highest price for the high inflation we face. That is why I’m targeting this significant support to millions of the most vulnerable people in our society. I said we would stand by people and that is what this support does,” he added in the statement.

“It is also right that those companies making extraordinary profits on the back of record global oil and gas prices contribute towards this. That is why I’m introducing a temporary Energy Profits Levy to help pay for this unprecedented support in a way that promotes investment,” Sunak continued.

Rigzone emailed HMT asking if the government ministry has any comment on OEUK’s latest windfall tax statement. HMT responded by pointing Rigzone to its May 26 announcement. 

The UK’s opposition Labour party has been pushing for a “windfall tax” on energy profits for some time, although the ruling Conservatives voted against the idea last week.

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