OEUK: Raising windfall tax could put oil & gas investments at risk and undermine UK’s energy security
UK’s representative body for the offshore energy industry, Offshore Energies UK (OEUK), has warned that the windfall ‘supertax’ proposal risks driving out oil and gas investments from the UK waters. As a result, this has the potential to hinder the UK’s energy security along with its transition plans for a low-carbon future.
This warning comes after reports of a proposed windfall ‘supertax’ surfaced this weekend. Offshore Energies UK – former Oil & Gas UK (OGUK) – said that its members were shocked by it. If Jeremy Hunt, the Chancellor, carries out the threats, trailed in the media, to raise the windfall tax to 35 per cent, this risks driving oil and gas companies out of investing in UK waters, says OEUK.
Furthermore, OEUK explained that the UK’s oil and gas producers were already paying an effective tax rate of 40 per cent, “the highest rate of any industrial sector,” on the profits from oil and gas production, before the additional 25 per cent windfall tax was imposed earlier this year. This means they are already now paying a 65 per cent tax rate, which raised concerns a few months ago that some oil and gas projects could be at risk.
Therefore, if the UK government added another 10 per cent to the windfall tax, it would push the overall tax level to 75 per cent, “a rate so high that many oil and gas producers would have to reconsider investment plans worth billions,” underscored OEUK, adding that its members were “proud to pay their taxes but long-term fiscal stability and intelligent taxation are essential” to the future of an industry that plans and invests over years and decades.
Commenting on this, an OEUK spokesperson, outlined: “We’re completely taken aback by this, coming just days before the Chancellor gives his fiscal statement. Our industry plays a critical role in providing reliable and responsible supplies of energy to the UK, with all the benefits that brings in generating taxes, secure energy and jobs for UK workers.
“Imposing sudden extra taxes will make it even harder for these companies to invest in UK energy production – both the gas and oil we need today, and the wind, hydrogen and other low-carbon energies we need to reach net-zero by 2050.”
Offshore Energies UK also warned that a reduction in investment would soon translate directly into reduced domestic production of gas and oil, “damaging jobs, undermining the UK’s energy security and driving up imports.” In addition, it would reduce the tax income in the long term, as the Chancellor can only tax the profits on oil and gas produced in the UK waters and not those earned on overseas production, even for companies based in the UK.
Bearing this in mind, OEUK points out that if UK production of oil and gas declines then the tax take will fall too, making it “even harder to increase domestic production of lower-carbon energies.” As 75 per cent of total energy comes from oil and gas, OEUK believes that the UK should be doing all that can be done to protect its North Sea energy industry.
“We need a diverse range of offshore operator and supply chain companies with the skills and people to build the low-carbon energy future we all want to see. It deeply concerns us that the complexity of the UK offshore energy sector is not being considered when we are on the cusp of such an important transition,” added the OEUK spokesperson.
Furthermore, as the UK faced a £39 billion net import bill for oil, gas, and electricity between January and September this year – “a five-fold increase over the same period last year, according to the latest government trade statistics” – this has prompted Offshore Energies UK to warn that further import cost surges could follow, especially if windfall tax increases deter investment and so make the UK more reliant on imported energy.
Deirdre Michie, chief executive of OEUK, stated: “While the UK will always import and export energy it makes sense that we make the most of the resources in our own backyard, meaning the North Sea, with all the benefits that brings such as generating UK taxes, jobs and energy security.
“We know that today, shortfalls in domestic gas production must be met by imports to help heat homes, power businesses and supporting UK manufacturing. But with the UK paying £39 bn for imports, people will wonder why we are not prioritising gas produced here and encouraging companies to invest.”
Domestic gas production plays “an important role in reducing the UK’s reliance on imports,” which is particularly relevant when global demand is high and costs for European gas and international sources of LNG are higher than usual.
Taking this into account, Offshore Energies UK highlighted in its earlier statements that an increase in domestic production could only be sustained with continued investment in oil and gas reserves, urging the UK government to prioritise domestic energy production to protect consumers from supply and price shocks.
As domestic gas production continues to meet around half of the UK’s needs, OEUK emphasises that uncertainty over the future of the North Sea, including future taxes and regulation, means “production is falling and could fall faster,” which would result in the UK increasing its reliance on imported gas even further at a time of competitive global demand and shortages.
Offshore Energies UK believes that the energy price crisis has underlined why the UK should make the most of its domestic resources while energy security represents another “key reason” for maintaining domestic production. This leads to benefits through “taxes paid, jobs supported, direct influence over any emissions associated with their production, while also retaining the companies needed to invest in and drive the transition to cleaner UK energies.”
Without such investment, imports would surge so that by 2030, the UK would have to import 80 per cent of its gas and 70 per cent of its oil, putting at risk “tens of thousands” of industry jobs. In line with this, tax revenues would plummet since oil and gas from outside the UK are not subject to UK production taxes.
Moreover, OEUK elaborates that replacing the existing infrastructure with low-carbon alternatives is predicted to take at least three decades “during which secure supplies of oil and gas will be essential, albeit in diminishing amounts.”
“The UK and our industry are already in action, progressing a rapid transition to green energy – with UK companies set to invest up to £200 billion in offshore energies in this decade alone. But a homegrown transition will only happen if we have the companies, jobs and innovation we need, based here in the UK,” concluded Michie.