UK government imposes extra levy on oil and gas profits

May 27, 2022
Britain’s government has responded to public pressure to help alleviate rising energy prices by introducing an Energy Profits Levy.

Offshore staff

LONDON — Britain’s government has responded to public pressure to help alleviate rising energy prices by introducing an Energy Profits Levy.

This is a new 25% surcharge on what the government describes as “the extraordinary profits” the U.K. oil and gas sector is achieving in the current market, with oil prices nearly doubling since early last year, and gas prices more than doubling over the same period.

The government expects to raise about £5 billion ($6.3 billion) over the next year from the new measure, some of which will cover rebates of £400 ($504) for each U.K. household’s energy bill later this year.

To offset the impact on the industry, Chancellor Rishi Sunak also announced a new "super-deduction" style relief, intended to incentivize companies to invest in oil and gas extraction on the U.K. Continental Shelf.

With the new 80% Investment Allowance, businesses should derive a 91p tax saving for each £1 that they invest. The government claims this measure nearly doubles the tax relief available.

The levy does not apply to the electricity generation sector (including offshore wind), even though certain companies have also made higher profits, linked partly to record gas prices.

Currently, the oil and gas sector pays a 40% headline rate tax on profits comprising a 30% Ring Fence Corporation Tax and 10% Supplementary Charge. The total rate, the government says, is lower than in Norway, Denmark or the Netherlands.

But adding the levy to the existing 40% headline rate of tax, the combined rate of tax on profits earned by UKCS oil and gas companies rises to 65%. And companies will not be able to offset previous losses or decommissioning expenditure against profits subject to the levy.

The measure seems likely to remain in place for the future, unless oil and gas prices return to historically more normal levels, in which case the levy would be phased out.

Industry association Offshore Energies UK (OEUK), which has put out a series of statements over the past few days and months warning against a windfall tax, described the new levy as “a backward step by a government, which just weeks ago was pledging to build a greener and more energy-independent nation.”

OEUK CEO Deirdre Michie said the measures “will discourage U.K. offshore energy investments, meaning declines in oil and gas exploration and production, and so force an increase in imports. This is the exact opposite of what was promised in the British Energy Security Strategy published just last month.”

She added that investor confidence depended on taxes being predictable and that introducing a new one, without any consultation, would undermine investment in offshore wind and other low-carbon energies—the expansion of which was also highlighted in last month’s strategy.

“The extra £5 billion the industry will have to pay in new taxes this year are on top of the £7.8 billion bill it faced under the existing tax regime (a 20-fold increase on two years ago)," she said.

Michie said that while the industry acknowledged the severe pressures on U.K. consumers, funding help through sudden new taxes would damage U.K. business, not just the major operators, but also the U.K. supply chain’s companies providing equipment and services to the oil, gas and renewable industries.

She pointed out that the oil and gas sector supports about 200,000 U.K. jobs, many of which now face a less-secure future.

While the industry would work with the government for now, she called for an energy summit involving ministers and leaders from the U.K.’s offshore energy operators and supply chains.

“The British Energy Security Strategy 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," she said. “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 U.K. energy production. That means less oil, less gas and less renewables. It also makes it much harder for the U.K. to reach net zero by 2050.”

The government’s priority, she countered, should be “to prevent a flood of investment formerly earmarked for U.K. energy projects now being diverted to Norway, Saudi Arabia and Qatar."