UK offshore oil and gas, renewable energy groups react to steep tax increases

Nov. 18, 2022
Britain’s North Sea oil and gas and offshore wind sectors will have to pay higher taxes on profits, under changes announced yesterday by UK Chancellor Jeremy Hunt in his autumn budget statement.

Offshore staff

LONDON – Britain’s North Sea oil and gas and offshore wind sectors will have to pay higher taxes on profits, under changes announced yesterday by UK Chancellor Jeremy Hunt in his autumn budget statement.

Offshore Energies UK (OEUK) said the collective measures could lead to an exodus of investors, increasing the UK’s need for imports and therefore leaving consumers increasingly exposed to global shortages.

Hunt plans to raise overall taxes on UK oil and gas production to 75%, and the Treasury will impose a new 45% levy on electricity generators, including offshore wind, from Jan. 1, 2023.

OEUK said the changes would affect not just North Sea operators but the hundreds of other companies in the supply chain across the UK, including specialists in marine engineering, deep-sea diving and subsea communications.

Collectively, the association pointed out, the industry supports nearly 200,000 UK jobs.

This May, then-Chancellor (now Prime Minister) Rishi Sunak introduced an additional 25% Energy Profits Levy, in response to soaring energy prices, lifting the tax rate on North Sea oil and gas production from 40% to 60%.

The latest rise, taking the overall tax rate to 75% from January, will garner the Treasury £80 billion ($95.23 billion), including £15 billion ($17.86 billion) this fiscal year and £20 billion ($23.81 billion) the year after.

Hunt also extended the duration of the new levy from December 2025 to March 2028, with no reduction even if oil and gas prices fall. As OEUK pointed out, the UK offshore sector now faces some of the world’s highest taxes.

Working with government

Oil & Gas UK Chief Executive Deirdre Michie said the association had long argued that the best way for the UK to protect itself against global energy shortages is to produce as much as possible of its own requirements.

The industry is participating in plans to spend £200 billion ($238.2 billion) by 2030 on developing all types of energies. However, the budget changes could curtail much of that investment with UK offshore oil and gas production falling rapidly, forcing Britain to import up to 80% of its gas - double the current level – by 2030.

OEUK did welcome the government’s planned review of the long-term tax treatment of UK oil and gas production.

Michie said the coming 75% rate was not the only damaging factor.

“It’s also the disruption and uncertainty generated by constant changes to our tax system,” she claimed, following the removal of the UK’s previous, short-lived administration, led by Liz Truss, which had sought to introduce measures to stimulate offshore oil and gas activity.

"No industry can invest or plan without knowing what kinds of tax regime will be in place,” Michie continued. “We want to work with the government to build a long-term tax regime that will let us play a full role in the energy transition. Unlike politicians, energy companies think and invest in terms of decades - not election cycles. That approach means we have built a stable, strong and prosperous industry which has supported the nation for 50 years. We’re now planning for the next 50 years, and we want to work with our politicians to do the same.”

Investment analysis

American investment bank and financial services provider Stifel was also critical of the latest changes.

Energy analyst Chris Wheaton said, “The reality of this tax… is that it hits the wrong targets.

“We think [it] will not touch the substantial profits that some big oil companies have been able to make this year- including exceptionally high trading profits…made outside the UK- and instead penalizes UK companies who have been investing to deliver energy security, something that the Chancellor also mentioned in today's autumn statement.

“These aren't just the UK North Sea energy producers, but this includes UK generators investing in renewable energy too. We also see no incentives to bring much more of the renewable energy supply chain to be made in Britain, something we find surprising given the substantial growth in renewable generation the UK will see over the next three decades.”

Wheaton suggested that the independent oil companies that account for the majority of the marginal investment in the UK North Sea would now be wary of investing significant additional capital “when an arbitrarily imposed tax could be increased, extended, or the additional investment allowance reduced.

Wheaton said“We see a risk that companies will allocate investment away from the UK to other countries if they can, to the detriment of the UK’s energy security and carbon intensity. Government claims it is offering certainty in this tax increase; the only certainty we see is that deterring investment will push up energy costs-longer term.”

He cited Harbour Energy's Tolmount gas project in the southern UK North Sea, which came on stream in April and currently satisfies about 5% of UK gas needs, at a supply cost of c.35p per therm, half the cost of LNG that Britain is importing from the US.

“We also note that this field was originally discovered in 2011 and, once approved, the project took three years to develop, illustrating the long-term nature of investment required against the short-term tax decisions being taken. “

Wheaton claimed a more logical approach would be a graduated scale of tax, with higher rates of tax paid at higher commodity prices, giving companies as much certainty as possible on tax structure, with incentives in the tax allowance regime for electrification, hydrogen and carbon capture.

Renewable energy projects

RenewableUK warned that the windfall tax on electricity generators could be detrimental to prospects for new renewable energy projects.

Hunt announced a 45% windfall tax on renewable electricity generators from January 2023 through March 2028, with no investment allowances equivalent to those available for investments in oil and gas production.

RenewableUK said that new wind and solar projects were the UK’s cheapest sources of new power – up to ten times cheaper than gas and added that last year, renewables generated 40% of the UK’s electricity, with more than half coming from offshore and onshore wind.

The association’s CEO Dan Mc Grail said, "Many renewable generators are on long-term, fixed price contracts and most other sold their power for this winter over a year ago, so they haven't been making excess profits.

“We need to attract more than £175 billion [$208.4 billion] in new wind farms and our supply chain over the course of this decade, so we need to make the UK one of the most attractive destinations for private investment in renewables. Ministers now need to work with the industry to ensure that the implementation of these plans ensures a level playing-field, rather than imposing unfair burdens on renewables.”