Updates with detail throughout
The UK government will impose a 25pc tax surcharge on oil and gas company profits for an unspecified length of time as part of efforts to shield the population from high energy prices. But it sought to assuage any disgruntlement in the country's upstream sector with a generous new investment allowance.
The "temporary targeted energy profits levy" is effective as of today, 26 May, until the end of 2025 at the latest, although it will be removed when and if oil and gas prices return to "historically more normal levels", UK finance minister Rishi Sunak said. He did not offer detail on what price level will allow for the levy's removal, and an Argus query on what constitutes "normal" price levels was unanswered by the government at time of publication.
The government said today the levy will raise £5bn ($6.3bn) "in its first year", and it set out a financial assistance package to aid with the cost of living.
The move represents a change of heart by London. The government earlier in May shrugged off calls for a 'windfall' tax on profits, saying the idea "could deter billions worth of investment, which would risk both security of our energy supply, as well as almost 200,000 jobs that rely on the industry."
The about-turn will see the combined rate of tax paid by UK onshore and offshore operators rise to 65pc from 40pc. Firms will be unable to offset previous losses or decommissioning costs, but the levy has an investment allowance built in that will see operators get a 91p tax saving for every £1 invested in oil and gas production.
The government will hope this goes some way to reassuring operators in the country's upstream industry who say that higher taxes will mean less funds available to invest in maintaining or increasing UK output. Production in the UK North Sea fell to 1.35mn b/d of oil equivalent (boe/d) last year, down by 17pc from 2020 because of heavy field maintenance, industry association Offshore Energy UK (OEUK) said in its recent business outlook. Investment of £4bn this year will only maintain output at 2021 levels.
BP chief executive Bernard Looney earlier this month said a windfall tax on profits "would challenge investment in home-grown energy." Shares in some of the UK offshore's major operators appeared broadly unaffected by the announcement. BP, Shell, TotalEnergies and UK independent Harbour Energy all traded higher by more than 1pc as of 13:40 GMT.
The levy is not yet being extended to power generators, where the government noted "extraordinary profits are also being made because of the impact that rising gas prices have on the price paid for electricity in the UK market". Finance minister Sunak said the government is talking with the sector "to ensure the price paid for electricity is more closely linked to the cost of production".
