Energy sector braces for UK budget

Energy companies in the UK are braced for possible tax rises in the government's autumn budget statement on 17 November, as finance minister Jeremy Hunt looks to fill a £60bn ($68bn) hole in the country's finances and regain the confidence of financial markets.

It is just six months since North Sea oil and gas producers were hit with a 25pc windfall tax on profits generated from their UK output to help fund the government's price cap guarantee on consumer energy bills. Oil and gas prices have remained stubbornly high since then, making them an obvious target for another tax raid.

Calls from outside the oil and gas sector have mounted in recent months to extend the tax surcharge beyond its end date of 31 December 2025, in light of the record profits being enjoyed by many producers. Proponents point to the fact that the energy profits levy was softened with a generous new investment allowance. Shell, one of the biggest oil and gas producers in the UK, expects to avoid paying the levy altogether this year because of tax relief on its UK investments.

As well as an extension, Hunt has the option to increase the rate of the tax or expand it to include other businesses that are benefitting from high energy prices. Industry lobby group Offshore Energies UK (OEUK) said this week that raising the levy will put at risk billions of dollars of upstream oil and gas investment. In a report on the outlook for UK exploration, published today, OEUK bemoaned the tax at its current rate, saying there is a "real risk" it will have a similarly negative impact on exploration as tax hikes did back in 2011.

OEUK estimates only nine exploration and appraisal wells be drilled this year, down from around 60 in 2010.

Widening the windfall tax to other parts of the energy sector is a possibility, but it will involve rowing back on yet another policy of former prime minister Liz Truss. Last month Truss' government included a provision in its Energy Prices Bill that would allow it to impose a temporary revenue cap next year on low-carbon power generators not covered by contracts for difference (CfDs). That bill is now on the statute books, although the government has yet to decide on the finer details including the revenue limit.

Given that revenue above the cap will end up in government coffers anyway, many view it as a windfall tax in all but name. Industry group Energy UK said it risks being more punitive than the levy on oil and gas producers.

"While the windfall tax for oil and gas producers contains generous exemptions through an investment allowance, no such provision exists with the revenue cap," it said.

Scrapping the cap and replacing it with something more akin to the energy profits levy would help the government avoid accusations that it is treating oil and gas producers more favourably than low-carbon power generators. But given the government's focus on delivering a credible plan to balance the books, it may come down to the policy that raises the most cash.

By James Keates