UK sets price floor mechanism for oil windfall tax

The UK government today announced a price-floor mechanism for its controversial Energy Profits Levy on oil company profits that will see the 35pc windfall tax removed if low prices for oil and gas persist for two consecutive quarters. The UK oil and gas sector had been calling for such a price-floor mechanism connected to the tax since late last year.

The EPL was first introduced in May 2022 by UK prime minister Rishi Sunak when he was finance minister. The levy's initial tax rate of 25pc was later raised to 35pc in the government's autumn budget in November, when it was also extended for a further two years into 2028. The overall marginal rate on oil and gas profits increased to 75pc as a result.

Now the government has said that the overall tax rate on oil and gas companies will return to 40pc if both average oil and gas prices fall to — or below — $71.40/bl for oil and £0.54 (68¢) per therm for gas for two consecutive quarters. It said that these levels are based on 20-year historical price averages.

Since the increase in the levy the upstream oil and gas sector has complained vociferously that it would deter investment and reduce future production on the UK continental shelf, with independent producers focused on the UK North Sea being particularly hard hit by the windfall tax.

The UK's biggest offshore producer, Harbour Energy, launched a review of its UK operations as a result of the levy, confirming in May that this review would result in the loss of 350 jobs. The company noted that work programmes had been cancelled by its partners at the Elgin/Franklin and Beryl fields.

In response to the announcement of the price floor mechanism David Whitehouse, chief executive of industry group Offshore Energies UK, noted that it was "a step in the right direction" but that further steps will need to be taken to restore confidence to the sector. "We will now work closely with government and lenders to understand the detail of the measure and its effectiveness at unlocking investment," he said. "Enabling continued UK energy production now and in future depends on a predictable and fair fiscal environment. The UK must be competitive if we are to be successful in the global race for energy investment."

The government said today that the EPL has raised around £2.8bn to date, pointing out that this helped it to pay just under half the typical household energy bill last winter. "It is right that we recover excess profits resulting from Putin's war and use the money to help people with their energy bills," said Gareth Davies, exchequer secretary to the finance ministry, before adding that the UK also needed to secure investment in its own domestic supply. "It would be beyond irresponsible to turn off the North Sea taps overnight. Without oil and gas from British waters, we would be forced to import even more from overseas, putting our security of supply at risk."

By Jon Mainwaring