Windfall Tax to be Dropped if Oil and Gas Prices Fall to 'Historically Normal Levels'
Posted 09/06/2023 09:09
Britain’s windfall tax on oil and gas producers is set to be scaled back as part of efforts to boost investment in the North Sea, according to three people briefed on the government’s plans.
The chancellor, Jeremy Hunt, is expected to confirm plans to introduce a "floor" on the 35 per cent levy in the coming days so that it only applies if oil and gas prices trade above a certain level. Treasury officials are due to meet the oil and gas industry on Friday at a forum in Aberdeen.
The move comes after months of lobbying from the sector and as Norway’s state oil company, Equinor, considers whether to go ahead with its major new North Sea project, Rosebank.
Where the floor for the windfall tax could be set is not yet clear. One industry source suggested the sector would like to see it set at about 120 per cent of the long-term average price, but said there was little consensus in the industry.
Softening the windfall tax is likely to be controversial among campaigners on the cost of living as consumers continue to face high energy bills. Wholesale oil and gas prices have fallen sharply in recent months, but government support for households and businesses has also been scaled back.
Plans to introduce a floor were first reported in March ahead of the Budget, but were subsequently shelved by the government.
The government is likely to contend that the move will help boost energy security, after producers argued that the current design of the levy was deterring investment in the basin. The drop in oil and gas prices and rising inflation for other inputs has made new investments less attractive, even without the windfall tax in place.
Ministers introduced a windfall tax on North Sea oil and gas producers last year to offset the estimated £29.4bn bill for subsidising household energy bills as wholesale prices soared in the wake of Russia’s invasion of Ukraine.
Under the measures, the tax rate climbed from 40 per cent to 65 per cent in May and then to 75 per cent from January 1 this year, set to be in place until 2028.
Producers have argued that the measure has deterred investment by heavily taxing projects as prices have returned to more normal levels and banks have pulled financing from the sector.
After peaking above £6 a therm last summer, UK wholesale gas prices are back to just above 60p a therm, only a little above the long-term average for the past decade. Oil prices are back to about $75 a barrel — roughly the level they stood at before Russia’s invasion of Ukraine — after reaching $130 a barrel last year.
Meanwhile, the Labour party has said it will end new gas and drilling licences in the North Sea if it wins the general election expected next year.
Labour first announced its plan last year and the policy was re-announced by party leader Sir Keir Starmer in January. But the issue has taken on greater salience as the party establishes a clear lead in the polls and the measure has provoked a backlash from the party’s union backers.
Gary Smith, general secretary of the GMB union, last month urged Starmer to scrap the plan, warning that "strangling" the North Sea oil industry would be "bad for jobs" and would be "