The UK government has introduced a price floor for the windfall tax on oil and gas producers, arguing that it is necessary to support investment and boost the country’s energy security.
The tax rate, which was raised to 75 per cent last year at the peak of the energy crisis, will revert to the pre-crisis level of 40 per cent if oil and gas prices fall below their long-term average under the so-called Energy Security Investment Mechanism.
The floor has been set at $71.40 for crude oil and £0.54 a therm for gas. Both would need to average below that level for two consecutive quarters to trigger the reduction in the tax rate.
Treasury officials are due to meet oil and gas industry executives on Friday at a forum in Aberdeen.
The move comes after months of lobbying from the sector, who argued the levy was deterring investment, and as Norway’s state oil company, Equinor, considers whether to go ahead with its major new North Sea project, Rosebank.
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.
Gareth Davies, Exchequer Secretary to the Treasury, said it was “important that we secure investment in our own domestic supply, protecting the tens of thousands of British jobs that come with it”.
It would be “beyond irresponsible to turn off the North Sea taps overnight,” he added.
Plans to introduce a floor were first reported in March ahead of the Budget, but were subsequently shelved by the government.
Ministers introduced the 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. It will now fall away before then if the prices fall below the new floor.
Oil and gas companies 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.
The Treasury said on Friday it did not expect the price floor to be triggered before the tax’s planned end date in 2028, based on forecasts by the Office for Budget Responsibility. Prices were last at or below the floor level in 2021.
It said the tax has so far raised around £2.8bn and is expected to raise almost £26bn by March 2028.
The move boosted oil producers’ share prices on Friday morning. Harbour Energy, which has warned it will shift investment to the US due to the tax, climbed 3.45 per cent to £2.55. Serica Energy climbed 3.10 per cent to £2.49.
The softening of the windfall tax comes as the Labour party has said it will end new gas and drilling licenses in the North Sea if it wins the general election expected next year.
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 “bad for the environment” because the UK would still have to import gas and oil from overseas with a higher carbon footprint.
One industry figure said he expected that the Conservative party would feel that the backlash against Labour’s plans had “opened up the political space” to revisit the windfall tax, allowing the Tories to position themselves as strong supporters of the sector.
Source: Financial Times