Oil bonanza sparks windfall tax row: Energy giants reap bumper profits

Energy giants are awash in cash as rising prices yield huge profits.

Meanwhile, cold consumers are afraid to turn up their thermostats because they worry about bills.

It therefore seems like a good idea to ask oil and gas companies to channel their flowing profits to help households – especially as the government is struggling to fund an aid package. Such is the argument for a windfall.

But what does that mean in practice? And what are the consequences if we squeeze even more out of the companies?

Recent corporate results have only fueled calls for action, as earnings have swelled by a surge in oil and gas prices — and shareholders showered with rewards.

BP has sucked in nearly £20bn in the first nine months of this year, while Shell was able to rake in £26bn in profits over the same period.

What has happened so far?

Energy companies are already on the hook for billions after a windfall tax was introduced earlier this year.

Even before that, North Sea oil and gas profits were subject to a corporate tax rate of 30 percent, higher than the current 19 percent rate for other companies. On top of that there is a so-called ‘surcharge’ of 10 percent.

In May, then-chancellor Rishi Sunak bowed to pressure to implement a 25% windfall on oil and gas companies to pay for living expenses.

That brought the tax rate for those companies to 65 percent.

In September, the Treasury Department estimated it would be £7.7 billion net for 2022-23, and £28 billion in total, before a ‘sunset clause’ ends the levy by the end of 2025.

BP expects to pay just under 700 million pounds this year as a result of the windfall tax.

However, Shell has paid nothing – thanks to tax breaks from its investments in the North Sea – although the company predicts the costs will kick in next year.

That was because Sunak’s plan allowed companies to recover 91 pence in tax credits for every £1 invested to boost energy supplies.

What can happen now?

Since the original windfall tax was announced, the government has frozen accounts for six months at a cost of £60 billion over the winter.

That leaves the new chancellor, Jeremy Hunt, facing tough choices about where to cut government spending or raise taxes instead.

With profits piling up at the energy companies, they seem a tempting target.

Reports suggest the levy will rise from 25 percent to 30 percent, bringing the total tax rate for North Sea energy companies to 70 percent.

The 2025 time limit on the tax can also be extended to 2028.

What does Labor want?

Ed Miliband, Labour’s climate spokesman, has called for a ‘proper windfall tax’.

His party wants the existing windfall tax to be retroactively reversed to January and the tax credits for investments to be scrapped.

According to Labor, this would bring in £8 billion a year. But the plans are light on details.

So what does the industry have to say?

Shell boss Ben van Beurden, who will step down at the end of this year, has said the industry must accept and ’embrace’ it may be the target of tax increases.

But Chris O’Shea, boss of British Gas owner Centrica – which also has interests in North Sea production – has said the windfall tax is like ‘burning the furniture to keep warm’.

This week Offshore Energies UK, the industry association for the North Sea, wrote to the Chancellor to express his concern over reports of plans for the windfall tax.

“The ongoing uncertainty and ongoing changes in the tax regime are driving investment out of the UK and also encouraging some companies to leave,” said OEUK chief executive Deirdre Michie.

What are the pros and cons?

George Dibb of the Institute for Public Policy Research, a center-left think tank, said it was “unacceptable” for companies like Shell and BP to reward investors with payouts “when these companies make exceptional profits from our rising energy bills.”

It calls for a 25 per cent windfall on share buybacks for the two companies – to raise up to £4.8bn a year – and copies a smaller such tax of just 1 per cent imposed by President Joe Biden in the USA has been introduced.

But Andy Mayer, an energy analyst at the Economics Institute, said a renewed attack on energy companies was not the answer to the UK’s problems.

“Further UK windfall taxes will not solve this – 65 per cent is high enough – and will likely hurt investment,” he said.