Jeremy Hunt has handed the North Sea oil and gas industry a “get-out” clause from the windfall tax on fossil fuel profits if wholesale energy market prices fall back to normal levels.
The Treasury set out the change before a meeting with oil companies including Equinor, BP, Shell and Total in Aberdeen on Friday afternoon, after months of warnings from the North Sea industry that the windfall tax would threaten investment and jobs.
The chancellor hopes to boost investment in the North Sea by agreeing to suspend the windfall tax on oil profits if the market price for Brent crude falls below $71.40 (£56.77) a barrel, and gas prices fall below 54p a therm, for a period of six months.
The global oil price is now about $75 a barrel, and the UK’s gas price is about 64 pence p/th. These prices are well below levels recorded last year after Russia’s invasion of Ukraine, but experts believe they are likely to remain at similar levels while the war continues.
As a result the change is unlikely to reduce the amount of tax collected from oil companies over the coming years – but the greater financial certainty is expected to help oil companies proceed with plans for new fossil fuel projects.
The Guardian understands the controversial Rosebank oil project, planned by Equinor and the oil minnow Ithaca Energy, is expected to move ahead in the coming weeks in part because of the tweak in the windfall tax.
The Treasury has put forward the change to the windfall tax a little over six months after raising the energy profits levy from 25% to 35%, on top of the usual 40% rate of tax, and extending the regime by two years until 2028.
A No 10 spokesperson said: “You will remember that the energy profits levy was introduced last year to respond to exceptionally high prices that meant that oil and gas companies were benefiting from extraordinary profits.
“To protect domestic energy supply and safeguard thousands of jobs reliant on that sector, we’ve introduced the energy security investment mechanism, and that means that if oil and gas prices consistently fall back to normal levels before March 2028, which is when it would end anyway, the energy profits levy would be switched off.”
The levy has raised about £2.8bn to date, according to the government, and it is expected to raise tens of billions of pounds to help cover the cost of the government’s support for energy bills.
The levy attracted fierce criticism from the North Sea industry, which claimed it could discourage new investment in oil and gas projects at a time when the government hopes to increase domestic fossil fuel production.
Industry critics also said the levy had a disproportionate impact on smaller, UK-based oil and gas producers, which pay most of their tax in the UK, whilelarger companies including BP and Shell pay only a small part of the global tax bill to the UK.
Bumper profits at BP and Shell in recent months have prompted calls for a tougher windfall tax from Labour and campaign groups, who argue that oil and gas companies are benefiting from high energy prices when many households are struggling to pay their bills.
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Simon Francis, a coordinator of the End Fuel Poverty Coalition, said: “Any talk of reducing or ending the windfall tax while millions still struggle through the energy bills crisis is premature.”
The End Fuel Poverty Coalition and Greenpeace called for the windfall tax to remain in place long enough to “fix Britain’s broken energy system in the long term” by investing in home insulation and green energy generation.
Georgia Whitaker, a climate campaigner at Greenpeace UK, said: “The UK has some of the lowest oil and gas tax rates in the world. Irrespective of what happens to the price of oil and gas, the tax these companies pay should be higher, permanently.”
Gareth Davies MP, the exchequer secretary to the Treasury, said: “It is right that we recover excess profits resulting from [Vladimir] Putin’s war and use the money to help people with their energy bills.”
Davies added it would be “beyond irresponsible to turn off the North Sea taps overnight”, and it was important to “secure investment in our own domestic supply, protecting the tens of thousands of British jobs” that came with it.
He said: “Without oil and gas from British waters, we would be forced to import even more from overseas, putting our security of supply at risk.”
