Jeremy Hunt Considered A Windfall Tax "Price Floor" For Oil And Gas Companies
3 min read
Changes to the Energy Profits Levy that would introduce a “price floor” for the windfall tax have been under consideration in the Treasury, following concerns investment in the North Sea is at risk, PoliticsHome understands.
The proposed mechanism for the EPL would aim to secure investment to bolster the UK’s domestic energy security following Vladimir Putin’s war in Ukraine.
A Whitehall source told PoliticsHome that plans were worked up ahead of the budget for a "price floor" that would mean the EPL would only kick in when the price of oil and gas reached a certain level. It is understood that the change will not be included in Wednesday's Budget, but has not been ruled out at a later date.
The EPL was announced on 26 May last year by Rishi Sunak when he was chancellor to help foot the bill of cost of living support.
That specific tax was chosen because energy companies began making record profits due Russia’s invasion of Ukraine triggering a huge increase in the price of oil and gas; prior to the war, Russia provided Europe with around 50 per cent of its gas supplies.
The tax – a temporary 25% levy on ring fence profits – was set to expire by 31 December 2025, or when oil and gas prices reduced to “historically more normal levels”.
However, in November, Chancellor Jeremy Hunt increased the rate of the levy to 35% and extended it to 31 March 2028 – regardless of oil and gas prices.
The EPL also includes an investment allowance, which currently allows businesses to claim £91.40 in tax relief for every £100 the invest.
The proposal to introduce a price at which oil and gas would need to reach before the levy kicks in follows stakeholder warnings that the EPL's current design is disincentivising banks lending to support investment in oil and gas projects.
Industry representative body Offshore Energy UK (OEUK) wrote to the Chancellor earlier this month ahead of the Budget calling for a “trigger price” that “switches off” the windfall tax.
“Government giving this certainty in legislation would materially improve the economics of projects and ensure investors could make informed decisions when modelling investment opportunities,” CEO David Whitehouse wrote in a letter seen by Energy Voice.
“Secondly, this would allow commercial banks to take a more favourable position on reserve-based lending facilities which are an essential lifeline to financing North Sea production.”
Last week the UK’s biggest oil and gas producer, Harbour energy, said it has seen most of its profits “all but wiped out” by the government’s windfall tax.
“The UK Energy Profits Levy, which applies irrespective of actual or realised commodity prices, has disproportionately impacted the UK-focused independent oil and gas companies that are critical for domestic energy security,” chief executive Linda Cook said.
“For Harbour, the UK’s largest oil and gas producer, it has all but wiped out our profit for the year.”
The UK is not the only European country that has introduced a windfall tax on energy profits – with Germany, Spain, and Italy taking similar approaches.
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