North Sea investment ‘could dry up’ due to Government’s windfall tax

Investment in the UK’s oil and gas industry could dry up as a result of the Government’s windfall tax, an industry group has warned.

The windfall tax was introduced earlier this year by Rishi Sunak when he was Chancellor of the Exchequer.

It was expanded in November by one of his successors, Jeremy Hunt, as the Treasury looked to offset the cost of subsidising energy bills as prices spiked following restrictions of Russian gas supplies to Europe.

The levy imposes a 35 per cent tax on profits from North Sea oil and gas producers, a burden that many in the sector say risks cutting off investment in the industry at a crucial time when the UK is looking to beef up its energy security and leave it less reliant on imports from abroad.

It means North Sea oil and gas producers face a whopping 75 per cent tax burden.

Offshore Energies UK (OEUK) warned that without any changes, the windfall tax could cause banks to reduce financing for fossil fuel projects in the North Sea if oil and gas prices fall too low.

Instead of an all-encompassing levy, companies have called for the Government to implement a pricing mechanism where the windfall tax will cease to apply if prices fall below a certain threshold. 

‘The scale of the tax and lack of a clear price mechanism for removal of the levy as prices begin to normalise are key issues,’ said Michael Tholen, OEUK’s sustainability and policy director.

He added that unless these issues were addressed, oil and gas companies could see cuts of ‘up to 50 per cent’ to their borrowing ability based on the value of fuel reserves, which is estimated to provide around £14billion of cash to small and medium-sized UK producers.

Windfall taxes were introduced by several countries this year amid growing anger from politicians and campaigners that energy companies were raking in bumper profits while household bills surged, fuelling the cost of living crisis. 

But firms have pushed back fiercely against the measures, saying such taxes are unfair and stymie investment in the sector as it looks to transition towards renewable energy.

US giant ExxonMobil became the first oil major to throw down the gauntlet this week after it filed a lawsuit against the European Union in a bid to stop the bloc from imposing its own windfall tax.

The company has accused Brussels of exceeding its legal authority and argued that the 33 per cent levy on profits was ‘counter-productive’.

Exxon has also estimated that the EU tax could cost the company over £1.6billion.