UK slaps 25% tax on oil companies

May 30, 2022 News

…to raise $6.3B for citizens gripped by cost of living crisis

Kaieteur News -The UK government has announced that it will introduce a windfall tax on oil and gas operators which could raise US$6.3B in the first six months which will then be used to alleviate the cost-of-living crisis in the country.

A windfall tax is a one-off tax imposed by a government on a company, specifically targeting those that benefit from something they were not responsible for. In this instance, the huge profits gained by oil and gas companies in the UK is due to a sharp increase in oil and gas prices following Russia’s invasion of Ukraine. The UK government said the purpose of this tax is to distribute excess profits made by oil companies for the greater social good.

The windfall tax comes as oil and gas giants, like Shell and BP, booked record profits in the first quarter of this year, driven by a spike in oil and gas prices. BP had also revealed it would invest up to £18 billion in the UK’s energy system by the end of 2030 due to significant profits gained.

It was actually UK Chancellor, Rishi Sunak, who on Thursday last announced that the government is introducing a temporary, targeted Energy Profits Levy charged on profits of oil and gas companies at a rate of 25 percent. Kaieteur News understands that this is the highest rate seen in 40 years in the UK. Stating that the oil and gas sector is making extraordinary profits not as the result of recent changes to risk-taking, innovation or efficiency but as the result of surging global commodity prices driven in part by Russia’s war, the Chancellor said, “For that reason, I am sympathetic to the argument to tax those profits fairly.”

He further added, “But as ever, there is a sensible middle ground. We should not be ideological about this; we should be pragmatic. It is possible to both tax extraordinary profits fairly and incentivise investments.”

Therefore, Sunak stated, “We will introduce a temporary targeted energy profits levy. But, we have built into the new levy a new investment allowance.” He explained that that means companies will have a new and significant incentive to reinvest their profits, underlining that this is a temporary measure and, when oil and gas prices return to historically more normal levels, the levy will be phased out with a sunset clause written into the legislation. “Crucially, with our new investment allowance, we are nearly doubling the overall investment relief for oil and gas companies. For every pound a company invests, they will get back 90 percent in tax relief. So, the more a company invests, the less tax they will pay,” the Chancellor added.

Kaieteur News had reported on Sunday that two other global powerhouses, Canada and the USA, are also following the same trend of strengthening their fiscal regime for the oil sector. British Columbia (BC), Canada’s westernmost province, had announced that it will be increasing royalty rates between five percent and 40 percent to raise an additional CAD$200M a year in revenues for its people. The revelation was made by Premier John Horgan. The official recently said that for too long, “a broken system of fossil-fuel subsidies” has failed to ensure citizens “fully benefit” from their resources.

Kaieteur News understands that the changes came after it was found that the royalty system was failing the people of British Columbia. This newspaper learned from the Vancover Sun—a daily newspaper which dates back to 1912— that royalties had topped a billion Canadian dollars a year for almost a decade starting in 2000, largely from natural gas. Gas royalties then peaked in 2005-06 at CAD$1.92 billion, but by 2010 royalties had plummeted to sometimes less than CAD$150 million, even though gas production was rising.

In light of the deep losses, the government said a new minimum royalty rate of five percent will replace the old rate of three percent. The move by British Columbia also follows those made by the Joe Biden Administration in 2021. Kaieteur News had reported that oil companies typically have been charged 12.5 percent the value of oil and gas extracted from onshore leases, under a rate dating to the 1920s. For offshore leases, royalty rates have ranged recently from 12.5 percent to 18.75 percent. But the Biden administration has ordered that these rates be increased.

In Guyana, current and future generations are shackled to a two percent royalty and a host of other debilitating provisions in the Stabroek Block Production Sharing Agreement (PSA), which the government insists it has shown no interest in amending. It has affirmed that sanctity of contract must be maintained, least Guyana scares away valuable investors like ExxonMobil, Hess Corporation and CNOOC, the partners running rapid oil development projects in the Stabroek Block.