UK Offshore Industry Warns That Windfall Tax Could Have "Consequences"

The UK has announced plans to impose a windfall tax of 25 percent on oil and gas profits, raising complaints from industry that the UK North Sea offshore sector could become a less attractive region for investment - just as the UK is looking to boost its domestic energy security. 

Chancellor Rishi Sunak has rolled out a plan for a temporary 25 percent tax on oil and gas profits. The proceeds - estimated at $6 billion - would help underwrite subsidies for British households to offset the rising cost of living, which has been driven up (in part) by the soaring cost of energy. Each household would receive between $700 and $1,500, depending on need.

The levy would phase out automatically by 2025, or when energy prices return to normal levels, whichever occurs first. In the meantime, industry would be able to reduce its tax liability by investing more in UK energy production. 91 cents of every dollar invested in UK energy would be credited towards the tax bill. 

The levy does not cover the UK's electrical power sector, which has also seen extraordinary profitability amidst soaring prices. The Treasury plans to evaluate these earnings and consider ways to "ensure that the price paid for electricity is more reflective of the costs of production."

Industry warns of "consequences"

The new levy has not been well received in the oil and gas sector. In London, BP announced that the windfall tax would prompt a review of its offshore investment plans in the North Sea.

“Today’s announcement is not for a one-off tax – it’s a multi-year proposal. Naturally, we will now need to look at the impact of both the new levy and the tax relief on our North Sea investment plans," BP said in a statement. 

The trade group Offshore Energies UK released an open letter warning of "severe consequences" if the tax went forward.

"A one-off windfall tax on energy producers will not sustainably help consumers and will only further reduce investor confidence in the UK, the ripple effect of which we will feel for many years to come," wrote 31 members of trade group Offshore Energies UK. "We look at current calls for a windfall tax on energy producers with grave concern that it would be a blunt short-term response which could undermine the levers to long term solutions."

The group pointed to the $10 billion in production taxes that its members will pay this year as evidence that it is doing its part. It also warned that driving off foreign investment in the UK energy sector could slow down the rollout of renewable energy sources. "It is unclear where the £1 trillion investment required would come from should international operators decide to pivot away from the UK in response to an unpredictable fiscal regime," the group wrote.