The UK government has announced new changes to oil and gas taxes, which it says are aimed at protecting energy security and British jobs.
In a statement published on its website, the government noted that the Energy Profits Levy, which it noted places a marginal tax rate of 75 percent on North Sea oil and gas production, will remain in place for the next five years while oil and gas prices. they remain higher than historical norms, but he added that the tax rate will return to 40 percent “when prices consistently return to normal levels over a sustained period.”
While the rate included an investment allowance to encourage companies to continue investing in oil and gas extraction in the UK, the industry has warned that companies are reducing investment, the government said in the statement , adding that this puts the future in the long term. of UK domestic supply at risk.
The government noted that the Energy Security Investment Facility, which sees the tax rate drop to 40 percent when oil and gas prices remain at normal levels, responded to this. The government noted that the mechanism was announced to give certainty to the oil and gas sector to raise capital and invest in new and existing projects, “ensuring an affordable and reliable national energy supply and protecting some of the 215,000 jobs British that supports the sector”.
The tax rate for oil and gas companies will only return to 40 percent if average oil and gas prices fall to or below $71.40 per barrel for oil and £0.54 per therm for gas , for two consecutive quarters, the government revealed. That level is based on 20-year historical averages, according to the government, which noted that, in line with the forecast by the independent Office for Budget Responsibility, the mechanism will not be triggered until before the expected end date of the tax in March 2028.
In its statement, the government said the tax was put in place to tax windfall profits made by the industry following record high oil and gas prices fueled by Putin’s invasion of Ukraine. It has so far raised about GBP 2.8 billion ($3.51 billion) and is expected to raise nearly GBP 26 billion ($32.6 billion) by March 2028, the government revealed.
The government also revealed that it has published the terms of reference for a review of the oil and gas tax regime that was announced in the Autumn Statement. The review will focus on how the tax regime can support the country’s energy security and net zero commitments, while ensuring that the UK retains a fair return for the use of its resources when responding to any future price shock, the government said in its statement.
“It is only right that we take back the excess profits from Putin’s war and use the money to help people with their energy bills,” Gareth Davies MP, secretary to the Treasury, said in a statement of the government
“Thanks to the revenue raised from the extraordinary energy benefit tax, we will have helped save the typical household £1,500 ($1,881) on their energy bill in July,” he added.
“While we stepped in to help, never again can our energy supplies be at the whim of petro-state despots like Putin. That’s why it’s so important that we secure investment in our own domestic supply, protecting the tens of thousands of British jobs that they go together,” Davies continued.
“It would be beyond irresponsible to turn off the North Sea taps overnight. Without oil and gas from British waters, we will be forced to import even more from abroad, putting our security of supply at risk,” he said.
Industry response
When Rigzone asked industry body Offshore Energies UK (OEUK) for comment on the UK government’s oil and gas tax change announcement, OEUK sent a note saying “the industry is still ‘faces considerable challenges in safeguarding the jobs of its 200,000 skilled workforce, ensuring the UK’s energy security and driving the transition to net zero and beyond with homegrown oil and gas rather than imports”.
“We have always been clear that when the unexpected happens, the tax on the unexpected should go,” OEUK chief executive David Whitehouse said in the comment.
“This is a step in the right direction, but much more will need to be done to restore confidence in our sector. We will now work closely with the government and lenders to understand the detail of the measure and its effectiveness in unlocking investment,” he added.
“Enableing the UK’s continued energy production now and into the future depends on a predictable and fair tax environment. The UK must be competitive if we are to succeed in the global race for energy investment,” he continued.
Commenting, Whitehouse said the industry was “proud to make a huge contribution”.
“In 2022/23 alone we will add more than GBP 20 billion ($25 billion) to the UK economy as a whole. We provide more than 200,000 good, skilled jobs across the UK,” Whitehouse added.
“As we build the future, there is no simple choice between oil and gas or renewables. The reality is that we need both. In the mid-2030s, oil and gas will still provide 50 per hundred of our energy needs,” he continued.
“By investing in homegrown production, we avoid more expensive, less secure and higher carbon imports, while supporting an industry we need to make cleaner and more affordable energy in the UK, for the UK. Our sector is expanding into renewable energy, supported by a world-class supply chain,” Whitehouse said.
“We will continue to work closely with the government and all parties on the way to restore confidence in the sector,” he said.
In March, the OEUK highlighted in a statement posted on its site that it had called for a “trigger price” for the windfall tax, “meaning the tax would only apply when oil prices or gas are high and an extraordinary profit is being obtained”. won”.
“The prospect of the tax being applied even when no windfall profits are made, without any mitigation, has proven to be a massive deterrent to investment in the UK North Sea, with 90 per cent of operators which confirm that they are reducing investments,” noted OEUK. in this statement.
Tax on energy benefits
In a policy paper published on its website on March 15, the UK government highlighted that the Energy Profits Levy was introduced from May 26 last year “to tax the exceptional profits of companies oil and gas companies operating in the UK and the UKCS”.
“To maintain the incentive for companies to invest in oil and gas production to support the UK’s energy security, the EPL included a[n] … 80 percent rebate against tax based on investment expenditure,” the policy paper stated.
The levy was due to expire on 31 December 2025, but in the Autumn Statement the UK Chancellor of the Exchequer announced changes to the Energy Profits Levy, including an extension to 31 March 2028 , according to the document. Other changes include an increase in the rate from 25% to 35% and the reduction of the investment allowance rate to 29% for all non-decarbonisation investment expenditure, the document highlighted .
The chancellor also announced that from 1 January 2023 qualifying investment expenditure for upstream decarbonisation will be eligible for a higher expenditure allowance of 80 per cent, instead of the endowment of 29 percent, the document notes.
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