Threats of a ‘windfall tax’ on the UK’s offshore oil and gas operators could cause irreparable damage to the industry and put consumers at risk of future supply crises, the industry’s leading body has warned.
Offshore Energies UK (OEUK), whose 400 members embrace established industries like oil, gas and offshore wind, plus emerging technologies like hydrogen production and CO2 capture, all operating in UK waters, said calls for a windfall tax offered consumers false hope – and ran the risk of damaging the UK’s own energy industry.
Deirdre Michie, chief executive of OEUK, said: “We recognise global prices are having a severe impact on consumers. The UK gets 73% of its total energy from gas and oil. About 24m homes are heated by gas which also generates 42% of our electricity. So, the Europe-wide gas shortages are a stark reminder of why the UK should safeguard its own offshore sector – otherwise we risk heaping a supply crisis on top of an existing price crisis.
“Financial stability is an essential part of that. The calls for a windfall tax are based on one year’s profit announcements by oil and gas companies. But oil and gas companies operate on a global scale and produce globally-traded commodities with volatile prices – so some years see them making losses while in others they make profits.
“For example, the global rise in gas prices mean the profits of some energy suppliers rose sharply in 2021. But, in 2020 the sales slump caused by the pandemic meant many made big losses. It shows that, if you look at the industry over any single year you would get a misleading picture. The best way to look at industry profits is over several years, averaging out the highs and lows.
“It’s also important to remember that many companies operate and make profits on a global basis. An increase in UK production taxes would only tax the profits made in the UK – and these have been in decline for a long time. The latest ONS figures on ‘Profitability of UK Companies’ show that the annual rate of return was just 2.4% for companies exploring or producing oil and gas on the UKCS when averaged from 2014-2020.
“This decline in North Sea profits is because the UK Continental Shelf is moving into a new era. The most accessible oil and gas resources have been exploited and those remaining tend to be more technically challenging and less profitable.
“This has coincided with a long-term decline in prices, over that longer period. These factors have discouraged investment in the North Sea meaning capital expenditure has fallen by more than 90% since 2014.
“If that lack of investment in platforms, pipelines and other infrastructure, were to continue, then production would decline in coming years – just when we most need our own oil and gas supplies.
“All this can be reversed – the UK’s surrounding seas have enough oil and gas to help support the nation through the transition to Net Zero, provided they get the right level of investment. We know the long-term future lies in low carbon energies and they will need investment too.
“It means a windfall tax would actually be the worst thing for consumers because it would discourage energy companies from making all those vital investments. That would reduce our energy security and make us even more dependent on imports from places like Russia and the middle east.”