Pressure is mounting on Rishi Sunak, chancellor, to levy a one-off windfall tax on UK offshore oil and gas operators, just weeks after the boss of BP said high commodity prices had turned his company into “a cash machine”.
Labour, the Liberal Democrats and some Tory MPs want Sunak to levy a tax on the profits of North Sea operators to alleviate soaring domestic energy bills, arguing the sector can easily withstand the hit.
Rachel Reeves, shadow chancellor, said a windfall tax would partly fund a Labour plan to cut energy costs for all consumers by about £200 this year, with a further £400 taken off the bills of more than 9m poorer households.
The industry has claimed a one-off windfall tax on UK offshore oil and gas operators would cause “irreparable damage” to the sector and leave consumers even more exposed to global shortages.
But politicians at Westminster are eyeing the operators as a potential source of money to alleviate the cost of living crisis, not least because industry leaders have suggested their companies are awash with cash.
In November, Bernard Looney, BP chief executive, said soaring global commodity prices had made his company a “cash machine”, as it bolstered its share buyback programme, thanks to a sharp rise in quarterly profits.
“When the market is strong, when oil prices are strong and when gas prices are strong, this is literally a cash machine,” he told the Financial Times.
Meanwhile, Serica Energy, the North Sea company responsible for 5 per cent of UK gas production, said in September it was expecting to make “very significant returns” to shareholders, thanks to record high prices.
Despite that, Oil and Gas UK, the offshore industry body, claimed companies would become increasingly reluctant to make long-term investments if they were threatened with windfall taxes whenever prices rose.
Mike Tholen, sustainability director at OGUK, said that calls for a windfall tax were “in no one’s interest” and that the Treasury was already seeing “significantly higher returns” from North Sea energy companies.
“Over the next two years, the Treasury expects an additional £3bn in tax revenue from this industry — with a predicted direct tax take of almost £5bn. The upstream oil and gas industry already pays almost double the rate of corporation tax that other sectors pay,” Tholen said.
He added that, by taxing companies more, the government also risked holding up investment into green energy infrastructure in the UK.
Despite energy companies’ UK tax contribution, North Sea operators still benefit from one of the most favourable tax regimes compared with other oil and gas-producing regions around the world.
Under Labour’s plan, North Sea energy producers would be forced to pay £1.2bn to mitigate household bills through a year-long increase to their corporation tax of 10 percentage points.
Labour would also scrap VAT on fuel bills as part of a drive to contain energy prices; a cap on household bills is in April expected to rise from £1,277 for an average household to almost £2,000, driven by high wholesale gas prices.
Reeves said the whole package would cost £6.6bn; she claimed that aside from the £1.2bn windfall tax, the Treasury would raise £3.1bn from higher-than-expected VAT receipts from higher prices and £2.3bn from higher tax receipts from North Sea energy production.
Sir Ed Davey, Lib Dem leader, who also backs the windfall tax, said: “It can’t be right that a few energy fat cats are raking it in from record gas prices while millions of people can’t even afford to heat their homes.” Chris Skidmore, a former Tory energy minister, has also endorsed the idea.
Sunak will hold a mini-Budget in March but the Treasury has been wary in the past of one-off taxes, which can have the effect of significantly reducing investment and supply in the year they are implemented — putting further upward pressure on prices.
There is a fear in government circles that an offshore windfall levy would also largely hit oil rather than gas producers, forcing up fuel prices. But Sunak has also said he is considering a range of options to help people with their domestic energy bills.
Meanwhile, Labour will set out proposals on Monday to help businesses facing higher power costs, with a “£600m contingency fund to support struggling firms, including energy-intensive industries”.
