THE windfall tax on the extraordinary profits North Sea oil and gas companies have been making on the back of historically high prices is to be slashed. But industry figures have declared the changes to the energy profits levy announced by the UK Government do not go far enough, stating that the policy has “shattered” confidence in the sector.

The levy was introduced in May of last year as companies hiked profits because of the soaring oil and gas prices which followed Russia’s invasion of Ukraine.

Giants such as BP and Shell have announced record profits in recent months, leading trade unions and anti-poverty campaigners to calle for companies to be taxed even more.

However, oil and gas producers have persistently argued that the levy will cause companies to invest outside the UK and force the country to rely on expensive energy imports.

Harbour Energy, one of the biggest oil and gas producers in the North Sea, reported in March that the levy had “all but wiped out” its profits for 2022 and had led it to cut staff in the UK and investment, with companies such as Ithaca Energy and Parkmead Group also going on record with their concerns.

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The levy amounts to a 75 per cent headline rate of tax on North Sea oil and gas company profits, albeit the UK Government has simultaneously been providing generous tax incentives to help ensure producers continue to invest in new projects. It was announced yesterday that the levy will fall back to 40% “when prices consistently return to normal levels for a sustained period”.

The UK Government said the energy profit levy will remain in place until March 2028 and will introduce a new energy security investment mechanism to protect domestic energy supply and safeguard jobs.

It means that the tax rate for oil and gas companies will return to 40%, the rate before the levy was introduced, 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 levels are based on 20-year historical averages.

On Friday morning Brent crude oil was trading at $75.38 per barrel. UK gas prices were at around £0.64 per therm.

Ministers say the mechanism will give the oil and gas sector the confidence to raise capital and invest in new and existing projects to help secure affordable and reliable domestic energy supply.

Based on forecasts by the Office for Budget Responsibility, it added, the mechanism will not be triggered before the levy is planned to end in March 2028. It said the levy has raised around £2.8 billion to date, noting that it has helped fund measures to help people with the cost-of-living crisis, and is expected to raise nearly £26bn by March 2028.

Alongside the tax incentives brought in with the energy profits levy, the UK Government has opened applications for more North Sea exploration licences. This could lead to industry regulator the North Sea Transition Authority awarding more than 100 new licences later this year.

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Russell Borthwick, chief executive Aberdeen & Grampian Chamber of Commerce, said: “The introduction of a price floor is a welcome step in the right direction, but if the UK Government is serious about unlocking the investment trapped by its current fiscal regime, then the finish line is still some way off.

“We are pleased that the Chancellor has listened to an industry that directly employs over 200,000 people in the UK - a quarter of them in the North-east of Scotland - and currently provides the domestic energy security to keep the lights on. 

“Since it was put in place a year ago, and then further increased, this ill-thought-through tax raid has achieved little other than to shatter confidence in the sector, cost jobs, caused investment to be cancelled or driven overseas and further threatens our ability to deliver energy transition. Today’s intervention tells us that the UK Government clearly now recognises their mistake. 

“Prices have already returned to historically normal levels, so there are no windfall profits to tax. The changes announced today will do little to reverse the worrying trends we are seeing as it’s highly unlikely the oil price will fall below the floor of $72 for a six-month period any time soon.

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“A punitive tax rate of 75% - one of the highest in the world - remains an ongoing threat to a world leading sector that was once the jewel in the UK’s industrial crown. That rate needs revised downwards urgently.

“We urge government to work with the industry and re-think the terms of the changes being made to EPL, as in their current form, they will make no material difference.

“Get the fiscal conditions right however and the prize could be billions of pounds worth of investment and thousands of new jobs being created in the North Sea.”

North Sea veteran Sir Ian Wood, best known for building up the giant energy services company Wood Group, said: "The introduction of a price floor to the energy profits levy is a modest step toward creating a somewhat more stable fiscal regime that will incentivise investment toward achieving greater domestic energy security. 

“As prices return to normal and the windfall no longer exists, oil and gas producers are still experiencing one of the highest tax burdens of any sector in the world and the number of operators who have publicly announced plans to scale back or cancel operations in the North Sea with significant job losses linked directly to this policy is truly alarming. 

“It remains to be seen whether or not this price floor will have any real impact in reversing these decisions and we urge the UK Government to monitor this closely and take further steps, as necessary, to protect the future of the industry. 

“The UK oil and gas industry currently supplies 50% of the UK’s demand for fossil fuels – without more investment we would be dependent on imported, carbon heavier oil and gas for 80% of our needs by 2030. 

“Imported oil and gas pays no UK taxes and supports no UK jobs so it is economically and environmentally prudent for us to maximise domestic production. 

"There is an overwhelmingly strong case to support an industry that will contribute £20 billion to the UK’s economy this year alone and has the critical mass in skills, expertise and financial capital required to accelerate energy transition toward meeting net zero targets.” 

However, a different stance was taken by Simon Francis, co-ordinator of the End Fuel Poverty Coalition. He said: “Energy bills are predicted to remain high, and levels of household energy debt are still surging. Any talk of reducing or ending the windfall tax while millions still struggle through the energy bills crisis is premature.

“The Government should keep all options on the table to ensure the funding is available to fix Britain’s broken energy system into the long term.”

Gareth Davies MP, Exchequer Secretary to the Treasury, said it would be “beyond irresponsible to turn off the North Sea taps overnight”.

He added: “Without oil and gas from British waters, we would be forced to import even more from overseas, putting our security of supply at risk.”