Next week, the UK government is expected to offer windfall tax relief to its oil and gas companies. This move aims to boost investments and enhance the country’s energy security, according to Prime Minister Rishi Sunak.
Negotiations between the sector and ministers include a promise that the 35% windfall levy on profits would cease to apply if energy prices drop below a set “normal” long-term level. Officials near the negotiations report that Chancellor Jeremy Hunt is open to the idea, as it provides tax certainty to a sector being urged to invest in new energy projects.
Sunak will unveil a series of measures to improve energy security and help achieve net-zero targets next week on “Green Day,” as Whitehall has dubbed it. However, Sunak’s allies argue that the event should be referred to as “energy security day,” indicating that the package will also include measures to boost oil and gas production in the North Sea. “It’s not Green Day,” said one.
While there is speculation in the industry that Sunak may unveil the package in Aberdeen, the capital of the UK oil industry, his allies have stated that the location for the event has not yet been determined. Oil and gas companies have long argued that hydrocarbons in the North Sea play a crucial role in Britain’s “transition” to net zero and in ensuring energy security.
The industry has been vigorously advocating for limiting the impact of the windfall tax, or energy profits levy, which was set at 25% in May of last year and included a provision that it would be switched off if energy prices dropped. Hunt announced last November that the tax would be increased to 35% and would be in effect until 2028, even if energy prices dropped significantly.
In recent months, wholesale oil and gas prices have fallen sharply, with Brent crude trading near $75 per barrel, roughly the same level before Russia’s invasion of Ukraine in late 2021. UK natural gas prices are still higher than historical norms, but less than a quarter of their peak last August.
According to individuals familiar with discussions between industry and the Treasury, Hunt is considering implementing a price floor to prevent the levy from applying if energy prices fall below a certain level. The Treasury has declined to comment.
David Whitehouse, chief executive of Offshore Energies UK, stated that he hopes the government’s energy day will promote growth, employment, emission reduction, and energy security and that the price floor for the energy profits levy needs to be clarified to give companies the confidence to invest in UK oil and gas production.
The government has announced that it will disclose further measures later this month to ensure energy security in the UK. The windfall tax is already intended to encourage the reinvestment of profits. The “energy security day” is expected to be the occasion when the government revises its net zero strategies, following a ruling last summer by a judge that the prior version was insufficiently detailed, in a case brought by the Good Law Project and environmental activists.
Several departments are refreshing their net zero policies before next week, such as the transport department, which plans to introduce the “EV mandate,” a new initiative requiring a certain proportion of cars sold in the UK to be electric vehicles. A new plan to promote the production of sustainable aviation fuel, potentially through a new subsidy scheme, has also been created. Other policy areas being reviewed include a Green Finance Strategy, which could include speeding up the issuance of green gilts and creating new incentives for more “green mortgages” available to energy-efficient homes.
