CAPITAL STRIKE
Oliver Smith - Business reporter, BBC News
Fri, December 2, 2022
Oil rig workers
French oil giant TotalEnergies has said it will cut North Sea investment by 25% next year after the windfall tax on oil and gas firms in the UK was extended.
The company will cut £100m of spending on new wells in the region.
The windfall tax - the Energy Profits Levy - was raised from 25% to 35% in last month's Autumn Statement and will now stay in place until March 2028.
The government said the levy "strikes a balance between funding cost of living support while encouraging investment".
"We have been clear that we want to encourage reinvestment of the sector's profits to support the economy, jobs, and our energy security, which is why the more investment a firm makes into the UK, the less tax they will pay," a Treasury spokesperson said.
TotalEnergies is one of the North Sea's biggest oil and gas producers and its decision to cut investment will affect plans to drill a new well at its Elgin gas field.
"Following another change to the fiscal environment for energy investors in the UK, we are now evaluating the impact of this change on our current and planned projects," said TotalEnergies' UK chairman Jean-Luc Guiziou.
"We note that without a price floor to the EPL (Energy Profits Levy), the current regime will affect short-cycle investments, in particular infill wells.
"The energy industry operates in a cyclical market and is subject to volatile commodity prices. We believe that the government should remain open to reviewing the Energy Profits Levy if prices reduce before 2028."
What is the windfall tax on oil and gas companies?
The windfall tax on oil and gas companies operating in the North Sea was introduced in May after oil prices increased sharply.
Oil prices had already been increasing as Covid restrictions were lifted around the world, but they jumped when Russia's invasion of Ukraine led to worries over energy supplies.
The rate for the EPL was set at 25% originally. However, in the Autumn Statement last month, Chancellor Jeremy Hunt announced it would increase to 35% from January 2023, and stay in place until March 2028. It had previously been scheduled to finish at the end of 2025.
Oil and gas firms operating in the North Sea are already taxed differently to other firms. Taxes on their profits are higher - they pay 30% corporation tax on their profits and a supplementary 10% rate on top of that.
Other firms currently pay corporation tax at 19%.
'Extreme burden'
Last week, Brindex, an organisation representing smaller independent oil exploration companies in the North Sea, wrote to the chancellor saying the windfall tax increase represented an "existential threat" to the industry.
Robin Allen, the chairman of Brindex, said in the letter that its members can "no longer shoulder this extreme open ended tax burden", and warned that it could impact jobs and the country's energy security.
Like TotalEnergies, Brindex has called for a price floor mechanism whereby the windfall tax would only be triggered above a certain price level for oil and gas.
"Without such a mechanism and to continue down the path of the current anticipated 75% rate, further investment in the UK has become unviable and so begins a rapid onset of the decline of the North Sea," Mr Allen said.
Both Shell and BP have said that they will review North Sea investments following the tax increase, but have not announced any specific cuts to spending in the region.
The main North Sea industry body, Offshore Energies UK (OEUK), said the decision to increase the EPL was "undermining investor confidence".
Deirdre Michie, chief executive of OEUK, said: "Our industry was planning to invest £200bn in the broader energy sector - this includes low-carbon solutions - by 2030. This would help to ensure that the UK can meet its net-zero and climate goals and boost its energy security while we make that low-carbon transition.
"But... these tax changes really do jeopardise this."
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