The government has brought in a price floor for its energy windfall tax, which would remove the 35 per cent Energy Profits Levy when oil and gas trades below a certain price. It introduced the floor after major producers cut investment in the UK, saying the fiscal rules had made projects unprofitable while also adding too much uncertainty.
But the prices chosen for the floor – $71.40 (£57) per barrel for oil and 54p per therm for gas, averaged over two consecutive quarters – means the tax is likely to stay in place. “The Energy Security Investment Mechanism is not expected to impact receipts from the Energy Profits Levy, based on current market forecasts,” the government said.
Industry lobby group Offshore Energies UK said the change was a welcome u-turn, but chief executive David Whitehouse said more action was needed to increase spending in the North Sea. “This is a step in the right direction, but many more will need to be taken to restore confidence to our sector,” he said.
The government said it would still take in £26bn from the windfall tax in the next five years, having already added £2.6bn to its coffers in the first year of the scheme. A change was expected in the Spring Budget, but the industry was left disappointed when the windfall tax remained. Labour has promised to hike the charges further if it gets into government, to equal Norway's 78 per cent tax on profits.
Share prices in the sector have tumbled since the windfall tax was brought in, with lower hydrocarbon prices hurting valuations. The floor announcement triggered a 2.6 per cent rise in Harbour Energy (HBR) and Ithaca Energy (ITH) shares, while Serica Energy (SQZ) rose 1.8 per cent.
Harbour, the biggest independent North Sea producer, has cut planned expansion in the UK and will make an estimated 350 workers redundant later in the year.
Exchequer secretary to the Treasury Gareth Davies said the government’s aim was to ensure domestic production would continue. “Without oil and gas from British waters, we would be forced to import even more from overseas, putting our security of supply at risk,” he said.
Head of energy tax at KPMG, Claire Angell, said the idea of the floor levels was to add investment certainty rather than cutting the bill for producers.
“Even though forward price curves currently indicate that this relief will never kick in, the government hopes that this provides sufficient downside protection to secure investment to help increase long-term energy security,” she said.
