Big Oil Has a New Unknown: Taxes

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New UK ‘energy benefit levy’ shows how easily policy can be usurped by politics, bringing greater unpredictability in energy transition

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Shell and BP,

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Those based in the UK, in addition to operating in the waters around Scotland, have been front and center of the tax debate. Both have come out with dedicated UK investment plans in an effort to appease the public following strong financial results in recent weeks.

However, both are globally diversified, reducing the impact of the levy on investors. According to FactSet, Shell generated just 8.4% of its revenue in the UK last year and BP 7.1%. Exxon Mobil was up 5.3%, but it sold a portion of its British assets last year, so it will fall. According to Bank of America estimates, TotalEnergies will actually be the biggest hit. Investors had already factored in the tax — a much-trumpeted policy from the opposition Labor Party — and shares rose across the sector on Thursday.

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The levy was designed as a £15 billion funding component of measures designed to offset pressure on household incomes due to rising energy costs in the UK. The UK government has been widely criticized for its handling of the problem after a previous economic policy update in March. Mr Johnson’s government is also eager to show action after a report was published this week of a breach of lockdown restrictions at his home and office, 10 Downing Street.

The move is a reminder that energy policy is easily usurped by politics, leading to conflicting results and a messy operating environment for companies. Just last month the UK government said it was “giving the North Sea’s energy sectors a new lease of life” in a new energy-security strategy that also focuses on renewable resources such as offshore wind, with which the island nation is well. endowed with.

The government tried to maintain incentives for oil and gas companies to spend, including renewable energy, creating an 80% “investment allowance” similar to tax credits in the new levy. BP said it would review its £18bn UK investment plan.

The levy has been widely but misleadingly called a “windfall tax”. Economists see a true windfall tax, understood as a one-time cut in profits, as a theoretically efficient way for governments to raise money because it should not affect forward incentives. As BP pointed out, however, the new UK tax is a multi-year programme. The government said it would eliminate the tax if oil and gas prices return to historically more normal levels, although that too will automatically end at the end of 2025.

This adds further unpredictability to the uncertainty associated with the energy transition. A better, long-term approach would be higher rates for windfall gains used by many countries that automatically kick in at higher oil and gas prices.

European supermajors have long traded at a discount to their US peers, and that has only increased this year as shares of Exxon Mobil and Chevron outperformed. There are other reasons for the difference, such as different shareholder bases and different approaches to the energy transition, but inconsistent policy-making in London will not help reduce it.

Stephen Wilmot at [email protected] and Rochelle Toplensky at [email protected]

Credit: www.Businesshala.com /

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