UK government announces tweak to Energy Profits Levy

The UK government has today announced changes to the oil and gas tax framework with commitments to lower the controversial Energy Profits Levy, which the government acknowledged was putting the UK’s domestic energy supplies at risk.

The levy, which puts a marginal tax rate of 75% on North Sea oil and gas production, will remain in place for the next five years while oil and gas prices remain higher than historic norms — but will fall back to 40% when prices consistently return to normal levels for a sustained period.

The government acknowledged that, while the levy had raised about £2.8 billion ($3.5 billion) so far to assist the government in paying some of the typical household’s energy bill last winter, oil and gas companies were cutting back on investment.

This was putting the long-term future of the UK’s domestic supply at risk, “meaning we would be forced to import more from abroad at a time when reliable and affordable energy is a focus for families and businesses”, the government said.

In response to this, the government was introducing an Energy Security Investment Mechanism to give the oil and gas sector certainty to raise capital and invest in new and existing projects.

This means that if oil and gas prices fall to historically normal levels for a sustained period the tax rate for oil and gas companies will return to 40%, which was the rate before the Energy Profits Levy was introduced.

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Based on government forecasts, the new mechanism will not be triggered before the levy’s planned end date of March 2028.

Gareth Davies MP, Exchequer Secretary to the Treasury, said: “The tax rate for oil and gas companies will only return to 40% if both 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.”

In response, UK oil and gas industry association Offshore Energies UK said the mechanism was a “step in the right direction but many more need to be taken”.

The oil and gas industry still faced considerable challenges to safeguard the jobs of its 200,000-strong skilled workforce, to ensure the UK’s homegrown energy security, and to power the transition to net zero and beyond with homegrown oil and gas rather than imports.

OEUK chief executive David Whitehouse said: “We’ve always been clear that when the windfall conditions go, the windfall tax should go.”

“This is a step in the right direction, but many more will need to be taken to restore confidence to our sector. We will now work closely with government and lenders to understand the detail of the measure and its effectiveness at unlocking investment.”

Davies said the government had been right to “recover excess profits resulting from [Russian President Vladimir] Putin’s war and use the money to help people with their energy bills. Thanks to the revenue raised from windfall taxes on energy profits, we helped save the typical household over £1300 on their energy bill last winter”.

“While we stepped in to help, never again can our energy supplies be at the whim of petrostate despots like Putin.

“It would be beyond irresponsible to turn off the North Sea taps overnight. Without oil and gas from British waters, we would be forced to import even more from overseas, putting our security of supply at risk.”