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Our Take: When Rewards Are Great, So Are Risks

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Energy Intelligence considers the newly introduced UK windfall tax to be a sign of rising risk of legislative intervention in the energy industry amid high prices. While not unexpected — and by no means gamble-free — the move underscores the pressure governments are under to cut energy bills amid a global cost-of-living crisis. We see other countries at least contemplating following suit.

  • The UK Treasury has temporarily made oil and gas profits subject to a headline tax rate of 65%, up from 40%. It expects the change to generate £5 billion ($6.3 billion) in tax revenues in 12 months, allowing the government to raise discounts on energy bills.

  • Shell, BP, TotalEnergies and Eni are exposed via still-substantial UK North Sea portfolios, with the region accounting for around 6% of BP and Total’s global output last year. Jefferies analysts see the tax changes having a low single-digit percentage impact on the net income of BP, Eni and Total, and a more negligible impact on Shell.

  • As we flagged previously, companies need to consider stakeholders, not just shareholders, as they ponder how to spend huge profits. With hydrocarbon-rich countries around the world dangling the prospect of windfall tax, using bumper earnings to repurchase shares, pay out big dividends or cut debt will do little to appease cash-strapped consumers or government accountants looking to balance the books. Notably, Shell and BP were unable to fend off the tax even after pledging to invest £20 billion-£25 billion over the next 10 years and up to £18 billion by 2030, respectively, in the UK energy system.

  • The windfall tax naturally comes with risks to investment, even if producers can claim up to 90% tax relief if they reinvest profits upstream. Shell, which last year decided to move its tax residence to the UK from the Netherlands, noted the tax relief does not extend to renewable energy and wants more “certainty” of policy. The vaguely worded promised phase-out of the tax once prices return to “historically more normal levels” provides little reassurance. The sunset clause doesn’t hit until end-2025.

  • The introduction of a windfall tax in the UK — the least-risky investment jurisdiction under Energy Intelligence's Country Risk Index — is telling. True, the UK already scores worse than the likes of Norway, Canada and the US on Stability of Regulations and Energy Strategy and Stability, reflecting occasional ad hoc changes. But absolute risks are on the rise in previously “safe” jurisdictions as Western countries look to expedite the shift away from fossil fuels. Windfall taxes already exist in countries such as Italy, and some Democrats have been pushing for one in the US. Another special duty on excess profits at electricity generators, including renewable power producers, is said to be in the offing in the UK, extending the reach to other parts of the energy sector.

Topics:
Fiscal Terms, Prices, Earnings, Upstream Projects, Offshore Oil and Gas
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