ExxonMobil Sues Europe Over Whether Its New ‘Windfall Profits’ Tax Is Really A Tax

Just weeks after expressing fear that the hundreds of billions in new incentives and subsidies for green energy contained in the Inflation Reduction Act (IRA) could cause a flight of capital investment dollars from its continent to the United States, the European Union finds itself facing a flight of oil and gas industry capital thanks to its recently-enacted tax on “Windfall Profits.” That was one outcome threatened by ExxonMobilXOM
in a statement released yesterday after it filed a lawsuit with the General Court of the EU challenging the tax.

“This tax will undermine investor confidence, discourage investment, and increase reliance on imported energy and fuel products,” ExxonMobil said in its statement. “European industries already face a very real competitiveness crisis and governments should be supporting the production of reliable and affordable energy.

“Looking forward, as we consider future multi-billion Euro investments in Europe’s energy supply and transition, we look for strong business cases underpinned by a stable and predictable investment climate,” it added “Whether we invest here primarily depends on how attractive and globally competitive Europe will be. We will continue to work with EU leaders to address these issues. Thoughtful policy is critical.”

The EU’s tax, passed in September, would assess a levy of at least 33% on oil and gas companies that are at least 20% above average profits for the previous three years. It’s a harsh measure designed to punish companies for high commodity prices that have ironically been caused in large part by energy policies adopted by the EU’s own member countries in recent decades.

“It will be now up to the General Court to rule on this case,” EU spokesperson Arianna Podesta said. “The Commission maintains that the measures in question are fully compliant with EU law.”

That claim by Podesta is the question at hand in ExxonMobil’s lawsuit. When the EU measure was approved in September, it was labeled as a “solitary contribution” and not a “tax,” which is something the European Commission (EC) lacks the authority to impose without a formal piece of legislation approved by the European Parliament, which was bypassed in this instance. In approving this measure, the EC invoked the EU Treaty’s Article 122, an emergency provision that allows the EC to bypass the Parliament.

Certainly, ExxonMobil’s claim that the measure is indeed a tax seems valid, especially given that its structure is similar, though not identical to windfall profit tax measures that have been proposed in recent months by various Democratic members of the U.S. congress. Those proposed taxes in turn would work off essentially the same structure contained in the Jimmy Carter-era Windfall Profit Tax imposed on oil companies in 1980 during a past time of high commodity prices. The members of the EC can call their levy anything they like, but if it looks like a duck and quacks like a duck, chances are pretty good it’s a duck.

ExxonMobil’s business interests in the EU countries lie mainly in the area of refining, where it says it has invested more than $3 billion in major expansion and improvement projects over the last 10 years. In its statement, the company noted that “The expansions and improvements in Antwerp and Rotterdam have helped us achieve our best global production rates since 2008. We’re delivering more energy products at a time when Europe struggles to reduce its energy imports from Russia.”

But the relative merits of ExxonMobil’s argument are unlikely to matter in the near term. The filing of the lawsuit doesn’t prevent the EU from enforcing the levy/tax/solitary contribution, and there is no time certain in which the EU’s General Court must hear arguments and render a decision. Thus, any outcome could be years down the road.

In the meantime, the member nations of the EU will continue to struggle to survive an energy crisis that is still building despite all the measures recently invoked by the EC and their own national governments. At the same time, companies like ExxonMobil and others in the oil and gas industry will no doubt redirect some future capital investments to countries, like Guyana as one example, that offer more stable and predictable investment environments than the one governed by the EU.