At its peak in the early 2000s, the North Sea oil and gas industry, centred on Aberdeen, delivered over 2.7m barrels of oil daily – a heady 3.6pc of global production. North Sea gas fields provided the equivalent of another 1.8m barrels on top of that.
While production has since dropped sharply, with fewer than a million barrels of crude pumped daily, the UK’s oil and gas industry continues to employ 25,000 in and around Aberdeen and 200,000 more across the UK.
More fundamentally, with tens of millions of petrol and diesel cars on the road and 85pc of homes relying on gas for heating, oil and gas still meet around three quarters of the UK’s total energy needs.
Far better to pump our own hydrocarbons than relying on imports in an increasingly uncertain world.
Renewables are clearly important – powering 36pc of UK electricity generation last year, up from 11pc a decade ago.
But oil remains essential for transportation and a range of industrial processes. And gas-fired turbines generated 40pc of electricity used in the UK last year, up from 30pc in 2012.
Even the Climate Change Committee, a government-created advisory body, acknowledges that oil and gas will still account for half the UK’s energy usage in the late 2030s. At a time when energy security has become critical, it makes economic and geostrategic sense to make the most of our own resources.
Plus, using North Sea energy involves far fewer carbon emissions than doubling down on the UK’s sharply increased reliance on gas drilled in the US and Qatar.
That gas is liquidised, pumped into massive diesel-powered ships then “regasified” after travelling thousands of miles to UK ports – a hugely energy-intensive series of processes.
Environmentalists ignore such realities when they block roads and wreck high-profile sporting events, screaming for North Sea production immediately to cease.
For all these reasons, the Government’s windfall tax on UK oil and gas producers is deeply counterproductive. Little more than a year ago, when other UK businesses paid 19pc corporation tax, North Sea producers were charged 30pc plus a 10pc “supplementary levy” on top.
Since then, tax on North Sea profits has risen from 40pc to 65pc and now 75pc – thanks to then Chancellor Rishi Sunak and his successor Jeremy Hunt. This windfall tax also now applies not until 2025, as originally announced, but until 2028.
The Tories are keen to parade their green credentials – despite evidence even from the government’s own net-zero cheerleader that ongoing North Sea production will be environmentally useful for at least another decade and more.
Ministers are also under the impression this windfall tax will raise lots of revenue, helping to plug the huge post-lockdown hole in our national accounts.
Figures released last week showed that while government borrowing was £13.2bn less than expected over the last 12 months, the state still spent £139bn more than it raised during 2022/23 – a deficit £18bn up on the previous year.
The UK is, according to the Office for Budget Responsibility, facing triple-digit deficits for several more years to come. That highlights the case not for sky-high taxation, but pro-growth policies to boost GDP, making the debt more manageable by expanding our economy.
Sunak and Hunt have instead imposed the heaviest tax burden in 70 years – and who better to tax than those nasty North Sea oil and gas producers?
This Tory windfall tax will raise an average of £8.6bn a year between now and 2028, says the OBR, up from £0.8bn on average during each of the six years until 2021. So, on official estimates, the tax burden on this single industry has risen almost eleven-fold, despite the glaringly obvious national interest in making sure North Sea production is preserved.
Yes, crude prices rose after Putin invaded Ukraine last February, peaking at $138 a barrel the following month. During 2022 as a whole, oil averaged $101 – 40pc up on 2021.
But the oil price didn’t rise 11-fold and the profits of UK energy firms certainly didn’t rise eleven-fold – so how is this tax hike justified?
Some of the multinational oil majors still operating in the North Sea did indeed make vast headline profits as global energy prices went haywire last spring and summer.
But they were overwhelmingly derived from non-UK operations, in parts of the world with much lower extraction costs.
North Sea production is anyway now dominated by small, UK-centric independent operators.
They lack the huge balance sheets of the global energy companies, so struggle to take advantage of the tax breaks that Chancellor Hunt claims will lead to greater investment.
On the contrary, as I learned while visiting Aberdeen a few days ago, nine out of ten local operators have frozen their investment plans – and is it any wonder?
Imagine taking on tens of millions of pounds of debt to launch a complex offshore drilling project, then the tax rate almost doubles – at a time when the cost of labour and materials is also spiralling.
Harbour Energy, among the largest UK independents, made just £6.4m in post-tax profits last year – after setting aside a whopping £1.2bn (yes, billion!) for the so-called “energy profits levy”.
Far from rolling in cash, Harbour has just announced 350 onshore job losses, mostly in Aberdeen. The UK oil and gas industry as a whole is meanwhile dealing with the worst strikes in a generation among offshore workers.
North Sea operators have been lobbying the Treasury to set a “price floor” – so this eye-watering tax rate only applies when crude is above a certain level. They’ve been firmly rebuffed.
But Hunt needs to understand that unless this 75pc tax rate is slashed, North Sea production will drop very significantly – and perhaps fizzle out altogether.
That will make a nonsense of the OBR’s jacked-up oil and gas revenue projections and could even cost the Exchequer money.
If this is truly a “windfall tax”, Chancellor, why does it still apply now – when the price of the Brent crude pumped from British waters is 20pc lower than before Putin invaded Ukraine?
And why has this preposterous tax rate on so-called excess profits been extended until 2028 – when no one knows where the oil price will go?
Source: https://finance.yahoo.com/news/sunak-pulling-plug-north-sea-050000991.html