17 November 2022
If you are covering the extension to and increase in the windfall tax for oil and gas producers, please find below a comment from Jamie Maddock, equity research analyst at Quilter Cheviot:
“One of the biggest questions we had when the windfall tax was placed upon oil and gas producers back in May was for how long it would remain in place. Jeremy Hunt seems clear that 2028 will be the end date, taking into account the cyclical nature of energy firms, so it is now very much a higher tax for longer. Even since May the political mood has shifted further, and many of the energy giants have recognised this, with Shell being the most prominent company calling for further windfall taxes to help ease the burden on the consumer. That 2028 date will remain very fluid as a result, so certainty cannot be guaranteed.
“As a result, the government has spotted an opportunity to help plug its black hole in the public finances. It is perhaps seeing elevated oil and gas prices for some time beyond when inflation is expected to fall back to more normal levels. It is worth noting that the oil market is undersupplied and with recent tightening by OPEC, high prices are likely to be sustained for as long as the war in Ukraine continues and demand remains elevated.
“The biggest argument against the windfall tax has always been how it will kill investment at a time when we need the energy companies ploughing money into the transition to net zero and to alleviate overseas fossil fuel dependence to aid self-sufficiency. We are yet to see a meaningful drop off from the likes of Shell and BP in investment, though it is likely to be the smaller players whose spending could be threatened by this further government intervention. These smaller firms play as equally an important role as the giants in reducing the UK’s dependence on overseas oil and gas.
“However, the government continues to dangle the carrot of tax breaks to the oil and gas producers in order to protect this investment. This is politically controversial given there is no stipulation on what type of investment is permitted. The government has chosen not to tighten the rules around this, acknowledging how much it still needs these businesses. As a result, the government will continue with this blunt instrument that pleases few and remains murky on its effectiveness.”
