Windfall tax measures could ‘accelerate’ major UK oil projects like Cambo and Rosebank

Windfall tax measures announced by Rishi Sunak could “accelerate” major UK oil and gas projects like Cambo and Rosebank, according to experts.

The Chancellor’s 25% increase in the tax rate also came with a major boost to investment incentives up to 91.25% while the levy is still in place  – through to the end of 2025.

Graham Kellas of Wood Mackenzie said the timeframe “could be enough for some discoveries, currently awaiting final investment decision, to be developed” given the bulk of costs receiving relief.

“And if the field comes onstream after 2025” – and the government sticks to its plan to remove the levy, he added  – “they’re back to paying tax at 40% on the field’s profits”.

Neivan Boroujerdi, research director for North Sea upstream, said: “The move is unlikely to render new or existing projects uneconomic and it could even accelerate ‘ready to go’ developments, such as Rosebank and Cambo.

“Moving those forward to a final investment decision has been incentivised. It may reshuffle the order of some projects in global portfolios and affect some longer-term investment decisions.”

Wood Mac said the industry “abhor ad hoc revisions to the tax system”, but it should be noted that “no-one, industry or government, was anticipating $100 per barrel Brent in their planning scenarios”.

Kellas added: “Avoiding this kind of short-term response could be achieved if the UK adopted the approach – already used in other territories – where tax rates are linked to the price of oil, rising and falling in-step.”

The possibility of acceleration of certain developments was agreed by Professor Alex Kemp, petroleum economist at Aberdeen University.

But companies with mid or late life fields, which don’t have significant investment plans “will be hit the most” by the 25% increase to the headline tax rate.

The rules, announced by the Chancellor yesterday with immediate effect, also mean companies cannot claim relief on losses or decommissioning costs for profits subject to it.

“For operators with fields which are in the middle or late life positions, the investment incentive may not be particularly relevant to them.

“They may have losses made in previous years which can’t be carried forward, because remember a lot of companies made a lot of losses in 2020. You’re not allowed to get a relief on that (under the tax).

“Those are the companies that will be quite exposed.“

On the other hand, firms are being offered increased incentives to invest via a near doubling of the investment allowance and other measures – to a total of 91.25%.

That’s “quite dramatic” according to Professor Kemp, who said that it will be “very worthwhile” to companies like Shell and BP who have already got sizeable investment plans.

The relief will apply until the tax ceases – a sunset clause for December 2025 is being written into the legislation.

“There are very distinct pluses and minuses. The pluses were not particularly expected.

“If you make investments within that period, you do get a super deduction. That’s the sweetener.

“The extent will it be taken up and all that is a bit of an open question – it is a very strong incentive, to be sure, which wasn’t really to be expected.”

Broadly, though, the tax has been condemned by senior industry figures.

Derek Leith, global oil and gas tax leader at EY, said: “The Energy Profits Levy announced today will be detrimental to the energy transition and the UK oil and gas industry. It will impact investor confidence and be a bitter blow to the UK oil and gas supply chain.

“Even those who supported the concept of a ‘windfall tax’ may be surprised that investment in the energy transition, and in green energy more generally, will not be deductible against the levy nor qualify for the new investment allowance.

“It is also a fundamentally bad design for a tax to be imposed on an industry that is cyclical, with more lows than highs in recent years, in a manner which does not allow the trading losses of earlier years to offset the current profits. Essentially relieving losses at a lower rate than you tax profits – an extraordinary approach to tax policy.”