In a release sent to Rigzone recently, industry body Offshore Energies UK (OEUK) announced that it has released data “which models the impact of the government’s announced stronger Energy Profits Levy (EPL) on the UK economy”.
The modeling shows that the government’s proposed fiscal policy would generate a loss in economic value of around GBP 13 billion ($17.0 billion) compared to the economic contribution generated under the current windfall tax regime, OEUK noted in the release, highlighting that it has already shown the figures to HM Treasury.
“The loss comes from an expected reduction in investment by oil and gas producers into UK projects, with capital investments over the period expected to fall to GBP 2 billion ($2.62 billion) compared to around GBP 14 billion ($18.36 billion) under the current regime,” OEUK stated in the report.
“The analysis shows the policy will undermine the UK offshore energy sector’s ability to support the government’s overarching goal of driving economic growth,” it added.
In the release, OEUK also outlined that the data shows that “an environment in which the headline tax rate is increased to 78 percent and all EPL allowances are removed” would put around 35,000 jobs at risk to 2029 “due to projects not going ahead”.
OEUK said in the release that the data has been published to help inform decision making ahead of the Chancellor’s Autumn Statement in October. The industry body highlighted in the release that there have been five changes to the UK fiscal regime in 24 months and said the turmoil this has created for the industry will now be compounded by the plans outlined in the Chancellor’s Statement.
“The Prime Minister has said that the Budget will be painful,” OEUK Chief Executive David Whitehouse said in the release.
“This industry recognizes that difficult decisions will need to be made. This is a government that has made economic growth its main priority and yet our analysis shows that its policy will ultimately reduce this sector’s contribution to the UK economy,” he added.
“This paper shows that proposals to go further will trigger an accelerated decline of domestic production, and a corresponding reduction in taxes paid, jobs supported, and wider economic value generated,” he continued.
In his statement, Whitehouse noted that, “with an industrial strategy built in partnership with government, the UK can leverage the strengths of its offshore energy industry, put homegrown innovation and technology at the heart of its net zero ambitions, and ensure the UK is globally attractive for energy investment”.
“For more than two years UK oil and gas operators have paid three times the rate of corporation tax of any other sector in the economy,” he added. “Time is running out to mitigate damage that has already been done and to avoid further escalation. The Prime Minister promised to manage the North Sea in a manner that does not jeopardize jobs,” he said.
“We now need an honest conversation on how we can do this and need government to work with the sector at pace,” Whitehouse went on to state.
Rigzone contacted HM Treasury and the UK Department for Energy Security and Net Zero (DESNZ) for comment on OEUK’s release. In response, a HM Treasury spokesperson told Rigzone, “we are committed to maintaining a constructive dialogue with the oil and gas sector to finalize changes to strengthen the windfall tax, ensuring a phased and responsible transition for the North Sea”.
“Our plans for a new National Wealth Fund and Great British Energy will create thousands of new jobs in the industries of the future,” the spokesperson added. At the time of writing, DESNZ has not yet responded to Rigzone’s request.
In a statement sent to Rigzone last month, OEUK highlighted that the UK Exchequer Secretary to the Treasury, James Murray, “co-hosted a fiscal forum at Offshore Energies UK’s Aberdeen offices with senior industry leaders”. “The impact of changes to further extend and raise the Energy Profits Levy, or windfall tax, and the potential removal of critical capital allowances for the sector were central to discussions,” OEUK said in that statement.
EPL
The Energy (Oil and Gas) Profits Levy (EPL) was introduced in May 2022 to tax the extraordinary profits of oil and gas companies operating in the UK and on the UK Continental Shelf, a policy paper posted on the UK government website on July 29 states.
The levy is currently set at a rate of 35 percent, bringing the headline rate of tax on upstream oil and gas activities to 75 percent, the paper highlights, adding that the levy has two investment allowances – the 29 percent investment allowance and the 80 percent decarbonization investment allowance.
Capital allowances, including 100 percent First Year Allowances, are also taken into account in calculating levy profits, the paper notes. The paper states that the levy is due to expire on March 31, 2029, but points out that it “will end sooner if oil and gas prices fall to thresholds set out in the Energy Security Investment Mechanism (ESIM)”.
“Today the government is announcing that the rate of the Energy Profits Levy will increase to 38 percent from November 1, 2024, bringing the headline rate of tax on upstream oil and gas activities to 78 percent,” the policy paper notes.
“The period that the levy applies is also being extended to March 31, 2030, which is the end of the financial year in which the current Parliament is due to finish,” it adds. “The Energy Security Investment Mechanism will remain in place, helping to provide operators and their investors with confidence the levy will no longer apply if prices fall consistently to, or below, historically normal levels for a sustained period,” it continues.
“The government will also remove unjustifiably generous investment allowances from the Energy Profits Levy, including by abolishing the levy’s main 29 percent investment allowance for qualifying expenditure incurred on or after 1 November 2024,” it goes on to note.
“Expenditure incurred prior to making the changes on November 1, 2024, will not be affected. As part of this, the government will also reduce the extent to which capital allowance claims (including First Year Allowances) can be taken into account in calculating levy profits,” it continues. The paper states that there are no plans to change the availability of capital allowances in the permanent regime and says the government will retain the decarbonization investment allowance.
“Further details on these changes will be set out at the budget. Overall, money raised from these measures will support our clean energy transition, increasing security, and providing sustainable jobs for the future,” the paper says.
Source: rigzone.com