North Sea oilwells should be taxed more heavily and so should the production of natural gas. Energy companies are making record-breaking profits from the sale of hydrocarbons that lie in the deep water that surrounds Britain and that should shame the industry when the people paying the highest price are the poorest in society.
It should shame them into willingly parting with some of the gains, especially when the price of oil and gas is dictated by global markets that are driven at the moment largely by the conflict in Ukraine. These are not super-profits that can be attributed to the ingenuity of their staff or foresight of company directors.
It’s true that the economic recovery after the worst of Covid-19 was over has played a part, creating a mismatch of supply and demand. But Russian aggression and the west’s necessary sanctions on Moscow have delivered the exceptionally high prices we see today and the longer the conflict in eastern Europe continues, the longer prices will remain high.
Illustrating the industry’s role for investors, BP reported last week that its profits in the first three months of the year more than doubled to $6.2bn (£5bn). This was the highest quarterly profit since the last time shortages of black gold prompted prices on global markets to rocket after the 2008 financial crash. Shell, the other major oil producer listed on the London stock exchange, also delivered bumper profits. The record-breaking $9.1bn (£7.3bn) generated in the first three months of the year beat the $6.3bn in the final quarter of 2021 and $3.2bn during the first quarter of last year.
BP’s chief executive, Bernard Looney, let slip last November, when Brent crude hit $85 a barrel, that the business was “a cash machine at these types of prices”. His chief financial officer said in February after Brent crude went above $105 a barrel: “Certainly, it’s possible that we’re getting more cash than we know what to do with.” Looney, whose pay almost doubled last year to £4.5m, was asked later what investment projects he would cancel if a windfall tax was imposed on the firm’s profits. None, he replied.
Proposals for a windfall tax, backed by Labour, the Liberal Democrats and the Greens, have become irresistible because, layer by layer, those attacking the industry have peeled away its lines of defence. Oil industry supporters said a windfall tax would be seen as an attack on all corporations, which would live in fear of a similar move. Yet nobody has suggested a windfall tax on other industries. If anything, major corporations from other sectors want a tax on the oil firms. John Allan, the Tesco chairman, said last week that a surcharge on oil companies was needed when the country was facing “real food poverty for the first time in a generation”.
There was a suggestion that a tax on BP and Shell would hit the “widows and orphans” who rely on dividend income. Then it was revealed that UK pension funds own less than 0.2% of Shell and BP shares. Of the total market value of UK-listed shares, UK pension funds account for just 2.4%. A broader measure of indirect ownership via investment funds adds only another 6%.
Rishi Sunak’s last stand against those calling for a windfall tax is to repeat the threat from the oil majors that it will stifle investment. Looney, backtracking on his earlier comments, said an £18bn investment plan represented 15% to 20% of the group’s global capital expenditure, up from the 10% to 15% that BP has historically deployed in the UK. Yet relatively small sums are being directed at renewable projects and the company’s bosses cannot unsay their comments last year that the firm is a cash machine and has more money than it knows what to with.
Under Labour’s proposal, firms such as Harbour Energy, the largest oil and gas producer in the North Sea, and London-listed Serica Energy, which is responsible for about 5% of the UK’s gas production, would be caught by a tax that was on course at the time of the budget statement in March to raise around £2bn, but could be as much as £3bn today. BP would contribute about £250m, barely a blip on its financial radar.
Earlier this month, this newspaper argued for a three-pronged approach to resolving the cost of living crisis. First, economic policy needs to target rising productivity and ensure the spoils are shared evenly with employees through increased wages; second, the real-terms cuts to benefits and tax credits of the past decade must be reversed; and third, the government must implement structural reforms to tackle the high cost of living, most importantly housing. One estimate suggested lower-income households will face a drop in income of £1,300 this year. A £3bn tax would go some way to redressing the balance, but the government should go further.
The business secretary, Kwasi Kwarteng, has told his officials that he objects to singling out North Sea firms because there are so many other companies involved in the supply and distribution of oil, gas and electricity making hay. It’s a good point. He should identify them and add them to the list of firms due a surcharge tax.
However, Labour’s plan has the virtue of simplicity and so it is likely to be the option Sunak eventually agrees to implement. The chancellor has spent recent weeks telling MPs and TV audiences that he is mulling over the idea, but it is understood that only now is he considering the options compiled by his advisers in No 11. He needs to move quickly. Fairness demands it.