Britain's windfall tax on oil and gas producers will not be applied if prices drop below certain levels for six months in a row, the finance ministry said on Friday, in a move the government hopes will boost energy security.
The energy profit levy (EPL) was introduced in May last year after a jump in energy prices resulting from Russia's invasion of Ukraine, but the industry has warned that the high tax level could lead to reduced output in the long term.
The EPL was raised from its initial 25% rate to 35% in November, bringing the overall tax burden to 75%. It has raised 2.8 billion pounds ($3.51 billion) so far, the finance ministry said.
With Friday's changes the windfall tax would fall away, reducing the tax burden to 40%, if average oil and gas prices fall to or below $71.40 a barrel for oil and 0.54 pounds per therm for gas for two consecutive quarters.
However, the government said independent price forecasts by the Office for Budget Responsibility suggest the price floor mechanism is unlikely to be triggered before the windfall tax’s planned end date in March 2028.
Benchmark Brent crude oil prices have fallen from a March 2022 peak of about $139 a barrel in the wake of Russia's invasion of Ukraine to about $75 a barrel currently, and have traded in a range between about $70 and $89 a barrel so far this year.
British wholesale gas prices skyrocketed in March 2022 to record highs of around 6 pounds per therm, but the benchmark front-month British gas price is currently trading around 0.63 pounds. It last traded below 0.54 pounds in April 2021, according to Refinitiv Eikon data.
Friday's move comes ahead of a final investment decision by Equinor EQNR.OL on the $5 billion Rosebank oilfield, which has been earmarked for the first half. An Equinor spokesperson said the government's decision had "no direct consequences for us."
Oil and gas producers in the UK North Sea, including TotalEnergies and Harbour, have said the levy would result in them cutting investment in the basin.
TotalEnergies and Shell broadly welcomed the government's announcement on Friday, and said they were analyzing details.
"This is a step in the right direction, but many more will need to be taken to restore confidence to our sector," said David Whitehouse, CEO of the North Sea sector's main business association Offshore Energies UK (OEUK).
From output of about 4.4 million barrels of oil equivalent per day (boed) - more than OPEC heavyweight Iraq - at the start of the new millennium, Britain now produces about 1.3 million boed and is on course for a decline to less than 200,000 boed by 2050, the NSTA sector regulator says.
Britain was a net oil exporter as recently as the 2000s, but now depends on both oil and gas imports.
($1 = 0.7960 pounds)
British oil and gas production https://tmsnrt.rs/45RmVUb
UK oil output vs oil demand https://tmsnrt.rs/3MIZjII
UK gas output vs gas demand https://tmsnrt.rs/3C8Dttb
UK government revenue from oil and gas sector UK government revenue from oil and gas sector https://tmsnrt.rs/3NB5I7H
Britain to introduce price floor to energy sector windfall tax - sources https://www.reuters.com/business/energy/uk-set-introduce-floor-oil-gas-windfall-tax-ft-2023-06-08/
(Additional reporting by Sarah Young, William James, Nora Buli, America Hernandez, Ron Bousso; Editing by Kate Holton, David Goodman and Jan Harvey)