The Exchequer Secretary to the Treasury (Gareth Davies)
The Government introduced the Energy (Oil and Gas) Profits Levy (EPL) in May 2022 to tax the temporary extraordinary profits of oil and gas companies, and to help fund vital support for millions of people facing rising bills, including the energy price guarantee and additional support for those most in need. With this levy in place, the UK has a tax rate of 75% on profits from oil and gas production, which is expected to raise around £50 billion between 2022-23 and 2027-28. This is one of the highest tax rates for oil and gas production globally.
While ensuring that oil and gas companies pay their fair share, it is also important that the Government support jobs, supply chains and the country’s energy security. A faster decline in domestic production would mean importing more oil and gas—at greater expense and potentially resulting in additional emissions. This is why today the Government will give operators and lenders the confidence they need to keep investing in the UK’s domestic energy reserves, while being clear that while prices remain high, the Government will continue to tax extraordinary profits.
Through the introduction of an energy security investment mechanism, the Government will ensure that the EPL is disapplied if oil and gas prices fall to historically normal levels for a sustained period. The energy security investment mechanism will only be activated when prices consistently meet or fall below a level typically associated with pre-crisis household energy bills. The mechanism will use a 20-year historical average to the end of 2022, so that it is set at $71.40 per barrel of oil and £0.54 per therm of gas. The Government will require average prices to meet or fall below the level of both price thresholds for two successive quarters before disapplying the EPL and will set out further details on how this will work in due course. This mechanism is not expected to impact receipts from the energy profits levy, based on current market forecasts.
In the 2022 autumn statement, the Chancellor announced a review into the long-term fiscal regime for North sea oil and gas, to ensure that the regime delivers predictability and certainty, supporting investment, jobs and the country’s energy security. The Government have published terms of reference for this review, setting out its scope and objectives. The review will focus on how the fiscal regime can support the country’s energy security while also realising our net-zero commitments in the medium and long term.
In addition, the review will explore how the fiscal regime should respond to any future price shocks, ensuring that the country retains a fair return in exchange for the use of its resources in a high-price environment.
The full terms of reference can be found on the gov.uk website at:
https://www.gov.uk/government/publications/review-of-the-oil-and-gas-fiscal-regime-terms-of-reference.
[HCWS845]