Energy (Oil and Gas) Profits Levy Bill

Lord Sikka Excerpts

2nd reading & 3rd reading
Wednesday 13th July 2022 Lords Chamber

[Lord Sikka (Lab)]

My Lords, it is good to see the Minister advancing and defending a policy that the Government so vehemently rejected not so long ago. The Bill is not what it seems to be. A large chunk of the £5 billion that may be raised is to be handed back to the oil and gas companies through the 80% investment allowance. The Explanatory Notes do not say how much that would be; there is no information. Neither is there any requirement that the gas and oil produced with that investment should be used in the UK—after all, we are short of energy. Companies can claim the investment allowance on assets that they do not legally own. In other words, they can claim it on leased assets. I can tell noble Lords, having worked in the oil industry as an accountant, that accountants would be very busy concocting transactions so they can claim this £91 in every £100 for the allowance.

The Government’s treatment of renewables is absolutely lamentable. At the moment, for every £100 of investment, renewables receive £25 in various reliefs. In 2023, that goes down to £4.50. Of course, if the Government think that this 80% investment allowance is so good that it will stimulate additional investment, why not extend it to all the other sectors too and see whether it achieves that? Of course, it will not.

The Government are handing billions to the oil industry. The real reason for that is that it has given vast donations to the Conservative Party: some £1.5 million since 2019, and this is its pay-off.

The 25% levy, or the windfall tax, is actually low. The companies are collecting extraordinary profits without making extraordinary effort or taking additional risks. In my writing, long before the Government or any other political party came around to it, I called for a 90% windfall tax—Greenpeace talked about 70%—which would have generated a lot of money for insulating homes and putting solar panels on every single public building. The 25% windfall tax is simply a gesture by the Government to manage public opinion. It will not really have much impact on oil and gas companies, which have highly diversified income streams. Only about 5% of BP’s consolidated production is based in the UK. The 25% levy will account for less than 2% of its earnings before interest, taxes, depreciation and amortization—in accounting circles, the acronym for that is EBITDA, in case anybody is wondering about that particular expression. This small 2% charge will hardly worry any major oil producer, especially BP. In the first quarter it had profits of $6.2 billion, and it handed over $4 billion to shareholders in the last 12 months. BP reported an average refinery profit margin of $18.90 per barrel during the first quarter of 2022. That is nearly three times the $6.70 per barrel margin reported in 2020. This windfall tax will hardly make a dent in that kind of profiteering. BP has now paid tax on North Sea operations for the first time in the last six years because the Government have showered that industry with all kinds of relief, and that is the result. It has now paid $127 million in tax on profits of $12.8 billion. It will hardly be affected by this levy that the Government are telling us about.

Only about 3% of the consolidated production of Shell is in the UK. Its share of the windfall tax, in terms of impact on EBITDA, is barely 1.5%—hardly worth worrying about. The Government are just making a gesture. Shell tripled its profits to $9.1 billion in the first quarter of 2022 and has just completed an $8.5 billion share buyback programme. It is awash with cash; its refining profit margin rose in the second quarter of this year to $28 per barrel, from $10.23 a barrel in the first quarter and $4.17 a year earlier. That is seven times more profit from refining, and the Government are hardly making any dent in it. Shell has paid no corporation tax on its oil and gas production in the North Sea for the fourth consecutive year.

In the broader context, the yield from the windfall tax is too low, and a vast amount of it is being handed back to the same industry. No questions are being asked about how these oil and gas companies have managed to dodge taxes. There is no investigation into the transfer pricing and profit-shifting techniques used by these companies to dodge UK taxes or any review of the government policies permitting them. In 2019, the UK collected $1.72 in tax per oil barrel; in contrast, Norway collected $21.35 per barrel. Yet the UK Government are mounting no investigation into why they are giving away vast revenues.

Oil and gas companies are also rigging the market. They not only produce but buy, sell and speculate on gas and oil that they have produced themselves. BP alone employs more than 3,000 traders to do exactly that; this speculation has generated $2.3 billion of profit. There is absolutely no transparency about it or any disclosure of the accounts. No accounting standard or government department demands it, so these companies are buying and selling products which they produce, speculating and pushing up the price. That should really be looked at.

There is profiteering at all stages of the entire circuit of producing and selling oil, gas, petrol and electricity, but no windfall tax on all stages. Between June 2021 and June 2022, the refiners’ margins on petrol increased by 366% and margins on diesel increased by 648%. Why is there no windfall tax on the refiners?

On 8 July, the Competition and Markets Authority said:

“Increase in ‘refining spread’ added 24p a litre to fuel over the last year”


and:

“The ‘refining spread’ tripled in the last year, growing from 10p to nearly 35p per litre.”


That is a massive amount of profiteering, yet there are absolutely no checks on it. The RAC and other motoring organisations tell us that major retailers are incredibly slow to pass on falling wholesale costs, yet very quick to pass on rising ones. Again, the Government have done nothing about this, thinking that these organisations will somehow regulate themselves. They have got used to picking our pockets and are carrying on doing so, with the Government’s help. There is profiteering by banks, supermarkets, electricity generators, water and other companies; why are there no windfall taxes on them but a tax on oil and gas companies operating from the North Sea? I hope the Minister can answer these questions.

The Minister will also have noticed that Spain is now levying a windfall tax on banks and utilities to provide free train travel to help people and alleviate pressure on energy demand and petrol prices. Why do the Government not do the same?

--- Later in debate ---

[Baroness Penn (Con)]

I believe she was comparing that Government to this one. This Government have legislated for our net-zero targets—the first major country to do so. We have decarbonised further and faster than our G7 counterparts, and we have shown global leadership on climate change and wider nature and biodiversity through our chair of the G7 and COP 26. I know that noble Lords will continue to push the Government to do better, go further and do more. That is absolutely right and appropriate. The noble Baroness believes in effective campaigning; I am not sure that an effective way to campaign is not to recognise some of the progress made on the journey.

The noble Lord, Lord Tunnicliffe, said that investment will be subsidised in the tax system at a rate of 20 times the incentives available to renewable energy schemes. We do not recognise these figures. Oil and gas companies within the ring-fence regime are already paying tax on their profits at more than three times the rate of other companies, so any tax relief is reducing a higher tax bill. Although oil and gas companies save an additional 45p in tax for every £1 they invest—91p in total from the levy—they will pay tax at 65% of remaining profits. In contrast, outside the oil and gas ring-fence regime, profits on companies such as those in the renewables sector are taxed at 19%. So if a company made £100 in profit it would pay £65 in tax in the oil and gas regime but only £19 if it were outside the regime. If it then reinvested £25 of that profit, an oil and gas company would still pay more than twice the tax of a normal company—just over £42 compared with just under £13 for a company outside the regime.

The noble Lords, Lord Sikka and Lord Teverson, expressed concern that a large proportion of the estimated £5 billion of revenue raised in the first 12 months of the levy being in place would be lost to the investment allowance. I reassure noble Lords that the £5 billion estimate is net of the effect of the investment allowance.

[Lord Sikka (Lab)]

Will the noble Baroness tell us the cost of giving this 80% investment allowance? She said that the £5 billion is net; what would it have been without that, so that we know what the cost is?

[Baroness Penn (Con)]

I will come on to that in just a minute. Relatedly, I was just about to answer the question about whether the money going into the tax relief might be dead weight, in that the investment would have happened anyway. The Government expect the combination of the levy and the investment allowance to lead to an overall increase in investment.

In relation to the noble Lord’s question, the OBR will take account of this policy in its next forecast. I think we will see some more detail from its assessment then. I hope that the net additional investment that we expect from the design of the levy provides some reassurance to my noble friend Lord Moynihan.

The legislation also includes an anti-avoidance provision to prevent any recycling of existing assets getting the allowance. I think that is about the targeting of the allowance and avoiding dead-weight costs, rather than not being supportive of the general concept of recycling assets.

[Lord Sikka (Lab)]

I appreciate the point the noble Baroness made about recycling, but there is nothing whatever in the Bill to prevent an oil and gas company leasing a used asset, saying that it is a new investment and claiming this allowance. That asset need not even be owned by a company in the UK—the lessor could be somewhere else in an offshore tax haven. It could be an affiliate of the same company that pays, acquires a right and then uses it. The Bill does not prevent that, does it?

[Baroness Penn (Con)]

My Lords, the investment allowance has been carefully designed to ensure that it incentivises investment but does not provide relief for investment that would have taken place otherwise.

I will pick up on a couple of further points from the noble Lord, Lord Teverson, who had a few questions. To clarify, the allowance does apply to new as well as existing fields. It will not apply to carbon capture, usage and storage, as it applies only to upstream activities, and carbon capture, usage and storage is not an upstream activity. However, it would apply to the decarbonisation of those upstream activities. I hope that makes sense.

On energy storage, the Government published an energy security strategy in April to increase domestic energy production and accelerate the move away from gas towards low-carbon energies such as nuclear, renewables and hydrogen. It builds on delivery over the past decade, including giving the go-ahead to the first nuclear power plant in a generation and a fivefold increase in renewables. The Government will ensure a more flexible, efficient system for both generators and users by encouraging all forms of flexibility, with sufficient large-scale, long-duration electricity storage, to balance the overall system by developing an appropriate policy to enable investment by 2024.

The noble Lord, Lord Tunnicliffe, asked about the £400 energy discount and whether that may apply to second homes. The Government’s intention is for the Energy Bills Support Scheme to reach as many households as possible from October, while minimising the administrative complexity of the scheme. We consulted on the basis of delivering the £400 via domestic electricity meter points. While he is right that some households have second homes or multiple meter points, it will be important to balance this against the timely and efficient delivery of the scheme. I know noble Lords have expressed concern about the targeting of the support that the Government will provide. I just say that, in contrast to calls from other Benches—for example, around a different route, which could be to reduce VAT—the flat-rate payment provides a better targeted level of support to those households that are most vulnerable. I think that is something that we should support.

The noble Baroness, Lady Kramer, asked for reassurance that the proceeds of the levy will go towards support with the rising costs of living. As her noble friend said, the support announced this year is worth £37 billion. Our estimate for the first year of the levy is around £5 billion. While there is not a direct ring-fence, it was announced at the same time as the additional measures in May, which were about £12 billion of that £37 billion. The extra support that the Government are giving people actually outweighs the revenue being raised from this levy. The distributional analysis published alongside the May package shows that it was highly progressive, and around three-quarters of total support will go to vulnerable households. As noble Lords will also know, we made it clear at that point that next April’s uprating of benefits will use the normal September CPI—as we expect that level of inflation to be higher than it will be the following April—to account for ongoing high energy costs for those households on the lowest incomes.

The noble Baroness, Lady Kramer, the noble Lords, Lord Tunnicliffe and Lord Teverson, and others asked about energy efficiency. I talked about the £37 billion of cost of living support, and I reassure noble Lords that the Government are spending £6.7 billion in this Parliament to improve energy efficiency and decarbonise heat in buildings. Over the next three years, the Government are investing a further £1.8 billion on low-income household energy efficiency, on top of the £1.2 billion spent since 2020. This will improve around 500,000 homes, saving households on average £270 a year on their energy bills long term, at current energy prices.

Some £471 million has been spent to date on the social housing decarbonisation fund and sustainable warmth programme, estimated to save households an average of £350 to £450 a year on their energy bills. We are also consulting on expanding the energy company obligation to £1 billion per year for improvements to fuel-poor households. The Government agree with noble Lords about the importance of improving energy efficiency, as well as providing immediate support to households with the cost of living.

I cannot answer the question from the noble Lord, Lord Teverson, on the coal mine in Cumbria, or all the questions from the noble Lord, Lord Sikka, but maybe I will write to them both and copy in all noble Lords so that they get satisfaction on those points.