Energy (Oil and Gas) Profits Levy Bill

Stephen Flynn Excerpts

2nd reading
Monday 11th July 2022 Commons Chamber

[The Chief Secretary to the Treasury (Mr Simon Clarke)]

I beg to move, That the Bill be now read a Second time.

People across the country are facing rising energy costs and an increase in the overall cost of living. Of the basket of goods and services that we use to measure inflation, a record proportion are seeing above average price increases. Indeed, the country is now experiencing the highest rate of inflation for 40 years, which is causing acute distress to the people of this country. In May the Government announced a series of measures to help the British people during this difficult time, in which we have seen oil and gas prices reach new highs; oil prices have nearly doubled since early last year and gas prices have more than doubled. This is a global phenomenon that is driven by factors out of any single Government’s control, in large part resulting from Russia’s illegal war.

With increased prices at the global level, profits from oil and gas extraction in the United Kingdom have also shot up. These are unexpected, extraordinary profits—above and beyond what forecasters could have expected the sector to earn. Because of these extraordinary profits, and to help fund more cost of living support for UK families, the Government are introducing an energy profits levy. The temporary levy is a new 25% surcharge on the extraordinary profits. When oil and gas prices return to historically more normal levels, it will be phased out.

[Stephen Flynn (Aberdeen South) (SNP)]

I would welcome some clarity from the Minister as to what his Government regard normal prices to be, because those involved in the industry will be watching on at this moment.

[Mr Clarke]

The answer is: prices of an order that we saw prior to Russia’s invasion of Ukraine and prior to some of the inflationary pressures resulting from the covid disruption—prices more akin to those seen in 2021. Indeed, we could also refer to factors that predate that, back to 2019. The system has clearly been in flux, but I would certainly not want to encourage the artificially low prices of 2020 to be seen as a baseline for these purposes.

[Stephen Flynn]

I thank the Minister for giving way again. Getting investment into the industry is one of the Government’s big arguments for the tax break incentives they are providing to the industry. How can that possibly happen when they do not even say what a normal price is?

[Mr Clarke]

I will set out more about our investment incentives in a moment. We are not going to tie ourselves to a specific price level, but will obviously look towards a return to more normative market conditions—not, as I said, the artificial lows of 2020—such as the pre-crisis situation in 2019 and some of the much healthier pattern of last year, prior to what Russia has done in Ukraine, which has obviously driven prices to new highs. That gives the House a sense, but we will obviously set out our thinking well in advance of repealing the levy.

I am firmly committed to our net zero strategy.

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[Mr Clarke]

No, I will not; I am going to make some progress.

As set out in the energy security strategy, the North sea will still be a foundation of our energy security for years to come. Currently, about half our demand for gas is met through domestic supplies. In meeting net zero by 2050, we have to be realistic; we will still be using about a quarter of the gas that we use now. It is therefore necessary to incentivise investment in oil and gas, and to encourage companies to reinvest their profits to support the economy, jobs, and our energy and security, but it is possible to tax extraordinary profits fairly and to incentivise investment. That is why, within the energy profits levy, a new “super-deduction” style relief has been introduced to encourage firms to invest in oil and gas extraction in the UK. We expect that the energy profits levy, with its investment allowance, will lead to an overall increase in investment. Indeed, one oil and gas company has already said that the immediate investment allowance should spark further investment in the North sea. The new 80% investment allowance will mean that, overall, businesses will get a 91p tax saving for every £1 they invest, providing them with a clear incentive to do so. This nearly doubles the tax relief available and means that the more investment a firm makes, the less tax it will pay. Unlike Labour’s windfall tax in 1997, this levy both incentivises investment and raises more revenue.

The energy profits levy contains an investment allowance that doubles the overall investment relief for oil and gas companies, unlike Labour’s proposal of a few weeks ago. Our levy raises around £5 billion over the next 12 months against Labour’s estimate of around £2 billion for its proposals. Its windfall tax would raise less than £70 per household, not £600 as it claimed. In fact, the Opposition’s regressive VAT plans would give millionaires in mansions more off their bills than those in need. They are now caveating their windfall tax costings by stating that their £600 per household support will be supported by “other measures”. By that I presume they mean more public spending and a higher rate of taxation for hard-working people across this country. As usual with Labour, the sums sadly do not add up.

The new tax we are introducing today ensures that the extraordinary and unexpected profits from which oil and gas companies have benefited are taxed fairly and provide a significant investment incentive. This is a sensible considered move and one that will be warmly welcomed across the House.

Our plans mean that the oil and gas producers can claim the allowance when their spending on investment is actually incurred. This is unlike the allowance under the existing permanent tax regime for oil and gas companies, which can be claimed only once income is received from the field, subject to the investment, and, as some Members of the House will know, that can take several years.

I want to make it clear what the investment allowance will apply to. First, if capital or operating expenditure qualifies for supplementary charge allowance, it will qualify for the energy profits levy allowance. As the levy is targeted at the extraordinary profits from oil and gas upstream activities—that is the profits that came about owing to global price increases—it makes sense that any relief for investment must also be related to oil and gas upstream activities.

Secondly, such spending can be used to decarbonise the oil and gas production, for example through electrification. Therefore, any capital expenditure on electrification, as long as it relates to specific oil-related activities within the ringfence, will qualify for the allowance.

[Stephen Flynn]

I thank the Minister for giving way once again; he is being very generous. On that specific point, the Financial Secretary to the Treasury stated the same last week. It is good to have that clarification, but why is it not written into the text of the Bill?

[Mr Clarke]

I can provide that assurance from the Dispatch Box. Examples of electrical expenditure on plant and machinery will be things such as generators, which include wind turbines, transformers and wiring. I also remind the House that there are other tax and non-tax levers to support non-oil and gas investments, such as in renewables. Those levers include the super-deduction and our competitive research and development tax credit regime. Importantly, the returns on these investments are taxed at 19% rather than at 65% as for UK oil and gas profits.

We have been listening closely to feedback from industry. Late last month, my right hon. Friend the former Chancellor met industry stakeholders in Aberdeen to discuss the levy and to make sure that it works as the Government intend it to. As my right hon. Friend the Financial Secretary to the Treasury confirmed in a debate last week, the Government have changed the legislation, which is reflected in the Bill before us today.

Tax repayments that oil and gas companies receive for petroleum revenue tax related to losses generated by decommissioning expenditure will not be taxed under the levy. These are repayments that are typically taxed under the permanent tax regime. However, as wider decommissioning expenditure is also left out of the account for the levy, this change is both consistent and fair. I wish to reiterate my thanks to those in the industry with whom we have engaged on this matter, and to again reassure the House that, with this change, the Government still expect the levy to raise around £5 billion over the next year.

On how long the levy will be in place, it will take effect from 26 May this year and, when oil and gas prices return to historically more normal levels, it will be phased out. The sunset clause in the Bill ensures that the levy is not here to stay. There are very few taxes that have their expiry date set in law, so this provision demonstrates the Government’s commitment to keeping the levy temporary and gives oil and gas companies further reassurance as they seek to plan their investments.

Our permanent oil and gas tax regime is competitive globally against similar operating environments and is lower than that of Norway, the Netherlands or Denmark. However, it is both fiscally prudent and morally right that we have a temporary and targeted levy that applies to extraordinary profits in our oil and gas sector and reflects an extraordinary global context.

Through the Bill, the levy will raise some £5 billion of revenue over the next year so that we can help families with the cost of living through significant and targeted support to millions of the most vulnerable. These are extraordinary times and we are seeing extraordinary prices, and that requires extraordinary Government action.

I did not come in to politics to raise taxes, nor did this Government, but we are about delivering the action required to support families in their time of need. At the same time, the Government are clear that we want to see the oil and gas sector reinvest its profits to support our economy, jobs and energy security. For those reasons, I commend the Bill to the House.

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[Stephen Flynn (Aberdeen South) (SNP)]

It would be remiss of me as MP for Aberdeen South not to reflect on the fact that last week marked 34 years since the Piper Alpha disaster. It is all well and good for Members to talk about the Bill, but it is important to reflect on the sacrifices that many people have made in the North sea, particularly my constituents and those of the hon. Members for Banff and Buchan (David Duguid) and for West Aberdeenshire and Kincardine (Andrew Bowie), who continue to work in inhospitable terrain daily. I also reflect on the ultimate sacrifice that was paid by so many people long ago; I am sure the Minister will join me in that in her summing up.

On a less serious note, it is funny that we are in the midst of a leadership contest where all we hear about is tax cuts—some have promised £200 billion of tax cuts—yet the Chief Secretary to the Treasury is in the unenviable position of coming to the Chamber to tell us that he will hike taxes to 65% on the oil and gas sector. The irony of that will not be lost on anyone present. Importantly, that tax hike is four times greater than the £1.2 billion that the Opposition pushed for in January, so I congratulate him on being the only Conservative at this moment who appears to want to hike taxes.

Seriousness is important in this debate, however, because we are talking about why the legislation is needed. All hon. Members present are aware of the severe challenges that people up and down the country are facing. Energy prices are absolutely skyrocketing and we have all seen the troubling news in the last couple of days that they are expected to go higher than even Ofgem anticipated. There is also the knock-on impact of inflation, which is away to hit double figures. Fuel costs are skyrocketing. Clothing costs are skyrocketing. Food costs are skyrocketing. Interest rates are going up. Whichever way people turn, irrespective of where they live on these isles, they are getting squeezed and hammered. And the situation is not going to get better: we know the UK under the leadership of the current United Kingdom Government has the slowest growth in the entire G20 outside of Russia and the true effects of Brexit continue to be felt.

So implementing a policy that puts money into people’s pockets is necessary and we of course support the principles of what the Government are seeking to do in that regard. It is worth reflecting on the fact that we are now at a point where the UK Treasury has coined some £400 billion from Scotland’s North sea oil and gas sector. Is it not a pity that we are returning to the well once again? We look enviously across the North sea at Norway, which has a sovereign wealth fund from its own oil and gas sector. It is a bigger basin there, but that fund sits at around $1 trillion. What a comparison to this Government. Not only are they going back to the Scottish well to try to put in place financial support for people, but they are at this crux, where they do not necessarily know what it is and where they are seeking to go, because the Bill was undoubtedly hastily written on the back of Sue Gray’s report, as the Minister acknowledged earlier, when he could not even tell us at what price the levy would be removed. He talks about a normal price for oil and gas. I do not know what a normal price is for oil and gas; I am the MP for Aberdeen South and I have no idea what a normal price for an oil and gas barrel should be, and I do not think any Members on the Government Benches do. That offers absolutely no certainty to industry, irrespective of what the Government seek to suggest.

Perhaps the most glaring omission from the Bill is the fact that the Government are going to offer tax incentives in relation to further exploration, but we will not have anything in the Bill on renewable technologies directly linked to the offshore industry. Those tax incentives are not going to be applied to the renewables industry itself. We were told that is outwith the scope of the Bill, but it is a great disappointment that the Government had an opportunity to seriously incentivise investment in renewables and chose not to do so.

We are of course talking about the wider picture at the present time and I reflected earlier on the UK Government’s desire to cut taxes, but we have not heard about climate change from any single Tory leadership candidate; what are their views on climate change? It is disappointing that there is no talk in relation to this Bill about the journey to net zero or the climate compatibility checks that I think we all across this Chamber, and indeed in industry, agree with.

It is clear, from looking at the situation at the moment, why the Bill is needed. The Government chose to introduce it when they did for reasons of political expediency, but we cannot allow the Bill to simply go through without attempting to improve it and I look forward to doing that at Committee stage.

[Several hon. Members rose—]

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[Abena Oppong-Asare (Erith and Thamesmead) (Lab)]

It is a pleasure to respond on Second Reading on behalf of the official Opposition. I thank all hon. Members; this has been a good debate with many interesting contributions from across the Chamber. I particularly congratulate my hon. Friend the Member for Wakefield (Simon Lightwood) on his excellent maiden speech—isn’t it great to see Wakefield turn red again? I know that he will be a great champion for Wakefield and his constituents, and I look forward to hearing many more of his speeches. I also thank the hon. Members for Waveney (Peter Aldous), for Bath (Wera Hobhouse) and for Aberdeen South (Stephen Flynn), who made interesting speeches; it is good to hear them supporting Labour’s policy.

The message that we have heard loud and clear from hon. Members today is that the Tory cost of living crisis is far from over. In fact, the financial pressures that many people are facing grow larger and larger. Food, fuel and energy bills continue to rise and families across the country are already worrying about the winter that lies ahead, as we all see reflected in the emails that we get from our constituents across the country. As my hon. Friend the Member for Wakefield mentioned, in that context, we are finally considering this long-overdue Bill, seven months after my hon. Friend the Member for Leeds West (Rachel Reeves), the shadow Chancellor, set out Labour’s plan for a windfall tax on oil and gas producers—I repeat: seven months.

As my hon. Friend the Member for Ealing North (James Murray) said, since Labour first called for the windfall tax on oil and gas producers, energy bills for typical households have risen by a shocking £700, inflation has rocketed to its highest level in 40 years, and, of course, people’s taxes have gone up as the Government have pressed ahead with the national insurance increase. In that period, oil and gas producers’ profits have soared. Indeed, we estimate that between Labour first calling for the windfall tax in January and the former Chancellor and soon-to-be former Prime Minister finally accepting our arguments at the end of May, nearly £2 billion of tax revenue could have been raised to help people with the cost of living crisis. In that time, Conservative MPs voted against our plans for a windfall tax not once, not twice, but three times. Ministers repeatedly claimed that such a plan would not work. Famously, the current Chancellor said that oil and gas producers were “already struggling”; I would be very interested to hear from the Chancellor whether he has changed his mind about that.

It is shameful that it took the Government so long to come to their senses and finally do the right thing. That is yet more evidence, if we needed it after last week, that this Government are on their last legs, out of touch, out of ideas and now truly out of time. With the windfall tax and with so many other issues, it is Labour that leads and the Conservative party that follows. We are relieved that the Government are finally legislating for a windfall tax, and we will not oppose the Bill today, but there are several areas of concern for us.

Several hon. Members have mentioned the Bill’s tax break for oil and gas producers. We simply do not think it right that the Bill will hand back money to the same companies that are supposed to be contributing their fair share to tackling the cost of living crisis. As my hon. Friend the Member for Ealing North said, for every £100 that an oil and gas company invests in the North sea, it will receive £91.25 from the taxpayer. How is that right? I compare that with the £25 that companies receive for investing for renewable energy, which is set to fall even further. A third or more of the revenue from the windfall tax will be handed straight back to oil and gas producers. How can it be right that we are subsidising oil and gas projects, which companies have said would happen anyway, to this level? It is an insult to families who are struggling and it makes a mockery of our climate commitments.

I turn to electricity generation and the excess profits in the electricity sector.

[Stephen Flynn]

The hon. Member is making a very passionate case. A similar question was asked earlier of her Front-Bench colleague, the hon. Member for Ealing North (James Murray), but I would be keen to know when shadow Ministers last met industry representatives in Aberdeen to discuss their views on the matter. I ask out of interest.

[Abena Oppong-Asare]

As the hon. Member knows, Labour has been consulting regularly with organisations and stakeholders about the matter. We are willing to meet anybody who would like to meet us. Our door is open.

We called for the windfall tax months ago and are glad to see that the Government are taking it forward, but I have to say that they have been all over the place on the issue. In May, it was suggested that the Chancellor had asked the Treasury to draw up plans for a windfall tax on excess profits by electricity generators. I really wish that the Government had been vocal on the issue when Labour raised it months ago. As hon. Members will know, the price of electricity is closely linked to the price of gas; electricity prices have therefore been pushed up, although the costs of generating electricity from renewable sources have not changed. That is leading to significant profits for the sector. It was reported that such a windfall tax could raise up to £10 billion, but the Bill says nothing about the electricity generation sector.

As the Government have gone quiet on wider plans to decouple electricity prices from the price of gas, I would be grateful if the Financial Secretary would shed some light today on the Government’s plans for the electricity generation sector. It is clear that the market needs urgent reform so that it delivers for consumers and businesses. I hope that she can tell us why the Government are delaying bringing forward an energy market reform Bill that will finally break the link between gas and electricity prices.

Hon. Members have mentioned the support announced alongside the windfall tax. Of course it is a relief to our constituents that the Government have finally brought forward payments to help with energy bills and have scrapped their proposed “buy now, pay later” scheme, but we think it simply wrong that owners of multiple properties will receive the £400 payment for each and every property that they own and live in. There are surely far better uses for the money than that, so I urge the Government to think again.

Although we will support it today because we have long argued for a windfall tax on oil and gas producers to help people with soaring energy bills, we know that the Bill will not be enough. It is simply not ambitious enough. We need a long-term plan to guarantee the UK’s energy security and bring down bills for families. We have called for an acceleration of home-grown renewables and new nuclear, a plan to double onshore wind capacity and reform our broken energy system, and a national mission to retrofit 19 million homes to save households an average of £400 a year on their bills.

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[Stephen Flynn]

I was of course aware of the former Chancellor’s fluff in relation to this topic. Is the Minister confirming to the House and to the industry, which will be watching, that if the price of oil falls to around $60 or $70 a barrel, the levy will be no more?

[Lucy Frazer]

As I have just said in responding to the hon. Gentleman’s earlier point, the former Chancellor said that that “gives you a sense”, and I too am happy to relay that sense of where the prices would be, but we also have the long-stop date, which should give the industry some certainty as to when this will finally come to an end.

I welcome the hon. Member for Wakefield (Simon Lightwood) to this place. I was born and made in Leeds so I am very pleased to welcome a neighbour, in one sense of the word, and to hear him extol the virtues of Wakefield. He made a passionate speech about standing up for victims of sexual abuse and I welcome him to his place in the House of Commons.

The hon. Member for Bath (Wera Hobhouse) asked for bold and swift action, and that is what this Bill is about. Tonight this House has the opportunity to support the introduction of an energy profits levy on the extraordinary profits of UK oil and gas producers. It has the opportunity to support investment in the North sea through the levy’s investment allowance, and to support the automatic expiry of the levy in law, giving companies additional reassurance that the levy is temporary. This is a balanced approach that allows the Government to deliver support to families while encouraging investment and growth. For those reasons, I urge Members of this House to support the Bill.

Question put and agreed to.

Bill accordingly read a Second time.