Energy (Oil and Gas) Profits Levy Bill

Viscount Hanworth Excerpts

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

[Viscount Hanworth (Lab)]

My Lords, this legislation, which is being rushed through Parliament, has the ostensible purpose of addressing the crisis of fuel poverty that is affecting an increasing number of households. The crisis is a consequence of the escalation of fuel prices in the international energy markets. Temporary measures are to be taken to tax windfall profits that are accruing to the domestic energy companies, which are the providers of oil and gas. The Labour Party has called for such measures, and the present legislation should be seen as a welcome response by the Government. Therefore, it might seem surly and ungracious to call this legislation into question, but that is what I intend to do.

Although the Explanatory Notes suggest that the measures are intended to help fund more cost of living support for UK families, they are not directly connected to this purpose. The additional energy taxes or levies have not been hypothecated in this way; that is to say that they have not been pledged in a legally binding manner to serve the purpose of alleviating fuel poverty. The levies will serve to bolster the tax revenues of the Government, which sustain a multitude of purposes. Nevertheless, the Government can expect to derive some significant political capital by imposing the levies.

The current high prices that we are paying for gas and petrol have been determined in the international markets. It does not necessarily follow that our domestic energy suppliers are bound to profit from these circumstances or that their profits will have increased automatically. We are led to believe that their profits have increased; this is true for the US but the figures to prove that it is true for UK companies operating on the UK continental shelf are not yet available. We know that, in 2021, their total profits across supply and generation fell by £133 million, or 3.4%, on the previous year. However, profits increased in the domestic supply market, providing an average profit margin of 4.3%, I believe.

The truth is that the UK’s oil and gas revenues are now a fraction of what they were in the peak period in the mid-1980s, when North Sea oil and gas were plentiful. The supplies are virtually exhausted now, which means that only a small proportion of what we consume comes from domestic sources. Therefore, one should not expect the levies on windfall profits to generate a large amount of additional revenue. The aspersion that the companies have been adding a substantial mark-up in selling what they have been purchasing on international markets is not substantiated. Companies operating in the North Sea are subject to a 30% corporation tax levied on their profits and a supplementary charge levied at the rate of 10%, whereas the standard rate of corporation tax is currently 19%. The energy profits levy, which will take effect retrospectively from 16 May—which is when we were notified of this legislation—will represent a 25% tax on oil and gas profits, bringing the total tax burden on profits to 65%.

In the financial year from 2021, the total receipts from profits on oil and gas from companies operating in the North Sea were £3.1 billion. The Treasury estimated that the additional revenue from the oil and gas levies will be £5 billion in the first 12 months—a highly speculative figure, which may represent an exaggeration. Moreover, as we have heard, the additional revenues are not expected to persist, and the legislation includes a sunset clause that will remove the levy after 31 December 2025, when it is expected that the profits will have declined.

The proposal to impose the levies has been met with the criticism that they are bound to deter investment by energy providers. The Government have met these criticisms by providing some very substantial investment allowances. A new 80% investment allowance will be available to companies in respect of qualifying expenditures. Such expenditures are closely circumscribed to prevent the allowance being used in financial acquisitions, for example, or covering decommissioning costs. It appears that the Government envisage further investment in oil and gas extraction.

However, the allowance will not be available for investment in alternative sources of energy, and here lies the main criticism of the legislation. To encourage investment in fossil fuels flies in the face of the commitments to staunch emissions of carbon dioxide. One can be fearful that these provisions represent the beginning of an attempt to roll back the measures to attain net-zero emissions, to which the Government are seemingly committed.

In any case, one must question the rationale behind investments in oil and gas. Given that the prices of oil and gas are determined in the international markets, and that domestic UK production is now a negligible fraction of global production, there can be no expectation that expanded domestic production could impact significantly on prices.

An economic rationale for an expanded domestic production might be to alleviate the impact on our balance of payments of the cost of our energy imports. Given the magnitude of our balance of payments deficit on the current account in respect of goods and materials, this alleviation would be small in proportional terms.

The truth of the matter is that the UK has failed to take the appropriate steps over the past decade to secure its supplies of energy. Now is a time for urgent action to embark on a viable long-term strategy for the provision of energy. Instead, the current exigencies are encouraging the Conservative Government to attempt to suck from the North Sea what little energy there remains under the waves, and to encourage further attempts at deriving oil and gas by a process of fracturing rocks, which has already been strongly resisted by the citizens of the UK.