The following opinion piece is written by Sir Jim Ratcliffe, Chairman and CEO of INEOS
Competitively priced energy is key to growth in an advanced economy. This has been proven many times in the last two centuries. But UK Government tax policy on energy is squeezing the life out of our abundant energy reserves in the North Sea.
The US taxes the oil and gas industry at 21pc - the same corporate rate as other industries, with a total effective tax take from offshore operations of around 40% and investment there are at an all time high. Tax rates in the UK on energy are 78% and investments are at an all time low.
The result of this strategy is that we import most of our energy from abroad. It is expensive. It leaves the UK strategically vulnerable as Europe discovered from its dependance on Russian supplies. It removes North Sea jobs from the UK economy. And it hinders growth in manufacturing.
The UK Government should be bold. Remove the EPL and return tax rates for its strategic energy sector to levels competitive with the USA . Then investment will return.
The UK’s North Sea oil and gas industry has kept the lights on, heated homes and turned the wheels of industry for more than 50 years.
Since production started, the equivalent to around 50 billion barrels of oil and gas have been produced, contributing about half a trillion in production taxes to the UK Treasury.
INEOS has been a big part of that. We supply natural gas to the UK from gas fields off Humberside and the Orkneys and our stake in the Greater Laggan Area. In 2017, we also acquired the Forties Pipeline System, which transports oil and gas from over 80 offshore fields roughly half of North Sea Production.
We are happy to pay our taxes on earnings from operations in the North Sea, but we need a stable tax regime that gives us the certainty to plan and invest for the long term.
In 2022, the Energy Profits Levy (EPL) was introduced as a windfall tax in response to a steep rise in energy prices due to the crisis created by the war in Ukraine.
Subsequently there have been three further changes to the EPL, increasing and extending the tax. All this has created acute fiscal uncertainty for the oil and gas industry.
Today the headline tax rate on the industry’s production profits stands at 78% - a rate set when prices peaked three years ago - and which has remained in place, despite oil and gas prices trending back towards pre-crisis levels.
The Energy Profits Levy is flawed. Its success is short-term, trading near-term tax gain for long-term damage to the UK oil and gas industry.
As a tax raising mechanism, it is a failure. Capital is migrating abroad resulting in lower investment, lower production and lower UK tax receipts, offsetting the short-term EPL tax gains. However, the real cost isn’t lower tax receipts, it is the damage to the wider UK economy and the climate.
According to Offshore Energies UK, the industry body whose Business Outlook was published this week, the UK is on track to extract up to 4bn barrels of the 13 to 15bn required domestically by 2050. However, a further 3bn barrels will remain untapped due to current tax and energy policy. This production would add £150bn of gross value to the UK economy.
Instead we will export this value to other economies with a more sensible tax and energy policy, and all for no benefit to the environment. By asking them to produce oil and gas for us, it means the lost UK production will be replaced by more expensive imports with a higher carbon footprint.
The industry estimates there are currently £30bn worth of investment opportunities requiring the right fiscal conditions to be unlocked. This investment alone would have an economic value of £60bn - now at risk of being lost to the UK.
On top of this, there are significant wider detrimental impacts of the windfall tax to the UK. Reduced investment and steepening production decline will lead to fields and production hubs shutting down earlier, accelerating decommissioning.
Decommissioning activity is simply expenditure not investment and results in reduced tax take. It is estimated that the total industry costs from 2024 onwards for decommissioning all UK oil and gas infrastructure are in the order of £45bn. Exchequer cost of tax relief associated with this is estimated to be £11bn according to the North Sea Transition Authority (NSTA).
The NSTA, the government’s regulators, have confirmed the UK has significant remaining oil and gas resources offshore. Much of the NSTA’s contingent resources are in mature, developed areas. But these resources will become stranded without the infrastructure to produce them. Premature closure of vital hubs will result in future resources being permanently lost.
Reduced UK production will result in increased imports, with less security of supply.
The UK came perilously close to energy blackouts during this January’s cold snap, when the wind stopped blowing. With one week of gas storage and strained electricity supply, the National Grid was forced to issue emergency market notices. These warnings, and the threat of energy blackouts, will only become more frequent and more serious as domestic gas production falls and critical infrastructure is prematurely decommissioned.
The UK relies on oil and gas for 75% of its total energy needs, with UK production currently providing approximately 50% of that total demand. Imported LNG has a significantly higher carbon footprint than domestically produced gas. Production, processing and transport processes generate almost four times the amount of CO2 than the equivalent amount of piped gas.
The Government response is that “Sprinting to clean power by 2030 is the only way the UK can take back control of its energy and protect both family and national finances from fossil fuel price spikes.” This is simply not practical given the intermittency of solar and wind and the constraints within the National Grid.
Compare all this to the US where production is at an all-time high and where the fiscal policy is highly effective and stable, providing an investable business environment and security of supply of domestic energy.
Change is needed.
The UK North Sea is a strategic national economic asset. It will continue to be an essential resource for supporting UK energy security for many years to come as we move through the energy transition. However, the right policy environment is required to ensure it can deliver.
A lower tax rate that provides balanced risk and reward and long-term certainty would help create an investable environment once again, which would be more beneficial to the UK economy in the long run compared to the current EPL ‘feast and famine’ policy.