Billions of pounds of investments aimed at building the UK’s net zero energy infrastructure could be diverted to other countries if politicians keep threatening to impose windfall taxes, the chief executive of Offshore Energies UK (OEUK) will warn next week.
An estimated £200-£250 billion has been set aside by energy companies to build offshore wind farms, hydrogen production plants and carbon capture facilities, plus maintaining oil and gas supplies. A windfall tax imposed by HM Treasury could undermine such plans, Deirdre Michie, will tell OEUK’s annual conference on Tuesday (May 24).
Michie, will warn that new taxes would not just damage company profits but also drive up the cost of borrowing money for new projects, making them more expensive and in some cases unviable.
Such a move by HM Treasury would undermine investor confidence to the extent that we would see investment being moved abroad. to projects in other parts of the world, she will warn in a speech to the conference, to be held in Aberdeen.
It follows a similar warning from John Pettigrew, chief executive of the National Grid, who has today (Friday) warned that a windfall tax on the UK’s offshore oil and gas producers would hit investment in renewables and undermine attempts to cut emissions.
Surveys of OEUK’s 400 member companies, all involved with producing energy from offshore gas, oil and wind, shows they are collectively planning to spend £200-£250 billion by 2030. This equates to up to £9,000 per UK household.
Of that, about £90 billion will be used to maintain the flows of oil and gas on which the nation relies. Another £100 billion will be invested in building new offshore windfarms and maintaining those already built.
A further £20 billion will be spent developing facilities for the mass production of hydrogen fuel and for capturing and storing CO2, the main greenhouse gas. The scale of the spending will also create tens of thousands of skilled new jobs and support the 195,000 people already employed by the sector.
Such developments have two key aims. One is to boost the nation’s energy supplies and security to stop the global energy price crisis escalating into a supply crisis – meaning shortages, and even rationing of energy. Many European countries already face such threats, due to their reliance on Russia for oil and gas.
The second, longer-term aim is to build the low-carbon and renewable energy supply systems needed for the future – enabling the UK to reach net zero greenhouse gas emissions by 2050.
The Office for Budget Responsibility has estimated that it will cost £1.4 trillion for the UK to achieve net zero by 2050, with the industry expected to provide at least £1 trillion of that money.
Michie will say that the energy industry is proud to help build the UK’s low-carbon future, but companies will struggle to raise the necessary funding if there is a risk of random new taxes whenever the industry makes increased profits. Especially if those profits, as now, come on the back of the huge losses, totalling tens of billions of pounds, incurred during the pandemic.
She will also point out that the UK’s oil and gas industry has paid £375 billion in UK taxes over the last five decades.
It will pay HM Treasury another £7.8 billion in taxes this year, equivalent to £279 per UK household. This is a 20-fold increase on the £400m UK tax paid in 2020-21 when plummeting prices drove most energy firms into massive losses.
The Treasury’s already-surging tax take is because offshore oil and gas operators pay 40% tax on all profits made in UK waters – the highest tax rate of any UK industry. It means that as soon as the oil and gas operators start making money the UK Treasury gains rapidly too – as is happening now.
The increase in profits also supports company investment. Recent investment announcements include:
- £18bn from BP by 2030, including three offshore wind developments to power 6m homes
- £20-£25bn from Shell by 2030, of which 75% is for low and zero-carbon developments
- £2.4 billion from Ithaca Energy – subject to the UK offering “fiscal stability”
- £800m from Neptune Energy, which produces 11% of the UK’s gas supplies
Deirdre Michie said: “We are worrying about energy prices now, but we should worry about energy supplies as well. The risk of shortages and rationing is already real in Europe. It will become real here too – unless we invest in the North Sea and other offshore resources. The threat to supplies is an issue not just now but for the long-term.
“So, we are proud that our members will be among the biggest investors in the UK’s low-carbon future – spending £200-£250 billion by 2030 and up to £1 trillion by 2050. That’s in addition to the £7.8 billion that the UK’s offshore oil and gas operators will contribute in tax this year – equivalent to £279 per UK home.
“However, these are huge long-term projects with many risks, especially around swings in the prices of gas and oil. The downturn in 2020/21, for example, saw many of our members incurring significant losses.
“That is why our industry puts a premium on stability in the way it is taxed and regulated. Sudden tax increases make it more expensive to borrow money for big projects – and that can make them unviable.
“We should not risk upending what could be a remarkable British success story for a short-term gain that will fade far faster than the drop in investment that will certainly follow. If investment falls, then production will fall too and the UK will have to buy ever more of its oil and gas from other countries – meaning surging import bills and exposure to future shortages
“Such policy swings risk achieving the opposite of what politicians say they want. A windfall tax now will reduce energy security, undermine the energy transition – and impose huge long-term costs on UK consumers and businesses.”