BP and Shell’s divergent tax bills highlight UK windfall flaws

Shell’s outgoing chief executive Ben van Beurden is adamant that oil and gas companies have to “embrace” the idea of paying more tax during the energy crisis to support society’s most vulnerable. But the message did not appear to have reached the accountants at Shell’s UK arm in time for the company’s most recent results.

The energy major, which has relocated its headquarters to London from the Netherlands, reported it paid zero tax in the UK in the first three quarters of 2022, during which time it racked up profits of more than $30bn globally. Various offsets for field decommissioning and a “super discount” for investments in new oil and gasfields absorbed any potential take for the Treasury by cancelling out UK-generated profits.

BP, by contrast, said on Tuesday it would pay about $2.5bn in UK taxes this year. This includes $800mn under the so-called “energy profits levy”, better known as the windfall tax introduced by chancellor Rishi Sunak, now prime minister, during the spring in response to soaring energy prices.

The divergent tax fortunes of the UK’s two most prominent energy companies illustrates just one of the reasons calls for amendments to the windfall tax have gathered steam in recent weeks.

A windfall tax that raises a big fat doughnut from one of the UK’s largest oil and gas producers at a time of record prices is, by its very definition, imperfect, even if Shell has indicated it expects to start paying tax in the UK next year.

That BP has been caught in the taxman’s net has done little to dampen calls for the windfall tax to be overhauled, with opposition politicians in the UK zeroing in on the disconnect between record profits for big-name energy producers while households are struggling to afford heating.

As the Treasury tries to shore up the UK’s finances, Sunak and chancellor Jeremy Hunt are discussing increasing the windfall rate from 25 per cent to 30 per cent (taking the tax rate on profits to 70 per cent in total) and extending the lifetime of the levy from 2025 to 2028.

But increasing the rate and duration of the scheme in isolation may not be the most efficient way of raising much-needed funds to buttress the national finances or extend help to bill payers.

When government support for household energy bills expires this April, typical middle-class families, who have already seen bills double from roughly £100 to more than £200 a month for typical usage, may well be paying closer to £400 a month. The increase in 18 months is roughly equivalent to adding the cost of a new mid-range car on to the household budget.

The experience of the biggest North Sea producers is illustrative.

Both BP and Shell produce about 120,000 barrels of oil a day equivalent from their fields on the UK continental shelf, vying to be the third largest producers, despite their differing tax payments.

Private equity backed Harbour Energy, the biggest UK North Sea producer (having bought a lot of Shell’s old fields), has said it expects to pay about $500mn in UK taxes this year while France’s TotalEnergies, the second largest, has said it expects to pay somewhere in the region of $1bn under the UK’s windfall tax.

This hodgepodge of payments is a poor reflection on a North Sea tax system mired in complexity and misaligned incentives.

A system that taxed oil and gas production first rather than zeroing in on profits would ensure the government’s take from the exploitation of an irreplaceable natural resource was never zero.

A simple escalator that taxes a limited per-barrel-of-production rate when oil and gas prices are low, and a much higher one when prices shoot to the stratosphere, would provide certainty for producers. It would also ensure the government always has funds available to mitigate the worst societal effects when energy prices soar, without turning energy into a political football.

Offsets for taxes on profits, if left in place, should be extended to green investments that lie outside the ringfencing of North Sea oil and gas receipts.

Both BP and Shell plan to invest heavily in the energy transition in the UK, with only a quarter of their combined UK-focused capital expenditure of about $40bn over the next decade going towards oil and gas projects.

Given reducing the UK’s reliance on volatile international gas markets with cleaner energy sources is the main route out of this crisis, a simplified tax system that ensures a fair government take and encourages green investments should be a priority.