Energy (Oil and Gas) Profits Levy Bill — House of Lords, 2022-07-13
Topic: Energy
Colin Moynihan (Conservative, Centre-right): My Lords, I hope that the rumour to which the noble Baroness, Lady Kramer, refers is correct. I will argue the case as to why this should not be implemented if passed by both Houses We all support energy transition, and we are all committed to working towards net zero. The fundamental questions are these. What is the appropriate timeline and what is the policy framework we should be pursuing? The answer on policy underpinning has been unchanged since we first developed oil and gas reserves in the North Sea. Security of supply is best delivered through diversity of supply. At the present time, we vitally need to produce gas within a regime of strict environmental standards—gas coupled to policies to promote energy efficiency, as the noble Baroness said, supporting the vital issue of creating effective baseload energy while intermittent renewables and a new generation of nuclear plants are developed. That must underpin energy policy in the UK After 20 years and nearly $5 trillion of investment, the world has only 15 million barrels of oil equivalent of wind and solar, against the 237 million barrels of oil equivalent per day which we require. So it will take many decades more to complete the transition. In the meantime, we must encourage investment in gas production in the UK, while insisting on rigorous environmental controls surrounding its production. To have the capacity to invest, the industry must be profitable and be fiscally encouraged to invest its profits in future production The noble Viscount, Lord Hanworth, is correct that oil and gas companies operate in a highly competitive global market for the marginal investment dollar. Political uncertainty and populist short-term fiscal measures turn those investment dollars away to more stable provinces. Rather than a short-term measure—despite the good words of my noble friend the Minister regarding the sunset clause—there is no political chance whatever that this levy will not be in place until at least 31 December 2025, which is currently shoehorned into the Bill as a sunset clause. There is no conceivable way that an outgoing Government, in the run-up to a general election, will phase it out, whatever the price of gas, nor a new Government court political unpopularity by taking immediate action So what has the EPL done? By announcing the energy profits levy on UK oil and gas production, it almost halved the post-tax profits of the industry by increasing the marginal tax rate from 40% to 65% effective immediately, which Lambert Energy Advisory estimates could cost companies up to $30 billion in taxes over the next three and a half years, to the end of 2025. This was despite repeated protestations over the last three months from the Prime Minister that "The disadvantage with those sorts of taxes is that they deter investment in the very things that they need to be investing in ... I don’t think they’re the right way forward", and the Business and Energy Minister, Kwasi Kwarteng, saying: "I don’t believe in windfall taxes because what you’re taxing is investment in jobs, wealth creation, and investment" As Philip Lambert, who has been one of the leading advisers to successive Governments around the world, has rightly summarised through the publications of Lambert Energy Advisory: "In the end these reservations counted for little when faced with the political pressure from opposition political parties and the general public to be seen to do something about the current energy and cost of living crisis, even though the action taken will make matters worse." Again, as the noble Viscount, Lord Hanworth, pointed out, this is not hypothecated. At its core, the issue is that there has been systematic underinvestment over the last decade in the primary lifeblood of the global energy, gas, leading to a squeeze on supply versus ever-rising demand, combined with an inability of policymakers to recognise or act on this fact. The Russian invasion of Ukraine has recently magnified this crisis but did not create it, and in fact made it harder for policymakers to focus on the root problem The only solution to high prices and energy insecurity is more investment to create new supplies from a diverse range of sources. Oil and gas still account for more than 10 times the global energy supplied by wind and solar, and without continuous investment this will immediately start depleting rapidly. Even with the intermittent wind and solar industries continuing to grow at the current exponential rates, it would still take about two decades for wind and solar annual generation additions to match current oil and gas annual depletion with zero investment, let alone start meeting growing global demand for energy. Furthermore, the current rate of wind and solar growth may slow, given the rising costs of import materials and supply chain bottlenecks. Therefore, an increase in oil and gas investment is essential to meet the world’s energy needs and alleviate the current energy cost crisis even as other low-carbon initiatives are welcome and progressed. While the UK continental shelf is a modest contributor to the global energy mix, accounting for about 1% of both the world’s oil and gas production, and UK energy prices are as much dependent on the USA’s energy system as they are on the UK North Sea, it is still a bellwether for the state of the wider industry and matters at the margin. Hence, the EPL is important both as a signal of wider trends and for its impact matters in its own right. In that regard, despite the UK Government’s rhetoric couching it as an incentive for investment, make no mistake that the EPL is bad for investment in the UKCS. It confirms the UK’s existing reputation for fiscal instability and political opportunism with regards to oil and gas, having already drastically changed the UKCS tax regime rates multiple times in just the last decade. Its policymakers are introducing an additional layer of tax which will come on top of the natural windfall that the sector would pay anyway due to high prices. The EPL is designed to disallow offsetting of historic tax losses only two years after the industry endured severe losses from the crash in commodity prices in 2020 from the Covid crisis, when the UK Government provided the industry with no tax support I am sure that the noble Baroness, Lady Bennett, will argue strongly against what I have just said, but this contrasts with Norway, a country I am sure she praises—she shakes her head, but it does at least claim to take a very strong line on environmental policies and in that context, I think it is worthy of comparison. Across the median line, the basic marginal tax rate and principles that have underpinned its approach to investment have remained unchanged for the last two decades. Recent structural changes were carefully signalled in advance and designed to allow a smooth transition, and its Parliament did not hesitate to support the sector in 2020, unlike here. They were confident that the support would be paid back in the long term through greater profitability from a healthy industry. They invested some $10 billion of support. Consequently, despite much higher marginal tax rates than in the UK, Norway retains greater investor confidence than the UK and is already attracting heavy investment in new production with a much healthier independent E&P sector, which is really relevant to gas production in the North Sea. Whatever the details of the law which we are considering today, the mere fact of the EPL’s introduction will certainly impair foreign direct investment in the UKCS because of its reputational impact. It was already very difficult to attract long-term investment into the UK oil and gas industry at a time when three out of the four major party leaders in our county have either called for, or signalled they are open to, an end to new oil and gas investment The oil and gas sector globally, but especially in the North Sea, has limited access to new incremental equity and debt capital. Indeed, it is a net repayer of equity and debt capital, so almost all its capital expenditure is funded out of operating cashflows. Hence, the UK Government removing $30 billion from the capital pool in the next few years via the EPL will impair the sector’s ability to spend and to pay out to equity investors, especially for those who are leveraged and still have to meet their debt obligations. There will likely be reluctance, even among those who have the choice, to divert cashflows from other geographies to the UK to make up for this. While the construction of the EPL is in theory designed to encourage more investment, it is questionable whether it will do so even for those who are already committed to the UKCS Regrettably, I stand to say this is a bad tax at the wrong time. It will have a negative impact on investment at a critical juncture in our early steps towards a net-zero economy and it should be scrapped.