North Sea oil and gas operators including BP have hit back at Rishi Sunak’s £5bn windfall tax on the sector, warning it was a “multiyear” assault on their profits that would “drive away investors” and cut production.
Sunak turned his sights on “extraordinary” profits in the energy sector to help pay for a £15bn package to help UK households cope with rising domestic fuel bills, to the dismay of oil bosses and rightwing Tory MPs.
After having repeatedly rejected Labour’s call for a windfall tax, Sunak announced a 25 per cent “energy profit levy” that will increase the rate paid by North Sea producers from 40 per cent to 65 per cent, raising £5bn this year.
The chancellor caused dismay in the sector by announcing in the small print that the windfall tax would remain until December 2025 — unless oil and gas prices “return to historically more normal levels” in the meantime.
“Today’s announcement is not a one-off tax — it is a multiyear proposal,” BP said. “Naturally we will now need to look at the impact of both the new levy and the tax relief on our North Sea investment plans.”
One senior government figure said Bernard Looney, BP chief executive, was partly to blame for the move, after he said this month that a windfall levy would not affect his company’s investment plans.
The government official argued that Johnson felt he could no longer hold the line against a windfall tax after the BP boss’s comments. “It was a game-changer.”
Meanwhile the chancellor also said he was considering “appropriate steps” to target “extraordinary profits” made by electricity generators. A windfall tax on that sector could bring in a further £3bn-£4bn.
Kwasi Kwarteng, business secretary, was among the senior Tories to oppose a windfall tax, while one Tory MP, Richard Drax, said Sunak was “throwing red meat to socialists”.
Sunak had previously said that he was determined to start cutting taxes and bear down on the deficit, but his £15bn energy relief package was funded by higher business taxes and £10bn of additional borrowing.
Labour claimed that Sunak had stolen its ideas. However, the chancellor expects to raise more than twice as much as the £2bn proposed by Labour via a windfall tax and he has offered twice as much support to households.
Sunak was determined to ease the pain of households facing a £800 rise in the energy price cap — the average maximum amount paid by a household — in October, when bills are expected to hit £2,800.
The chancellor made a £6bn “universal offer” to all households. He replaced a proposed £200 one-off repayable discount to energy bills with a £400 grant, which will not have to be repaid.
Economists said the conversion of the repayable loan into a grant to households worth £6bn would force the government to borrow even more, because it would no longer claw back the money over five years.
Most of Sunak’s support went to the poorest, including a £650 one-off cost of living payment to 8mn households already receiving state benefits, at a cost of £5bn.
Pensioners will receive an extra £300 winter fuel payment costing £2.5bn, while disabled people will get a £150 additional payment costing £1bn. Sunak said the most vulnerable households would receive an extra £1,200.
Sunak insisted that a “pragmatic and compassionate” Conservative government was obliged to help vulnerable people and he defended the windfall tax.
Shell said Sunak’s proposed tax relief on investments was “a critical principle in the new levy” but stressed the “importance of a stable environment for long-term investment”.
Sunak said a Tory chancellor had to be “fiscally responsible” and if more spending was required he had to “fund as much of it as possible in as fair a way as possible”, rather than adding to borrowing and fuelling inflation.
Although cutting energy bills could reduce the peak rate of inflation later this year, this large stimulus was seen as inflationary at a time when unemployment is at a near 50-year low.
Samuel Tombs of Pantheon Macroeconomics described the package as “hefty” and said it gave the Bank of England more reason to raise interest rates this year.