The new North Sea windfall tax will remain in place until oil prices fall below $70 a barrel.
Chancellor Rishi Sunak has been under pressure to clarify his ‘Energy Profits Levy’ after official guidance revealed the tax will remain in place until oil and gas prices “return to historically more normal levels” or the activation of a “sunset clause” in 2025.
With no definition of what "normal levels" are, there is growing concern that this will be a multi-year tax which, based on current levels, could cost the industry up to £17.5billion.
However, when directly challenged by MPs on the Treasury Committee at Westminster yesterday, Mr Sunak suggested that level would be “between $60 and $70”.
“I think that if you look at the average Brent price over the last, say, five or 10 years, it would be that would give you a number of something like $60 or $70,” he said.
“To provide reassurance that this is not meant to be a permanent feature of the tax regime, there will be a sunset clause of just over three years in the legislation itself as a backstop.
“But obviously, if prices come back to the range that I've discussed, then you would expect this to fall away sooner.”
The chancellor confirmed he was in active discussions with the industry about what that level should be.
The levy’s investment allowance means North Sea companies will get a 91p tax saving for every £1 they invest in the basin.
The allowance is also applicable at the point of investment, rather than at the point it generates revenue, which is normally many years down the line.
The Treasury believes that these tax changes will actually increase investment in the North Sea in the short-term, not deter it.
Dan York-Smith, a strategy director at the HM Treasury who gave evidence alongside the chancellor, told the committee that the models they’ve run suggests the allowance will have “a net positive impact on investment”.
“Therefore there will be more investment than before,” he said.
Mr Sunak added: “The OBR (Office for Budget Responsibility) will no doubt publish their own analysis when they next do the forecasts, but using the standard models that we have, and expected behavioural responses, we expect this to not have a significantly negative impact on investment.
“It may well be that it increases it.”
The levy takes the effective tax rate on North Sea oil and gas producers from 40% to 65%.
Companies including BP and Shell have warned the move creates significant uncertainty, with both now reviewing their plans for investment in the North Sea.
And EnQuest is reported to be preparing to invest in South East Asia instead of the UK in the wake of the levy.