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Windfall tax may be flawed but inflated profits are an opportunity for energy giants to demonstrate genuine support for stakeholder capitalism

By Ian Morris
12 May 2022

By Ian Morris

The clamour is rising, the crowds are baying for blood and the vultures are circling. Demands for a windfall tax on oil and gas producers are growing louder after both of the UK’s major energy producers, BP and Shell, reported large increases in quarterly profits last week.

These arguments are not just coming from the opposition benches and consumer organisations. The business world is also making the case, with Tesco chairman John Allan arguing this week on BBC Radio 4’s Today programme, that there is an “overwhelming case” for a windfall tax. His belief is that the tax should be targeted to help consumers suffering the most from the cost of living crisis, struggling to heat their homes and feed their families.

The Government is resisting the pressure so far, though it is reported that the option is still on the table for Chancellor Rishi Sunak if oil and gas producers don’t significantly increase the size and scale of their energy investments in the UK.  

His stance, and that of the energy giants, may prove politically difficult to maintain against the backdrop of recent energy bill price hikes being experienced by consumers and SMEs. Easily portrayed as pantomime villains at the best of times, the negative perception of the oil and gas majors amongst the public may be super-charged by the genuine hardship being felt by many. It does appear, of course, an instantly appealing idea to say that these artificially heightened profits should be used to compensate the heightened energy bills of society’s poorest people.

There are, however, numerous reasons why this is not necessarily the neat solution it initially appears to be.

The Government itself has argued that it would serve to hinder the appetite of energy companies to invest in new oil and gas fields in the North Sea (which it wants to see as part of its Energy Security Strategy) and delay the transition to a decarbonised energy ecosystem.

Renewables supporters would argue that sacrificing investment in new oil and gas fields would be no great loss, but any delay to investments in decarbonisation would indeed be an unacceptable consequence – though there is no certainty that this would transpire.

Though potentially a quick fix to a short- to medium-term problem, a windfall tax must not be allowed to harm important long-term priorities such as energy producers’ ability or willingness to invest in renewables infrastructure, and the future energy security of the UK.

There are also practical issues to consider. Would the tax be imposed on global or just North Sea profits? If global, that would mean taxing profits that have already been taxed in other countries. The North Sea-only option is complicated by existing arrangements whereby profits on operations are allowed to be offset against the cost of decommissioning older North Sea oil and gas production facilities.

Would or should the tax be retrospective? Over what period of time? And how would it generate the revenue desired from the giants who can afford it, while not unduly punishing smaller companies who might be genuinely discouraged from investing because of it. These complexities, if not well thought-through, risk negatively impacting companies and shareholders who aren’t necessarily those who have actually benefited from the bounties of bumper profits.

The most obvious cause of current high oil and gas prices globally, which rose initially due to natural gas supply problems experienced during the pandemic, is the war in Ukraine. The unusually high profit levels of BP and Shell are effectively due to a terrible war in which much suffering is taking place.

But the impact of sanctions on Russia arising from it have also led to BP, for example, to write off its investment in Rosneft – resulting in an overall loss of $20bn. Taxing underlying quarterly profits in this context risks seeming somewhat one-dimensional.

Let’s not also forget that oil and gas companies already pay a rate of tax almost double that of a typical business. Or that just two years ago, BP and Shell both lost tens of billions of pounds as the COVID- 19 pandemic sent oil prices through the floor, while continuing to pay tens of billions more in taxes. There was no pity or fiscal support for them then.

Any windfall tax imposed could well prove to be a flawed solution. But the cost of living crisis is undeniably real, urgent, and not one that government should be responsible for solving alone.

Energy giants such as Shell and BP are stated supporters of the principles of stakeholder capitalism. BP and Shell are signatories of the WEF’s Stakeholder Capitalism Metrics. BP’s sustainability framework promises to improve people’s lives. As such they arguably have an ethical responsibility to use these profits in a way that benefits all their stakeholders – including their customers as well as the planet.

These artificially-inflated profit levels are an opportunity to demonstrate large oil producers here in the UK and elsewhere mean what they say, by voluntarily deploying money to alleviate the suffering of those suffering the most from fuel and food poverty, or even those suffering from the consequences of the War in Ukraine which helped to contribute to those profits in the first place. With profit levels as high as they are this could be done without having to ignore shareholders altogether – who let’s not forget are also important stakeholders - or without sacrificing planned investment in decarbonisation.

If they are brave enough, this could be the moment for energy giants to get ahead of the curve, lose the tag of pantomime villains and show that they are serious about creating value for all stakeholders.