The government is weighing up plans to bring in a price floor for the windfall tax amid fears Equinor could pull out of the proposed Rosebank oil and gas project, City A.M. understands.
The Norwegian energy giant is concerned about the lack of stability in the tax regime compared to its home market, which has higher taxes but an established investment allowance and a calmer political climate.
Rosebank is an oil and gas field 130km off the coast of the Shetland Isles, and is 80 per cent owned by Equinor – with the remaining 20 per cent owned by Ithaca Energy.
It is nearly three times the size of the controversial Cambo field, and is potentially the source of 500m barrels of oil and gas.
The development is currently awaiting a final investment decision – expected later this year – and is widely anticipated to be greenlit despite the windfall tax, with oil and gas exploration a key feature of the UK’s energy security strategy.
Under the new price floor proposals, first reported by Politics Home, the windfall tax will be switched off when oil and gas prices return to ‘normal levels’.
However, what constitutes ‘normal levels’ for the price floor in the Energy Profits Levy has not yet been agreed.
The government is also considering plans to expand the scope of the investment relief – set at 91p in the pound – to include carbon capture and storage if tagged onto existing oil and gas fields to reduce emissions.
It is unclear whether Chancellor Jeremy Hunt will go through with the new proposals, but an announcement could be made at the budget tomorrow or later in the year at a future fiscal event.
Equinor refused to comment on the speculation, but told City A.M. it was keen for a stable investment climate to be established.
Hinting at the windfall tax, a spokesperson said: “In general, predictable framework conditions are important for an industry with a long-term horizon. Sudden and surprising changes in taxes will affect our discussions on investments going forward.”
A spokesperson for industry body Offshore Energies said: “We’re aware of media reports and await the full details in the Budget tomorrow, including how UK government will continue to support consumers.
We continue to put forward our asks outlined in letters to the Treasury, making the case for a successful UK energy strategy which attracts the private investment needed across the entire energy landscape to maintain secure supplies of home-produced energy in line with the government’s net zero strategy.”
The government declined to comment.
Government fears exodus after windfall tax
Downing Street has been under pressure to ease the levy amid fears it could lead to an exodus of investment since it was first introduced last May.
Instead, Chancellor Jeremy Hunt hiked the windfall tax from 25 to 35 per cent, on top of the 40 per cent special corporation tax rate last November.
The government has prioritised harnessing profits to ease record energy bills ahead of fears over the industry’s long-term viability.
Yet, recent developments in the investment climate such as falling oil and gas prices this year alongside challenges from overseas have appeared to put the government’s under strain.
In particular, the UK’s energy sector is under increasing pressure from the US Inflation Reduction Act – which commits $368bn worth of tax cuts and subsidies to the renewable energy sector.
This includes industries vital to the North Sea like carbon capture, hydrogen and offshore wind.
If Rosebank did not go ahead, this would be a huge blow to the UK’s oil and gas sector, and would undermine the government’s goals to ramp up domestic energy production.
As it stands, over half the UK’s oil and gas is sourced internationally, with Norway its largest export partner.
OEUK has warned that production levels could fall to barely a quarter by the end of the decade unless new projects are developed.
There are already signs of increased hesitancy towards developments in the North Sea, with Harbour Energy announcing plans to diversify to international markets while also pulling out of the latest oil and gas licensing round.
Total Energies opted against a £100m project in the North Sea earlier this year after the windfall tax was toughened, while Shell has revealed it will have to assess plans on a “case by case” basis.
Hunt is expected to unveil £20bn in support for carbon capture and storage at the budget tomorrow, alongside pledges to expand nuclear power projects.