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UK energy windfall tax ‘could scare off Gulf investors’

UK offshore wind Masdar
Abu Dhabi-based Masdar has invested billions in the UK energy market in recent years
  • Scale of tax changes could undermine investment in UK energy projects
  • Some experts claim firms involved will still be better off even with tax

London’s plan to introduce a windfall tax on the profits of energy producers has prompted widespread disdain from the industry.

Experts have warned that the tax could harm the country’s long-term economic growth and deter international investors, including those from the Gulf, from pursuing new deals.

On November 17, chancellor Jeremy Hunt announced he would increase the levy charged to oil and gas companies, first introduced in May, from 25 to 35 percent of profits, alongside a windfall tax of 45 percent on all electricity generators, including those using renewable sources.

“The UK’s tax is particularly problematic for oil and gas and makes (the country) look worse than Norway, which has a similar tax rate now but much greater fiscal stability and more resource potential,” Robin Mills, CEO of Qamar Energy in Dubai, told AGBI.

“But Middle East investors mostly seem to be involved in renewables in Europe — for example, Masdar — rather than oil and gas.”

Masdar, which is based in Abu Dhabi, has invested billions in the UK energy market in recent years, most notably in a series of offshore wind farms. Many of those investments were alongside international partners. Most of them are European but at least one also involved a Chinese firm.

Deirdre Michie, chief executive of Offshore Energies UK, warned this kind of investment could be at risk if the windfall tax goes ahead as planned.

“The scale of these tax changes will undermine one of the UK’s most important industries,” Michie said.

“The UK offshore industry generates jobs for 200,000 people plus billions of pounds in taxes. The oil and gas it produces buffers the nation against global shortages. These changes put all those benefits at risk.”

UK chancellor of the exchequer Jeremy Hunt
UK chancellor of the exchequer Jeremy Hunt’s windfall tax on energy profits could deter investors, including those from the Gulf, from pursuing new deals. Picture: Reuters

Major energy companies have warned that they are reviewing their investments in Britain as a result of the planned changes. 

Shell, slated to invest £25 billion ($30.14 billion) in projects in the UK, said it would look at its investments on a “case-by-case basis” to “determine whether or not we invest to the amount we previously discussed.”

Alistair Phillips-Davies, CEO of SSE, one of the UK’s largest energy suppliers, warned of “unintended consequences” of the tax increases, and that the windfall tax will mean the company does not have enough money to reinvest in Britain.

For Michie, the taxes do not just endanger Britain’s economy, they also threaten to undermine the transition to renewables.

“Our industry was supporting offshore investments totalling £200 billion in the broader energy sector – including low-carbon solutions – by 2030,” she said. “This investment would help ensure that the UK can meet its net zero and climate goals.

“Tax changes, as in the budget, really do jeopardise this. No industry can invest or plan without knowing what kinds of tax regime will be in place long term.

“We want to work with the government to build a long term tax regime that will let us play a full role in the energy transition.”

However, others take a different view of the windfall tax.

Asgeir Heimisson, senior research associate at Aurora Energy Research in Oxford, said: “With the tax, many of these guys will be better off than they would have been when they made their investment decision.”

Given how long it takes to bring an energy-producing asset online from the point of investment, he explained: “From that perspective, everyone is better off than they were when they made that (investment) decision, and only worse off than they expected to be three or four months ago.”

This principle holds true across Europe, where energy prices are unusually high across the board. However, the EU and UK are approaching their windfall taxes differently.

The EU is planning a revenue cap of €180 ($186) per megawatt hour, taxing 100 percent of profits on anything over that.

The UK will tax 45 percent of profits on everything above £75 ($90) per megawatt hour.

Heimisson says this may harm the UK’s long term competitiveness relative to the EU: current projections for energy prices mean that the UK’s taxation scheme is more appealing for the next one to two years but, after that, the EU’s approach becomes marginally more attractive for outside investors as energy prices are forecasted to fall until the windfall tax is lifted in 2028.

He also pointed out that share prices for many of the UK’s energy companies actually jumped at the news of the windfall tax. “Immediately at the point when [Hunt] announced the windfall tax, the energy stock prices went up, not down,” Heimisson said.

Share prices for SSE, for example, climbed nearly 100 points after the announcement, and have stayed relatively stable since.

Heimisson suggested that the companies may have “prepared themselves for something even worse than this,” and instead were relieved to have regained a sense of stability after a tumultuous year for the British economy and politics.