Vast energy firm profits raise fresh questions over windfall tax

BP is among several oil and gas firms to have recorded soaring profits amid the cost of living crisis

• Vast profits for BP and Shell have put them in the frontline of a battle over the winners and losers from the energy crisis.

• Extension of the windfall tax is seen by the industry as a way of discouraging further investment.

• Some would prefer to see that discouraged and are dismayed as BP increases spend, while others want taxes to target benefits to shareholders.

BP and Shell get the attention because they're big, public brands based in Britain. They're not the only ones making vast amounts of money.

US firm ExxonMobil reported a profit of $56bn (£47bn) for last year. Chevron, also in the US, reported $36bn (£30bn).

Shell had profits of $40bn (£32bn) and BP has weighed in at $28bn (£23bn). All of them have more than doubled profits as the invasion of Ukraine and sanctions on Russia roiled the world's energy markets.

Equinor (formerly Statoil), based in Norway and the largest supplier of gas to the UK and European Union after Russian gas flow was cut sharply, announced on Wednesday its net profit for the year was $28.7bn (£24bn), up from $8.6bn (£7bn) in 2021. Adjusted operating profits - before tax and removing one-off items - came to $75bn (£62bn).

Climate campaigners protested outside Equinor's offices in Aberdeen on Wednesday

TotalEnergies, headquartered in France and a significant producer from UK waters, announced net profit at $20.5bn (£17bn), which would have been $15bn higher had it not incurred high costs for pulling out of operations in Russia.

And next month, the annual results for Aramco will be released. Largely owned by the Saudi government, it has reported earnings for the first nine months of last year at $130bn (£108bn).

So if you're wondering where the money goes on those inflated bills, those numbers give you some idea.

• BP scales back climate targets as profits hit record

• Shell reports highest profits in 115 years

The prices are not set by these companies. They're in the happy position of taking soaring prices from the global markets.

They're in the less happy position of being so high profile when energy prices are such a hot political topic.

Energy firms here are facing windfall taxes, paid to the European Union and to the UK Treasury, the latter at a tax rate on profits of 75%, following a double tax grab last year. Labour and the Liberal Democrats say more should be demanded in windfall tax.

The SNP takes a more nuanced position, as this is difficult for those representing constituents in the north-east of Scotland.

The party is talking about "expanding" the windfall tax (beyond energy companies), applying a tax on share buybacks and going after those paying the UK Treasury an annual fee as "non-doms".

Windfall taxes

Britain does not have the highest marginal rate on oil and gas producers. Norway's headline rate is slightly higher, at 78%, and look how well it's doing.

So there's no problem with high taxes?

Well, the problem is in the unpredictability of Britain's tax regime.

While Labour and the Lib Dems are talking about increasing rates further, the industry finds it hard to calculate returns on its investments.

Companies such as Harbour Energy says it is reviewing UK investments due to the extra profits levy.

The vast majority of Shell's profits are made overseas

The industry body, Offshore Energies UK, says Harbour won't be the only one.

And it pleads with us to understand that these big numbers are not being generated in UK waters.

Less than 5% of Shell's profits come from UK production, and only around 10% of BP's.

BP's results come with news about its big new projects in Mozambique, Senegal, Trinidad, Egypt, Indonesia and Brazil. It pays tax where the oil and gas is pumped, and international agreements ensure it can't be taxed twice.

And if you were to impose a further tax on UK-based companies making profits earned outside the UK? Watch how fast they relocate their headquarters.

• How much windfall tax are oil giants paying?

• How are other countries tackling energy bills?

So what about those share buybacks, suggested by the SNP?

First, a reminder of what they are: the company takes spare cash that it's not using to re-invest, to distribute through dividends or to pay off debt, and it goes into the stock market to buy its own shares, which are then cancelled.

The first impact of going into the market is to increase demand and push up prices. But the longer-term effect is to concentrate share ownership, and raise dividends for those who continue to own shares.

Shell and BP last year spent more than £20bn on share buy-backs. These share buy-backs can be taxed.

In a report published in October, left-leaning think tank, the Institute for Public Policy Research (IPPR), found the value of corporate buy-backs of shares in the UK was more than £46bn by that stage of last year.

By imposing a 1% levy, the think tank reckons it could raise £225m, at least in a more normal year.

If applied at 25% (then the level of the windfall tax), IPPR said it could raise a cool £11bn for the UK Treasury. Or it could be targeted at oil and gas companies, already paying a windfall tax.

Targeted only at Shell and BP, that could have brought in a further £4.5bn last year. And it is argued that a further change to dividend tax, bringing it into line with income tax (the non-Scottish rates, that is), would bring in a further £6bn.

All of that could be quite handy but there's no sign of it happening, yet.

Energy security

The big energy firms say that they need to keep investors happy if they're to continue raising the funds with which to make the energy transition from fossil fuels to the renewable varieties.

BP highlights its investments in next generation Scottish offshore wind power, and in plans to convert the Sahara sun of Mauritania and the Caribbean rays of Trinidad and Tobago into solar power, and then into exportable green hydrogen.

It says it intends to boost its $7bn investment each year this decade up to $8bn.

But environmental groups point out that instead of winding down its fossil fuel operations by 40% between 2019 and 2030, BP now says that will look more like a 25% cut.

The short-term BP outlook for energy prices is that they depend on winter temperatures in Europe, shaping the demand for gas, and how fast the Chinese economy re-opens.

For now, prices are a long way down on their peaks last year.

Longer-term, BP expects prices to remain high throughout this decade before they begin to fall as more electrification and demand is met with more renewable wind and solar power supply. It's also making a big play of sustainable aviation fuel (SAF), made from crops and waste products.

But the point being made to those who want to keep oil and gas in the ground is that shutting down supplies now is going to increase energy insecurity.

And while people still need petrol for their cars and gas to heat their homes, constraints on supply will push up prices.

In an attempt to help make the case for a balanced transition, the newly re-created Whitehall office (though a lot of its officials can be expected to remain in the Aberdeen office) is to be known as the Department of Energy Security and Net Zero.