Shareholders in BP and Shell are anticipating bumper payouts this week, with the energy giants set to reveal their best sets of results in years powered by soaring oil and gas prices.
The two companies are predicted to report a combined $13bn (£10.5 billion) in profit from the first three months of the financial year, a massive year-on-year hike.
Following February’s stellar results, BP’s finance director Murray Auchincloss told investors it was possible “we’re getting more cash than we know what to do with”.
This follows BP revealing profits of $12.9bn and announced $4.2bn of planned share buybacks in February, a week after Shell outlined earnings of $19.3bn and an $8.5bn buyback scheme.
Both energy firms have rebounded from heavy pandemic-driven losses thanks to oil prices spiralling above the $100 per barrel benchmark and gas prices peaking at record highs amid supply shortages and increased demand.
Markets were already tight at the beginning of this year, however Russia’s invasion of Ukraine has exacerbated fears of disruption caused by sanctions and escalating conflict in the region.
Russia has recently imposed rouble-requirements on gas payments, while the European Union (EU) has joined the UK and US in targeting the country’s energy supplies, and is now weighing up a ban on oil imports.
Shell and BP have both exited their Russian investments amid government pressure, expecting eventual hits of $3bn and $25bn respectively.
Cabinet splits appear over calls for windfall taxes
With BP and Shell wallowing in cash, the government is now under growing pressure to impose a windfall tax on North Sea oil and gas companies to mitigate the deepening cost of living crisis.
The Labour Party has consistently called for a one-off £1.2bn levy as part of its proposals to cut £600 per year off energy bills for low-income households.
This comes after energy bills spiked last month 54 per cent to nearly £2,000 per year for average households, amid market carnage across the energy sector, with expectations of a further hike of between 33 and 50 per cent later this year according to the latest forecasts from energy analysts.
While the government remains opposed to the measure, concerned it could deter key investment in the UK’s energy sector, there are reports of splits in the cabinet over the potential for new taxes.
Chancellor Rishi Sunak told Mumsnet founder Justine Roberts last week he would be prepared to U-turn and slap a windfall tax on oil and gas companies, if they fail to commit to pledges to ramp up investment in new UK energy projects
He said: “What I would say is that if we don’t see that type of investment coming forward, and companies are not going to make those investments in our country and energy security, then of course that’s something I would look at and nothing is ever off the table in these things.”
However, Business Secretary Kwasi Kwarteng played down the prospect of further levies on the North Sea oil and gas sector, when questioned by Sky News’ Sophy Ridge.
Kwarteng explained: “I’ve never been a supporter of windfall taxes – I’ve been very clear about that publicly. I think they discourage investment.”
Nevertheless, he has written to BP and Shell last week demanding a clear plan from them within weeks to reinvest profits, according to The Sunday Times, reflecting the urgency in government demands to boost UK energy spending.
He said: “We need to collectively show … how the success of our offshore oil and gas sector has a direct and enduring benefit to the British economy.”
Downing Street considers North Sea oil and gas exploration essential to the country’s energy independence, with fossil fuels a key tenet of the recently published supply security strategy following Russia’s invasion of Ukraine.
Shell has announced its intention to invest £25bn in the UK’s energy sector over the next decade, with 75 per cent focused on low or zero carbon energy sources, while BP has pledged to double the amount of money it invests domestically through the middle of the decade.
BP’s chief executive Bernard Looney dismissed calls for a windfall tax when questioned about the proposed measure earlier this year.
In an investor call in February, the oil and gas chief said: “The UK needs more gas, not less gas, right now and that’s going to require more investment, not less investment. A windfall isn’t probably going to incentivise more investment.”
The proposal has also faced criticism from UK think tanks.
John Macdonald, director at the Adam Smith institute, previously described the proposals for a windfall tax as ‘economically illiterate’.
Speaking to City A.M. in February, he said: “Labour’s proposal to impose one on successful energy companies like Shell might be superficially appealing, but in reality is more vindictive than effective, with costs of the tax likely passed onto consumers. A windfall tax on profits would make the UK energy market less attractive for investment, without which storage capacity, distribution networks, and generation become increasingly difficult, ultimately pushing prices up further.”