Energy giant BP has revealed it will have to “look at the impact” of the government’s new levy on its operations, including reviewing its investment commitments to UK energy projects.
The fossil fuel trader said it recognised “how difficult things are for people across the UK right now” and “the government’s need to take action.”
However, BP described the new levy as a “multi-year proposal” which it would have to assess.
A spokesperson told City A.M.: “Naturally we will now need to look at the impact of both the new levy and the tax relief on our North Sea investment plans.”
Chancellor Rishi Sunak finally unveiled a £15bn support package for struggling energy users yesterday, providing up to £1200 savings to some of the UK’s poorest and most vulnerable households.
This follows Ofgem’s warning the price cap could spike to £2,800 per year for average energy users, escalating a cost-of-living crisis that has also seen fuel and food bills soar.
The package is being partly funded by an ‘Energy Profits Levy’, a new 25 per cent tax on the profits of North Sea oil and gas companies.
It is estimated this will bring in £5bn of revenue next year.
Alongside the current 40 per cent special rate energy firms operating in the North Sea already pay, this will mean a 65 per cent tax on energy profits.
The measure has been described as “temporary” but could last for up to three years – with a sunset clause in 2025.
This comes after months of pressure from the Labour Party for a windfall tax to reduce household energy bill.
The government initially opposed a levy, concerned it would deter investment into the UK energy sector.
Tory MPs even voted down a Labour motion for a windfall tax in the House of Commons last week.
However, it has now U-turned, and after continued media reports of splits in the cabinet over the proposal, Sunak has brought in an even more extensive version of the measure than proposed by Labour.
The government has adopted a ‘carrot and stick’ approach with the new levy as it includes an 80 per cent investment allowance which mean businesses will get a 91p tax saving for every £1 they invest.
This nearly doubles the tax relief available and means the more investment a firm makes, the less tax they will pay.
Last month, Downing Street unveiled its supply security strategy, with targets to ramp up renewable and nuclear power generation alongside North Sea oil and gas exploration.
After Russia’s invasion of Ukraine, the government has reignited focus on securing the country’s energy independence and reducing its reliance on both overseas suppliers and natural gas.
BP spending strategy powered by record profits
BP has pledged to invest £18bn in the UK over the coming decade, with a focus on low and zero carbon projects.
Earlier this month, the company posted record underlying profits of £4.9bn in its first quarter of trading this year, powered by soaring oil and gas prices.
It also upped its buyback scheme for shareholders to $1.5bn per quarter.
These results were in line with rivals such as Shell and Equinor which also posted bumper earnings.
This reflected a huge post-pandemic turnaround for the fossil fuel sector, after reduced demand resulted in energy firms making record losses, with BP recording a shortfall of $18.1bn in 2020.
After the results were announced, chief executive Bernard Looney indicated the company’s plans to invest £18bn in the UK would not be affected by a government raid on its profits.
He told The Times that BP would continue with plans to invest despite the tax.
Looney said: “There are none that we wouldn’t do.”
He later clarified his views in an earnings call that, and argued that “a windfall isn’t probably going to incentivise more investment.”
Meanwhile, The Times has also revealed Sunak is still open to extending the windfall tax to electricity firms, despite only including fossil fuel producers in the levy yesterday.
This proposal was criticised yesterday by Nigel Pocklington, chief executive of Good Energy – a renewables-only supplier.
He told City A.M. the idea was “much too complex” without reforming the energy grid to better reflect input costs.
As for the windfall tax, he argued the Chancellor’s proposals were the “least painful way of doing it” even if he was “wary of its impact on investment.”
However, he criticised the government for failing to announce new measures to increase energy efficiency in UK households, describing it as “glaring hole” in government plans.
He said: “If we could do something about the UK’s high level of energy inefficiency, you could make a lasting impact on bills every year, not just as a one off.