£250bn: The Cost of Giving Tax Breaks to North Sea Oil Firms
The UK government has lost over £250 billion in 13 years by giving generous tax breaks to North Sea oil companies, according to an expert report.
Increasingly lax tax regimes by successive Westminster governments have also left taxpayers with a £23 billion bill for decommissioning old oil rigs, it says.
Campaigners are demanding a “just transition” away from climate-wrecking oil and gas in order to end a “crazy spiral of catastrophe”. The industry, however, highlights the multi-billion pound taxes that it has paid and the hundreds of thousands of jobs it supports.
A leading international oil expert and lawyer, Juan Carlos Boué, has written a 30-page report on North Sea oil taxes for the Scottish trade union climate group, Scot.E3. The report was funded by the Public and Commercial Services Union and the campaign group, Platform.
The report charts how UK Labour and Conservative governments have lowered taxes for oil multinationals, enabling them to make multi-billion pound “super profits”. This has resulted in a “significant” cost for taxpayers, it says.
The Treasury has sometimes bent over backwards to help the oil industry, Boué argues. “Under no conceivable circumstance – including accident, oversight, and even negligence – would the taxation of excess profits be allowed to bite into the returns due to oil capital,” he writes.
“The UK North Sea regime transfers risk to government alongside assured rates of return for investors.”
Boué, a former oil industry executive, government adviser and research associate at the Oxford Institute for Energy Studies, points out that much tougher oil taxes have been imposed by other countries exploiting oil from the North Sea. He calculates that the “effective tax ratio” in the UK has been significantly lower than in Norway, Denmark, The Netherlands and the German state of Schleswig-Holstein since 1989.
If the UK had levied taxes similar to those in Norway, the UK would have benefitted to the tune of a “staggering” £250 billion ($324bn) between 2002 and 2015, Boué estimates.
Norway has amassed a trillion dollars in its state petroleum fund from extracting 43 billion barrels of oil. The UK has extracted 48 billion barrels but has no such fund, he points out, because “it elected to channel its petroleum windfall to fund tax breaks for oil and gas companies.”
He adds: “The belief, in the face of such evidence, that the UK fiscal regime is not aberrant seems akin to the drunken driver’s conviction that it is everybody else who is going the wrong way down the motorway.”
Boué highlights the decision in 2016 by the then Chancellor, George Osborne, to zero-rate, rather than repeal, petroleum revenue tax. This meant that oil companies stopped paying any tax, but could still claim rebates from the government for the cost of decommissioning old oil rigs, estimated at £51 billion ($66bn) by energy consultants, Wood Mackenzie.
The UK Office for Budget Responsibility has forecast that between 2016 and 2022 petroleum revenue tax will result in a net loss to the exchequer of £500 million a year. “The UK government will be footing the bill for around 45 per cent of the future decommissioning costs in the North Sea,” Boué says.
“British taxpayers can look forward to a future in which the country will still be producing quite substantial volumes of oil and gas, but the petroleum fiscal income that the UK government will derive therefrom will be at best marginal, or more likely be negative.”
Boué also criticises the Scottish Government for backing a 2014 report by the Scottish businessman, Sir Ian Wood, on maximising economic recovery of North Sea oil. This was founded on “a simplified fiscal regime to incentivise investment and drilling activity,” he says.
Oil firms should rethink their attitude, he concludes. “For all their thirst for abundant and cheap oil and gas, and their talk of an endless succession of attractive investment prospects, oil companies would be well advised to reconcile themselves to the idea that they have got to pay, and pay a fair price, in exchange for access to petroleum resources.”
Scot.E3, which campaigns for “climate jobs and a just transition”, called for the run-down of North Sea oil to be planned to ensure sustainable jobs for oil and gas workers. It was time to stop “stuffing private pockets with public wealth”, it said.
“The report demonstrates how our government has colluded with the oil and gas industry to plunder a national resource for nearly half a century,” Scot.E3’s Pete Cannell told The Ferret.
“Now they want business as usual as fossil fuel production pushes us towards climate chaos, threatening the future of our grandchildren.”
Friends of the Earth Scotland accused the UK government of “falling over itself” to keep the oil industry happy. “No other industry does so much damage to the climate nor gets such favourable terms of operation by getting public money to clean up their mess,” said the environmental group’s director, Dr Richard Dixon.
“We are in a crazy spiral of catastrophe where public subsidies are funding mega-rich companies to extract every last drop of oil, thereby guaranteeing maximum climate chaos.”
The North Sea oil industry stressed that it was still subject to taxes. “The offshore oil and gas industry is subject to corporation tax that is double that of other UK industries and has contributed some £350 billion to public services through taxation over its lifetime,” said Mike Tholen, sustainability director, of the industry body, Oil and Gas UK.
“More than this, it continues to support over 270,000 jobs today, provides secure and affordable energy to the UK and will play a key role in supporting the energy transition.”
He added: “Our industry is already in action with governments and regulators to realise its full potential in this transition to a net zero future, with Roadmap 2035 setting out sixty actions in five key areas outlining a blueprint for a sustainable, fair and inclusive move to a more diverse and lower carbon energy mix.”
The Scottish Government pointed out that it had never had a direct say in offshore oil taxation. “Scottish ministers have, since 2007, also consistently argued that the UK government has squandered the revenues from the North Sea and failed the people of Scotland in not establishing a Norwegian-style national oil fund as a legacy for future generations,” said energy minister, Paul Wheelhouse.
“We made clear in last year’s programme for government that, reflecting the declared climate emergency, continued support from the Scottish Government for oil and gas businesses operating in the North Sea is conditional upon contributing to a sustainable, secure and inclusive energy transition that supports meeting our strengthened greenhouse gas emission targets.”
Wheelhouse emphasised the government’s “strong support” for the oil industry’s commitment to “decarbonise” the process of extracting of oil and gas from the North Sea. “The oil and gas sector can play a positive role in Scotland’s energy transition, helping to design the diverse energy system we need for the future,” he said.
“The knowledge and experience of the oil and gas sector and its supply chain will also be very important for developing and investing in essential low carbon technologies, such as carbon capture utilisation and storage.”
The Scottish Government was trying to cut the costs of decommissioning old rigs by 35 per cent. “We seek to maximise the value added of such activity for the Scottish economy, with consequential benefits in terms of tax receipts,” Wheelhouse added.
“The Scottish Government has included just transition principles in our climate change legislation. We have also established an independent Just Transition Commission, which is considering how Scotland’s move to a net-zero economy can be done in a way that is fair for all.”
The Treasury argued that the UK was a world leader in “clean growth”, reducing carbon emissions while growing the economy. “The oil and gas sector is an important part of the UK’s energy security strategy, producing the equivalent of around half of the UK’s primary energy needs,” said a spokesperson.
“The sector has contributed to our public finances, paying £340 billion in production taxes to date. These go towards funding crucial public services like the NHS. Tax relief is a normal part of a corporate tax system where there are genuine costs to the industry, such as the safe removal of infrastructure at the end of a field’s life.”