Jeremy Hunt has been told to scrap the windfall tax after analysis revealed it has left Aberdeen with the slowest growing economy in the UK.
The Energy Profits Levy has become a “barrier to investment”, according to international accounting firm EY, and the economy of Aberdeen is paying the price.
Amid speculation the tax could be extended even further, Aberdeen & Grampian Chamber of Commerce has said “enough is enough” and that the North-east should not be used as a “cash cow” by the Treasury as it seeks to balance the books.
The Chamber is calling on the chancellor to use his Spring Budget on Wednesday to abandon the levy, unlock investment and unblock the North-east economy.
Up to £200billion of new private capital for offshore energy projects is already earmarked and awaiting a green light, if the right fiscal conditions were put in place.
Aberdeen pays the price
According to analysis released by EY today, Aberdeen is predicted to be the slowest-growing economy in Scotland over the next three years (2024 – 2027) with an average GVA growth rate of 0.8%. Over the same period, the UK economy is forecast to grow by 1.9%.
EY’s newly published Regional Economic Forecast states: “This is likely explained by challenges in the Oil & Gas sector, upon which Aberdeen’s economy is heavily reliant, including the long-term decline in North Sea Oil production.
“Policy has also played a part as the introduction of the windfall tax continues to act as a barrier to investment in the sector.”
Windfall profits have gone
The biggest beneficiary of high energy prices in the UK is neither energy companies nor their shareholders – it is the UK exchequer.
Under the current tax regime, introduced by Rishi Sunak as chancellor and then extended by Jeremy Hunt, 75p in every £1 profit being made in the UK energy sector is going to the Treasury.
Since energy prices spiked following Russia’s invasion of the Ukraine, the UK oil and gas industry has paid over £21.5billion in tax. Energy prices have since normalised, but the tax has not, which has drained investor confidence in the North Sea.
In January 2022, the month prior to the Russian invasion, the oil price was $86-a-barrel and that month the UK’s oil and gas producers paid £427million in tax, according to public receipts data from HM Revenue and Customs.
Fast forward to January 2024, the oil price was actually lower, sitting around $80, but the sector is now paying over £1billion per month in tax. This includes £587million in corporation tax alone, even without the windfall tax on top.
More than 1,000 jobs have been lost at companies like Harbour Energy, Apache and Petroineos – and the Chamber fears many more could follow.
Reaction
Ryan Crighton, policy director at Aberdeen & Grampian Chamber of Commerce, said: “The windfall tax needs to go - it is not acceptable for Aberdeen to pay the price for economic problems it did not create.
“The North Sea is being used as a cash cow to plug financial holes created by the financial mismanagement of others – and Aberdeen is clearly paying the price. Businesses in the North-east are watching through their fingers as politicians of all parties fall over themselves to make things worse.
“After years of stagnation, the UK economy desperately needs investment to grow. North Sea firms are standing by ready to invest £200billion – but they need the right conditions. Jeremy Hunt has the chance to put that right on Wednesday.”
He added: “This saga again highlights why we need a seismic shift in how we draw up long-term energy policy in this country.
“Right now, we are at risk of the North Sea oil and gas industry being wound down through rhetoric, rather than strategic policy. If we simply tax it to death, it will be as chaotic as it will be economically damaging.
“We need a new body, entirely independent of government, to set a policy direction for the next 40-years. Like the Bank of England – which has maintaining monetary and fiscal stability as its central mission – the new body should be charged with developing recommendations which could command cross-party consensus and insulate the sector from political policy shocks in the future.
“If nothing changes, and we get five more years of the same muddled policy, discretionary capital will continue to move overseas, the transition will stall, and a world class supply chain built up over decades will go. We can – and must – do better.”