Water down windfall tax or energy industry will collapse, Jeremy Hunt warned

North Sea oil and gas production - ANDY BUCHANAN/AFP
North Sea oil and gas production - ANDY BUCHANAN/AFP

Jeremy Hunt’s windfall tax on oil and gas giants must be watered down to avoid industry collapse, Tory MPs have warned.

The Chancellor has been told that his so-called energy profits levy is “too blunt an instrument” in its current form and risks “destroying” North Sea production altogether.

It comes amid warnings from companies involved in North Sea oil and gas exploration that the sheer level of taxation now poses an "existential threat" to their industry and will lead to investment becoming "unviable".

Mr Hunt and Rishi Sunak, the Prime Minister, have faced criticism that the Autumn Statement did not include enough measures to spur economic growth.

Mr Hunt increased the windfall tax on North Sea oil and gas producers from 25 to 35 per cent, while also announcing it would be in place until 2028 rather than 2025, adding £19.4 billion to the existing bill.

The Chancellor has been told that his so-called energy profits levy is 'too blunt an instrument' in its current form - Zara Farrar
The Chancellor has been told that his so-called energy profits levy is 'too blunt an instrument' in its current form - Zara Farrar

MPs believe that unless a “sensible” floor price is agreed, energy firms will be “crippled” with higher taxes even when their profits fall.

Discussions are underway among rebel MPs about drafting an amendment to the Finance Bill - which is expected to be returned to parliament this week - to address this point. Some backbenchers have written to the Chancellor to express their concern about the windfall tax, while others have made their disquiet clear to the chief whip.

Sir John Redwood MP told The Telegraph that the windfall tax in its current form is “excessive” and will “damage the industry” as he urged ministers to “see sense”.

“We need to get as much oil and gas out of the North Sea as possible,” he said. “I don't believe it is a windfall tax if it doesn't stop when profits fall - it is just another tax on business, another tax on a business that is temporarily generating a lot of income but in the past has had heavy losses.”

Craig Mackinlay MP, the chairman of Net Zero Scrutiny Group, added: “We want more domestically derived energy. You do not get more domestically derived energy by taxing it more.

“While some of the supersize companies can accept they have had it pretty good for a while, what if those good times don't last? What happens if you have a more modest, normal profit? Are we going to still tax at 75 per cent? It is too blunt an instrument.”

Bob Seely MP said he is concerned about the security of oil and gas supply over the next decade, explaining: “We need that supply. There is no question about that. If we get this wrong and North Sea production collapses, a series of very bad things happen. For sure, we need to get tax from the industry, but we need to do so without destroying it.”

Separately, the Association of British Independent Exploration Companies has warned the Chancellor that the windfall tax on energy companies poses an "existential threat" to the industry.

Robin Allan, the association’s chairman, wrote to Mr Hunt arguing that taxing his members at 75 per cent will wipe out the industry “and with it, those jobs and our nation’s energy security”.

In the letter he went on to say that “UK Upstream companies can no longer shoulder this extreme open-ended tax burden”.

Arguing for the introduction of a price-floor, Mr Allan said: “Without such a mechanism and to continue down the path of the current anticipated 75 per cent rate, further investment in the UK has become unviable and so begins a rapid onset of the decline of the North Sea”.

'No plans' to introduce floor-price

In his Autumn Statement, Mr Hunt said he has “no objection to windfall taxes”  as long as they are “genuinely about windfall profits caused by unexpected increases in energy prices”.

A Treasury source said there are “no plans” to introduce a floor-price to go alongside the windfall tax on energy companies, adding: “We extended it to 2028 because we don’t believe gas prices will return to pre-Covid levels in that time”.

Last week it emerged that Shell is now reviewing plans to invest £25 billion in Britain’s energy system, following the expanded levies announced in the Autumn Statement.

A Treasury spokesperson said: “We have been honest about the difficult choices we face and are asking those with more to contribute more.

“The Energy Profits Levy strikes a balance between funding cost of living support while encouraging investment in order to bolster the UK’s energy security and is expected to raise just over £40 billion in total over the next 6 years.

“We want to encourage reinvestment of the sector’s profits to support the economy, jobs, and our energy security, which is why the more investment a firm makes into the UK, the less tax they will pay.”