‘Utilities’ like ScottishPower (Iberdrola) are saved… for now
Rishi Sunak’s unexpected tax is here. The UK Chancellor of the Exchequer announced on Thursday that he will levy a 25% surcharge on North Sea oil and gas producers, on top of the fees they already pay. The way to design it involves different levels of damage, designed to stimulate investment.
Taxing the rising profits of fossil fuel producers could have undermined Britain’s reputation as a business-friendly country. But the inflationary crisis has forced Sunak to double the fiscal package of 18,000 million euros that it announced at the beginning of the year. Citizens will now receive a 470-euro discount on their energy bills, while lower-income households will also receive a payment of 760 euros.
The $6 billion Sunak hopes to raise is more than double the amount Bank of America analysts estimated could be raised by the Labor opposition’s plan for a 10% tax surcharge. That’s partly because of a higher rate, but also because Sunak won’t allow drillers to offset their bills against decommissioning costs and past losses. But they will benefit from the duplication of an existing investment allowance. For every pound they invest, they will get a tax saving of 91 pence.
That creates winners and losers. Both Harbor Energy and EnQuest will be hurt by the tax losses. But Harbor is going to invest more than 700 million in new production in the UK this year, while EnQuest will spend less than 230 million. Surely for this reason, Harbor rose 1% on the stock market, while EnQuest plummeted 11%.
Oil majors such as Total, Shell and BP have less to fear as the UK is a small part of their business. Extrapolating from BofA’s analysis of a 10% mark-up, none of them should be paying much more than 5% of free cash flow this year. But they could still end up paying different bills, because Total is going to invest less this year.
The main winners appear to be utilities such as SSE, Drax or ScottishPower (Iberdrola), which will not be affected. But Sunak still has to finance 12,000 million of his tax package. And what was announced on Thursday is equivalent to just 0.7% of GDP, less than the rise in consumer energy bills in the fourth quarter of 2021 alone, Citi estimates. That means Sunak can still look for more windfalls. In time, they might join EnQuest in the infirmary.
