It is Christmas every day for oil and gas companies, and their shareholders and executives are laughing all the way to the bank, leaving the rest of us to pick up the cost in higher energy prices, inflation, bankruptcies and a deepening cost of living crisis.
Shell’s third-quarter profits have more than doubled to $9.5bn (£8.2bn) and add up to a whopping $30bn so far this year. Most of the additional profit is not made by sudden extra investment or effort. The cost of producing oil and gas has not changed much, but the selling price has.
In May this year, after initially resisting calls for a windfall tax on oil and gas companies, Rishi Sunak introduced a temporary 25% levy on excess profits for the period from 26 May 2022 to 31 December 2025. It was expected to raise around £5bn in the first year. But that number now looks optimistic.
On Thursday, Shell admitted that it had so far paid zero under the new levy in the UK, despite making record global profits. Indeed, it has not paid any corporation tax on oil and gas production in the North Sea for the last three years, and does not expect to make any windfall payments until 2023.
As usual, the Conservative government used its big majority in the Commons to rush through the legislation with minimal scrutiny. The result was a badly designed and ineffective tax that is easy to minimise and even avoid.
One of the glaring gaps in Sunak’s scheme is that the tax only applies to profits from oil and gas extraction in the North Sea. It leaves untaxed huge pools of excess cash Shell has been collecting from its trading arm, from refining and from its forecourts.
Motorists have been paying record prices at petrol stations, many controlled by oil companies. A study by the Competition and Markets Authority indicated that an extra 24p a litre profit may have been made. That profit is not captured by the UK windfall tax.
Oil and gas companies also own or control refineries. Shell’s indicative refining margin for the third quarter of 2022 is about $15 a barrel, compared with $28.04 a barrel for the second quarter and $10.23 a barrel in the first quarter. It was $4.17 a year earlier. However, the massive profits from refining are not subject to the UK windfall tax.
Shell and other energy companies employ armies of traders to buy, sell and speculate on the price of oil and gas, including that produced by the company itself. Traders earning an average of £100k a year can make thousands in bonuses. Company accounts do not reveal the profits made from trading, but Shell’s trading arm is estimated to make around $4bn a year. Trading profits are not subject to the UK windfall tax either.
The most optimistic forecast for the portion of Shell’s pre-tax earnings that would fall under the windfall tax – the gains it makes from North Sea extraction – would amount to just 3% of its pre-tax earnings. Even that is likely to be eroded by tax perks handed out by the government. For example, companies get £91 subsidy for every £100 invested in fossil fuels. In addition, oil and gas companies are masters of shifting profits to low- or no-tax jurisdictions through intragroup transactions, such as royalties, management fees and loan interest payments, all of which reduce UK taxable profits.
In principle, UK resident companies are taxed on their worldwide profits, subject to international tax treaties and credits for taxes paid in other jurisdictions. The government can tax the profits which escape UK taxes altogether. It can also design a more effective windfall tax to claw back excessive profits made by oil and gas companies, but has so far shown no interest in it.
• Lord Sikka is an emeritus professor of accounting at the University of Essex and the University of Sheffield
