The UK Government will remove the windfall tax on oil and gas companies, should the price of the commodities continue to fall.
Ministers said that they would slash the current 75% tax on North Sea oil and gas profits back to its regular 40% if prices reach certain levels.
They said they would take the move if the average price of oil fell to or below 71.40 dollars per barrel for two consecutive quarters, and the average price of gas fell to under 54p.
On Friday morning, Brent crude oil was trading at 75.38 dollars per barrel. UK gas prices were at around 64p per therm.
The windfall tax was first announced a year ago to ensure that oil and gas companies were paying what they owe and not benefiting unduly from Vladimir Putin’s war in Ukraine.
Oil and gas prices soared after the Russian president launched a full-scale invasion, bent on taking Kyiv in just three days.
But well over a year later, Ukraine is now pushing to take back the territory it lost in the early days of the war, which started in 2014.
The UK Government said that the windfall tax will remain in place until 2028 as previously planned unless oil and gas prices fall to the levels needed for it to be revoked.
It said that the tax had so far raised £2.8bn since being implemented.
“While the levy included an investment allowance to encourage firms to continue to invest in oil and gas extraction in the UK, industry has warned that companies are cutting back on investment,” the government said.
“This puts the long-term future of the UK’s domestic supply at risk, meaning we would be forced to import more from abroad at a time when reliable and affordable energy is a focus for families and businesses.”
It said that the tax will not be removed before 2028 if the Office for Budget Responsibility’s energy price forecasts are accurate.
Russell Borthwick, chief executive at Aberdeen & Grampian Chamber of Commerce, said: “The introduction of a price floor is a welcome step in the right direction, but if the UK Government is serious about unlocking the investment trapped by its current fiscal regime, then the finish line is still some way off.
“Since it was put in place a year ago, and then further increased, this ill-thought-through tax raid has achieved little other than to shatter confidence in the sector, cost jobs, caused investment to be cancelled or driven overseas and further threatens our ability to deliver energy transition.
“Today’s intervention tells us that the UK government clearly now recognises their mistake.
“Prices have already returned to historically normal levels, so there are no windfall profits to tax,“ he continued, adding: “The changes announced today will do little to reverse the worrying trends we are seeing as it’s highly unlikely the oil price will fall below the floor of $72 for a six-month period any time soon.“
Sir Ian Wood commented: “As prices return to normal and the windfall no longer exists, oil and gas producers are still experiencing one of the highest tax burdens of any sector in the world and the number of operators who have publicly announced plans to scale back or cancel operations in the North Sea with significant job losses linked directly to this policy is truly alarming.
“It remains to be seen whether or not this price floor will have any real impact in reversing these decisions and we urge the UK Government to monitor this closely and take further steps, as necessary, to protect the future of the industry.
“The UK oil and gas industry currently supplies 50% of the UK’s demand for fossil fuels – without more investment we would be dependent on imported, carbon heavier oil and gas for 80% of our needs by 2030.
“Imported oil and gas pays no UK taxes and supports no UK jobs, so it is economically and environmentally prudent for us to maximise domestic production.
“There is an overwhelmingly strong case to support an industry that will contribute £20bn to the UK’s economy this year alone and has the critical mass in skills, expertise and financial capital required to accelerate energy transition toward meeting net zero targets.”
Gareth Davies, exchequer secretary to the Treasury, said: “It is right that we recover excess profits resulting from Putin’s war and use the money to help people with their energy bills.
“Thanks to the revenue raised from windfall taxes on energy profits, we will have helped save the typical household £1,500 on their energy bill by July.
“While we stepped into help, never again can our energy supplies be at the whim of petrostate despots like Putin.
“That’s why it’s so important that we secure investment in our own domestic supply, protecting the tens of thousands of British jobs that come with it.”
The news was met with mixed reaction on Friday. Simon Francis, the coordinator of the End Fuel Poverty Coalition, said the idea was premature.
“Energy bills are predicted to remain high and levels of household energy debt are still surging,” he said. “Any talk of reducing or ending the windfall tax while millions still struggle through the energy bills crisis is premature.
“The government should keep all options on the table to ensure the funding is available to fix Britain’s broken energy system into the long term.”
Greenpeace UK’s climate campaigner Georgia Whitaker said: “The government’s windfall tax on oil and gas companies already contains more loopholes than a block of Swiss cheese. And now they want to scrap it altogether.”
But Offshore Energies UK, which represents the industry, said that it was not enough to restore confidence.
“We’ve always been clear that when the windfall conditions go, the windfall tax should go,” its chief executive David Whitehouse stated. “This is a step in the right direction, but many more will need to be taken to restore confidence to our sector.
“We will now work closely with government and lenders to understand the detail of the measure and its effectiveness at unlocking investment.”
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