Increased UK Windfall Tax Hits Shell’s Earnings for Last Quarter of 2022

A display sign at a Shell petrol station in Leamington Spa, England, is pictured in this file photo dated March 16, 2022. (Jacob King/PA Media0

The increased level of UK windfall taxes on oil and gas producers has hit Shell’s earnings in the fourth quarter of 2022, the company has said.

Shell revealed it will face a hit of $2 billion (£1.7 billion) to its latest quarterly earnings due to windfall taxes in both UK and the European Union.

The London-listed oil giant told investors on Friday that its earnings for the final quarter of 2022 were hit due to the increased UK energy profits levy and additional EU taxes.

In total, Shell said it now expects to have paid between $4.3 billion and $4.7 billion in global taxes over the fourth quarter.

Shell clarified that the amount it pays out to EU and UK authorities over the latest will be different from the earnings hit, due to its ability to use historic losses and investments to alter its tax bill.

The oil giant also revealed that trading in its chemicals business is expected to have been “significantly lower” in the final quarter of 2022 compared with the previous quarter.

It added that its liquefied natural gas (LNG) production over the quarter was impacted by major outages at two plants in Australia.

The group is due to publish its full results for the 2022 financial year on Feb. 2.

The Total Culzean platform is pictured on the North Sea, about 45 miles (70 kilometres) east of Aberdeen on Scotland's northeast coast, on April 8, 2019. Andy Buchanan/AFP via Getty Images

Investment Allowance

The idea of a windfall tax on energy companies was proposed by opposition parties after energy prices soared following the Russian invasion of Ukraine in February 2022.

Rishi Sunak, then chancellor of the Exchequer, initially resisted the idea, warning about the impact it would have on future investment.

But he was later forced to impose the tax to fund a £15 billion emergency support package to tackle the impact of energy inflation on British households.

On May 26, Sunak announced a 25 percent profit levy on oil and gas giants, which the government expected to generate £5 billion in tax revenues.

He said the oil and gas sector was making “extraordinary profits” not as the result of innovation or efficiency, but as the result of “surging global commodity prices driven in part by Russia’s war.”

“For that reason I am sympathetic to the argument to tax those profits fairly,” he said.

He also introduced a “new investment allowance” to incentivise energy firms to reinvest their profits in developing domestic energy sources.

In the third quarter of 2022, Shell benefited from the 80 percent investment allowance, which significantly reduced its tax bill.

Further Tax Rises

After Liz Truss replaced Boris Johnson as prime minister, she rejected the idea of raising the windfall tax to reduce energy bills for households.

She told the House of Commons on Sept. 7: “I am against a windfall tax, I believe it is the wrong thing to be putting companies off investing in the United Kingdom just when we need to be growing the economy.”

But a Downing Street spokesman later said that the existing windfall tax imposed by Sunak still stood.

Soon afterward, Truss’s plan to use government borrowing to fund massive tax cuts was shelved after it triggered market turmoil, causing the pound to fall sharply against the dollar and borrowing costs to soar for both the government and individual British households.

After Sunak became prime minister, Chancellor Jeremy Hunt increased the windfall tax on oil and gas giants from 25 percent to 35 percent and imposed a 45 percent levy on electricity generators. The investment allowance for energy producers was also significantly reduced as part of the autumn budget.

Industry Complaints

At a meeting held in Edinburgh on Dec. 9, UK energy producers complained to the chancellor that the government’s windfall tax is excessive.

Industry representatives told Hunt that the extension of the Energy Profits Levy was “a tax too far,” according to Deirdre Michie, chief executive of Offshore Energies UK.

She said: “At the moment our members produce nearly 40 percent of the nation’s gas. We can only maintain that kind of output by constant investment.”

A Treasury readout of the meeting said the chancellor “highlighted the importance of energy security in the aftermath of Russia’s war with Ukraine, and said that the government continues to recognise the importance of the sector and the value of its investments.”

It continued: “He stressed that this was both as a key asset for supporting UK energy independence and ensuring a sustainable transition to net zero. He explained that is why the more investment a firm makes into the UK, the less tax they pay.”

Hunt told the oil and gas leaders that his autumn statement had required “difficult decisions” and those with the broadest shoulders had been asked to pay more.

He said that the Energy Profits Levy is expected to generate just over £40 billion between 2022 and 2028.

PA Media contributed to this report.