As a result of the extension of the windfall tax on oil and gas companies in the United Kingdom, the French oil company TotalEnergies has said it will reduce its North Sea investments by 25 percent in the coming year.

The company will reduce spending on new wells in the region by £100 million.

Last month’s Autumn Statement hiked the windfall tax, the Energy Profits Levy, from 25% to 35%, and it will remain in effect until March 2028.

According to the government, the tax “strikes a balance between paying cost-of-living assistance and stimulating investment.”

Treasury spokesperson: “We have been clear that we want to encourage reinvestment of the sector’s income to support the economy, jobs, and energy security.” Therefore, the more investment a company makes in the United Kingdom, the less tax it will pay.

A representative for the Scottish government, however, stated, “This decision demonstrates that the fiscal and economic uncertainty induced by the British government is already having very serious effects on Scottish enterprise.”

“We have also been clear that the introduction of a windfall tax must involve a balanced approach across all industries and businesses, not simply energy corporations, which are disproportionately headquartered in Scotland.”

TotalEnergies is one of the largest oil and gas producers in the North Sea, and its decision to reduce investment will impact its plans to build a new well at its Elgin gas field.

Following an additional adjustment to the fiscal climate for energy investors in the United Kingdom, we are currently reviewing the impact of this change on our present and future projects,” stated TotalEnergies’ UK chairman Jean-Luc Guiziou.

“The energy sector operates in a cyclical market with variable commodity prices. We believe the government should be willing to reconsider the Energy Profits Levy if prices decrease before 2028.”

The windfall tax on the North Sea oil and gas corporations was implemented in May, following a dramatic surge in oil prices.

As Covid limits were loosened around the world, oil prices were already rising, but they surged when Russia’s invasion of Ukraine sparked concerns over the energy supply.

Originally, the EPL rate was set at 25%. However, in last month’s Autumn Statement, Chancellor Jeremy Hunt said that the rate would climb to 35% in January 2023 and remain at that level until March 2028. Originally, the completion date was set for the end of 2025.

Already, North Sea oil and gas companies are taxed differently than other businesses. Their profits are taxed at a higher rate; they pay 30% corporation tax on their profits plus an additional 10% rate. Other corporations currently pay a 19% corporate tax rate.

However, energy companies can also claim a 91p tax credit for every £1 invested in fossil fuel extraction in the United Kingdom.

Neivan Boroujerdi of the energy consulting firm Wood Mackenzie stated that although TotalEnergies is the second-largest producer in the North Sea, it will not be one of the largest investors in the coming years.

Mr. Boroujerdi explained that this is partially the reason why the levy (windfall tax) has such a negative impact, since they cannot use investment allowances to offset their levy payments.

‘Extreme burden’

Brindex, which represents smaller independent oil exploration businesses in the North Sea, addressed a letter to the chancellor last week stating that the windfall tax hike posed an “existential threat” to the industry.

In the letter, Robin Allen, the chairman of Brindex, stated that its members can “no longer sustain this excessive open-ended tax burden” and warned that it could hurt jobs and the nation’s energy security.

Similar to TotalEnergies, Brindex has advocated for a price floor system that would only trigger the windfall tax above a specified price threshold for oil and gas.

Shell and BP have both stated that they will evaluate North Sea projects in the wake of the tax rise, although neither company has revealed any particular spending cuts in the region.

Offshore Energies UK (OEUK), the leading North Sea sector association, stated that the move to increase the EPL was “undermining investor confidence.

Deirdre Michie, chief executive officer of OEUK, stated, “Our industry planned to invest £200 billion in the broader energy sector by 2030, including low-carbon solutions. This would ensure that the United Kingdom can accomplish its net-zero and climate targets, as well as improve its energy security, during the transition to a low-carbon economy.

But… these tax changes seriously threaten this.

Mr. Boroujerdi of Wood Mackenzie stated that many in the sector agreed “something needed to be done” when the EPL was originally proposed in May.

“We witnessed out-of-control energy costs and eye-popping profits. However, shifting the goalposts twice within six months has not been warmly received and is not favorable to future investment.

However, Philip Evans, an oil campaigner with Greenpeace UK, stated that the windfall tax was “far too little.”

“Investments from TotalEnergies are ultimately a horrible deal for the British public.” They provide increasingly unstable employment opportunities. The extraction of fossil fuels will undermine our climate goals, he said.

Renewable energy is the future of the North Sea, and the sooner the government realizes this and helps us get there, the better.