The biggest oil and gas producer in the North Sea has labeled the windfall tax on energy firms “seriously flawed” as it lobbied the chancellor for last-minute changes to the levy.
Rishi Sunak last month announced a windfall tax on oil and gas firms making outsized profits during the energy crisis, which he hopes will raise £5bn to fund efforts to cut household bills.
In a letter to Sunak, seen by the Guardian, the Harbor Energy chief executive, Linda Cook, called on the chancellor to urgently revise the proposals for the energy profits levy (EPL). The government hopes to put draft legislation in place by early July.
Cook said: “While I appreciate the scale of the cost of living crisis in the UK, the EPL as currently proposed is, in effect, retrospective and disproportionately impacts the independent oil and gas companies which have recently invested the most to help ensure UK domestic energy supply.”
Cook asked Sunak for a “gateway approach” where the levy only applies to “companies who have actually realised windfall profits”.
Harbor, which pumps about 200,000 barrels of oil a day, was created from a merger of the private equity-backed North Sea operator Chrysaor and its heavily indebted peer Premier Oil.
Cook argues that the effect of the levy on smaller specialist exploration and production companies is “disproportionately large compared with the projected impact on major oil companies such as BP and Shell”.
Harbor’s share price had rocketed by more than 40% since the start of the year as investors bet on oil and gas firms. However, since April all of those gains have been wiped out as the windfall tax damaged investor sentiment.
Cook estimated the largest independent UK producers – including Harbor, NEO, Ithaca and Spirit – will pay out more than £2.5bn.
The levy will result in energy firms paying an additional 25% tax but Sunak has allowed companies to make tax savings worth 91p in every £1 on investments in the North Sea. The tax will be in place until “normal” oil and gas prices return, or by the end of 2025.
Companies are not allowed to reduce the tax with losses made in previous years or money spent on decommissioning North Sea oil platforms.
Cook asked Sunak to “allow the offset of tax losses from past investment. Not doing so makes the levy, in effect, retrospective and penalises those who invested when commodity prices were lower.” She added: “Do not exclude decommissioning spend for EPL purposes. We are legally obligated to undertake decommissioning at the required time, and funding this alongside the EPL results in less capital available for investment.”
Cook asked Sunak to consider changing the sunset clause to the end of 2023.
A string of smaller players have built up North Sea businesses by buying ageing assets from big oil companies including BP and Shell in recent years. The BP chief executive, Bernard Looney, has been blamed for pushing the government into introducing the tax by admitting the levy would not hurt investment, a key argument originally made by ministers against its introduction.
Since Sunak announced the plan, BP and Shell – whose profits have soared this year – have warned that the tax could hit investment.
Harbor said it had invested £8.5bn into the North Sea, including on the Tolmount gasfield off the Yorkshire coast, during the past five years and had plans to invest an additional £2.5bn between 2022 and 2024.
Cook said Harbor’s hedging arrangements meant “we do not realise the full benefits of the recent high prices, unlike major oil companies who typically do not hedge and who have large trading organisations”.
The Guardian revealed earlier this month that executives of the 10 largest North Sea operators received a combined £54.4m in their last reported financial year, up from £29.4ma year earlier. Within that, Cook landed a £4.6m “golden hello” as part of her £6m pay package.
The Treasury is separately consulting on plans to hit electricity generators with a windfall tax.