Court defeat for climate campaigners makes North Sea windfall profits tax more likely

25 January 2022

It’s difficult to keep track of the distracting flow of new ideas coming out of Westminster; most vanish within a couple of days. However, proposals for a windfall profits tax on North Sea oil and gas producers seem to be gaining momentum as a way of mitigating steep increases in household energy bills, while simultaneously helping to meet the UK’s climate change commitments.

In a curious turn of events, the results of a recent judicial review could make a North Sea windfall profits tax more likely.

The case concerns the UK Oil and Gas Authority’s (OGA) net zero strategy. The OGA has a responsibility to achieve maximum economic recovery (MER) of oil and gas in the UK. This was challenged by three environmental campaigners who contended that taxpayer subsidies for the industry should be ignored in determining what was economic.

In a judicial review of the OGA’s approach, the Court ruled that the question of what MER means is up to the OGA, not the Court. Solicitors for the campaigners state that the ruling effectively allows the OGA, when deciding on new North Sea developments, to ignore in law how tax subsidies encourage increased fossil fuel production. However, by recognising that oil and gas companies can make more money from subsidies than they pay in taxes, the judicial review in the favour of the OGA may work against North Sea oil and gas producers which are enjoying a period of exceptional cash flow.

The scale of this cash flow has been confirmed by Bernard Looney, CEO of BP, who is reported as saying that the company “is a cash machine at these sort of (oil and gas) prices” and by the interim results of Serica Energy.

Balance-sheet cash deposits are an easy target for a hard-pressed Chancellor, particularly when those cash deposits arise from both taxpayer subsidies and escalating energy bills for consumers. But will the Chancellor take action?

In my view, the debate has shifted. A week ago, the question was whether the Chancellor would introduce a windfall profits tax on North Sea oil and gas producers. A week is a long time in politics. Now the question is why would the Chancellor not introduce a windfall profits tax?