UPDATE: The Office for Budget Responsibility released new forecasts for oil and gas expenditure alongside the Spring Budget (March 2023). These forecasts estimate that a total of £25.3 billion will be spent on new oil and gas projects between the second half of 2022 and end of 2027. This increased spending will result in the tax relief on the sectors windfall tax bill increasing from £10.6 billion to £11.4 billion over the period.
In the first half of 2022, BP, Shell, Equinor and TotalEnergies reported global pre-tax profits of over £74 billion. This led to loud calls, from campaigners to better tax these profits, in the UK and globally to help support people impacted by the oil and gas industry - whether that be through high energy prices, or through the loss and damage caused by climate change.
Following record high oil and gas prices and campaigning, the UK government introduced the Energy Profits Levy in May 2022, intended to help fund more cost-of-living support for UK families. This additional tax temporarily brings the UK's headline tax rate for oil and gas companies in line with the global average (70%), increasing it from 40% to 75%. Despite the introduction of the Energy Price Levy, BP, Shell, Equinor and TotalEnergies continued to report record global profits in October. Shell even suggested it would manage to escape paying the UK windfall tax.
With prices, and in turn profits, expected to remain high among oil and gas producers for the foreseeable future, the Energy Profits Levy was extended to 2028 in the Autumn Statement. The levy will raise £40 billion over the next 6 years.
But there's more work to be done! At the end of this period the UK tax rate will revert to being one of the lowest in the world. Under the previous tax regime, the UK received $1.72 in tax for each barrel of oil produced in 2019, while Norway received $21.35.
And while the Energy Profits Levy means that now Shell will pay tax in the North Sea for the first time in five years, it features an "investment allowance" that allows companies to claim tax relief on investments. This investment allowance, deemed a "huge tax subsidy" by the Institute for Fiscal Studies, means that for every £100 an oil and gas company spends on new oil and gas, they get roughly £45 off their tax bill. The UK's independent watchdog for public finances - the Office for Budget Responsibility - have forecasted that oil and gas expenditure on new oil and gas projects will amount to £23.6 billion between the second half of 2022 and the end of 2027. This means that they will get a £10.6 billion reduction in their windfall tax bills.
To give a sense of the scale of this subsidy: this money could cover the additional cost of raising all staff in the NHS and education sectors wages with inflation for a year (£10.7 billion).