The case for a windfall tax on North Sea oil is hard to fault

Another day, another oil company printing money. This time it’s BP, recently described as “a cash machine” by its CEO Bernard Looney.

Those are words I imagine he wishes he could eat. During a growing clamour for a windfall tax on oil companies, you can file them under “unhelpful at best”.

Looney’s cash machine spat out $13bn (£9.6bn) over the last year – which would require a fleet of oil tankers to remove from an ATM if it were delivered in actual notes.

Not quite as impressive as Shell, said some analysts sniffily, and the shares spent the day looking as if they could use some fresh fuel.

But sky high prices on global markets make these heady days for the world’s oil majors, with memories of the losses caused by the Covid-19 pandemic seemingly starting to fade and their shares in long term recovery mode.

The losses are now being incurred by ordinary families courtesy of sky-high electricity and gas bills, with still more pain at the pumps for those with petrol cars. The former have been partially offset by what’s officially called a “rebate”, which is actually a government loan, and some other measures. However, the pain will still be considerable. The clamour for the tax won’t soon die down.

The last time a such a levy was tried was when the New Labour government of Tony Blair imposed one on a range of privatised utilities back in 1997. Controversy had been generated by the prices they had been sold off at and the bumper profits they had made in the aftermath.

The argument for that previous tax, the proceeds from which were to be aimed at the young and long-term unemployed, was very strong.

The wave these companies had ridden into private hands under Conservative prime ministers Margaret Thatcher and then John Major sparkled in golden sunlight. Aggressively priced (in most cases) to go, the share prices of water companies, energy companies (and more besides) boomed, immediately generating huge capital gains for investors.

The majority also outperformed the wider market over the longer term, often by quite some distance, in part thanks to the light (the better adjective might be lax) regulatory regimes they were made subject too.

Britain had a competent and professional government at the time, and the tax was carefully thought out and calculated based on the difference between the values placed on these companies at privatisation and on the more realistic valuations that were based on their (bumper) post tax profits over four years.

It was designed as a one off. That was the promise and the promise was kept, which again seems like a radical notion today.

Critics of the move howled about the potential damage to investment, as they always do, but history shows the world didn’t come to an end. Any supposed damage caused to the UK’s reputation with investors, domestic and overseas, was very limited, in stark contrast to result of more recent political actions.

A fresh windfall tax, this time on North Sea oil, doesn’t break that promise. It would be imposed on a different sector, for different reasons and with a different justification.

The one off (once again) tax, as proposed by Labour, would be levied on North Sea producers rather than on any excessive profits made by the UK’s pair of oil majors, which are global businesses with global reach, global operations and global ownerships.

The UK’s share of the North Sea, on the other hand, is a state asset, which oil companies extract oil and gas from under licence. With prices the way they are, and household bills the way they are, there is a strong case for the taxpayer to be able to benefit from the bumper harvest through a more effective cushion to their bills.

The argument against are similar to the ones tabled against the last windfall tax. Looney expressed it like this: “A windfall tax on UK oil and gas producers would not encourage investment in producing the UK’s gas resources.”

The obvious counter to that is do we really want to be encouraging investment in hydrocarbons in the first place, given their role in heating up the planet to unsustainable levels?

Looney says BP is investing in the transition, but the activists at Follow This – a campaign group pressuring the oil industry to adopt greener practices – have criticised the company for not doing enough to align with the Paris Climate Accords. Support has been growing among shareholders. By its own admission, BP’s capital expenditure on energy from renewable sources will not amount to half of its outlay until 2030. The fact that it is doing better than some of its international rivals is immaterial. It is not doing well enough.

But back to those bills. With six new North Sea licences reportedly expected to be being granted, the political logic for such a tax to cut them, given they are leaving some people in the perilous position of “heat” or “eat” is hard to fault.

The UK’s polluting oil fields are producing pots of cash. The benefits, such as they are, should at least be shared.