Sunak’s Tax Helps Consumers, But Misses the Energy Brand

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The UK government’s 25% windfall tax on oil and gas companies’ profits, along with the associated investment deduction that allows them to avoid most of it, will do little to address the country’s pressing energy needs.

Speaking in parliament on Thursday, Finance Minister Rishi Sunak dared not utter the words “unexpected tax” – something the opposition parties had been urging him for months – and instead called it a special levy. It’s practically the same. The tax will remain in effect until oil and gas prices return to “historically more normal levels,” although he did not hint as to what those levels might be.

The subsidies to households that accompany the tax are undoubtedly welcome, and much needed by people who face another sharp increase in their fuel bills later this year.

To soften the blow to companies, he also announced an investment deduction that will allow them to offset 80% of the tax from new investments in the North Sea. But that doesn’t help future-proof Britain’s energy system.

Investments in new energy facilities usually have a long lead time. Whether it concerns oil and gas fields in the North Sea, micro-nuclear power stations or wind farms. We’re talking years, not months, before an investment idea translates into significant new inventories.

There are two things the country desperately needs in anticipation of more oil and gas production.

1. Natural gas storage capacity

The UK has nowhere to store natural gas in the summer months to meet peak winter demand. Since gas is a commonly used fuel for heating homes, demand is highly seasonal. Usage in winter is usually more than twice as high as in summer.

Until five years ago, the UK stored gas for winter use in an empty field in the North Sea called Rough. Withdrawals from storage provided about 10% of UK gas demand in the winter of 2014 to 2015, with Rough supplying about 70% of that.

But that facility was closed in 2017 when its owner, Centrica Plc, decided it was too expensive to fix technical errors that had plagued the site after more than three decades in operation. The decision was good for Centrica, but less so for energy security in the UK.

The then government was not concerned about the loss of the country’s only major warehouse. The UK’s Department for Business, Energy and Industrial Strategy saw no risk to the country’s energy security amid rising liquefied natural gas (LNG) production in the US and Australia, among other increases in supply. That complacency now seems misplaced.

Successive governments have since been unwilling to provide incentives for a replacement, leaving the UK exposed to the vagaries of spot prices. That’s fine if supplies are plentiful, but not if they’re severely limited, like last winter and maybe next winter.

In recent weeks, the UK has agreed to import so much LNG that it has more than it can use – and nowhere to store it when it’s delivered. The gas price in the UK is now a third lower than continental Europe as the market adjusts to the oversupply. If Rough were still open, or replaced by a new facility, the excess supply could be stored until needed, such as across Europe. Without it, next winter’s gas crisis will be partly caused by itself.

2. Urgent action on energy efficiency

Support for new oil and gas investments also undermines the COP26 climate deal reached six months ago in Glasgow. The meeting, hosted by the UK, called on countries to “phas out inefficient fossil fuel subsidies”.

Tackling energy waste by improving a poorly insulated building stock would help households lower their fuel bills more than investing in more oil and gas from the North Sea. The impact would be felt much earlier and last much longer. Improved insulation and more efficient boilers (or heat pumps once fuel taxes are revised to penalize CO2-heavy natural gas more than electricity increasingly decarbonised) would lower bills and cut gas consumption for decades.

Meanwhile, oil and gas discoveries in the British North Sea are shrinking and their production takes correspondingly shorter periods. Any benefit to security of supply will be fleeting.

The government could have set up an energy efficiency fund, with tax compensation for payments from the oil and gas industry, to provide grants and grants for building improvements. That would have been a much more beneficial approach than breaking the promises made at COP 26 just six months ago.

More from this writer and others at Bloomberg Opinion:

• How Putin ended Modi’s natural gas dream: Andy Mukherjee

• Russia needs more cash than Europe needs its gas: David Fickling

• Sunak’s Helicopter Drop Makes BOE’s Life Easier: Marcus Ashworth

This column does not necessarily reflect the views of the editors or Bloomberg LP and its owners.

Julian Lee is an oil strategist for Bloomberg First Word. He was previously a senior analyst at the Center for Global Energy Studies.

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