Windfall Taxes Will Stifle Oil Industry Investments

• As the energy crisis triggered a cost-of-living crisis governments around the world have turned to windfall taxes on the oil industry to raise funds.
• While it might seem like a good short-term solution, the consequence of windfall taxes on the future of the oil and gas industry could be significant.
• Plenty of energy companies have been complaining about the losses and warning of falling investments, while others are suing governments.

Windfall taxes have suddenly become quite popular. With oil and gas companies reaping record profits from the rally in energy commodity prices, governments have been unable to resist the temptation to skim a bit more of these profits.

It’s hard to blame them - the energy crisis has pushed most governments in Europe to come up with billions in aid for households and businesses. In the UK, millions have slipped into energy poverty, and the government has had to act urgently, too. India has also imposed a windfall tax on crude oil and fuels.

Yet while it seems like an easy way to find some extra money to spend on helping businesses and households survive the cost-of-living crisis, windfall taxes are tricky because they discourage investments.

Windfall taxes are counterproductive for the oil industry at a time when oil demand is forecast to outpace supply, Aramco’s chief executive Amin Nasser told CNBC’s Hadley Gamble this week. And they would also discourage investments in decarbonization efforts.

“I would say it’s not helpful for them [in order] to have additional investment. They need to invest in the sector; they need to grow the business, in alternatives and in conventional energy, and they need to be helped,” Nasser said.

“Decarbonizing existing resources also costs a lot of money,” he said. “So we need to see the support from the policymakers and from the capital markets at the same time. Capital markets [are] putting a lot of pressure also on these companies, where it makes it too difficult for them to make some of these investments and get the right funding and capital,” Aramco’s top executive also said.

Related: High Oil Prices And Mineral Demand Fuel Growth In Latin America

Indeed, so far, the windfall tax has been presented to the public as something of a punishment for Big Oil for making so much money from oil and gas when millions have been struggling to pay their bills—a well-deserved punishment. There has been no mention of what the impact of these taxes would be on future investment decisions, at least not from politicians.

The oil and gas companies themselves have been quite vocal about that impact. UK oil and gas producer Harbour Energy this week announced job cuts stemming from the 35-percent windfall tax that the industry has been slapped with. Shell said the windfall taxes in the EU and the UK will cost it some $2.4 billion.

Total estimated the hit from the windfall levy at around $2.1 billion after saying it would reduce investments in the North Sea by a quarter this year. The UK’s windfall tax will cost the French supermajor around $1 billion.

Some are going further than complaining. Hungarian energy major MOL is suing the government of Slovakia for the windfall tax it imposed on energy firms. Exxon is suing the entire European Union, arguing it exceeded its legal authority with this move. And the energy industry association in Britain has warned that financing for new oil and gas projects will dry up because of the additional levy.

It makes sense that when additional taxes discourage investments, they won’t only discourage specific investments but would rather lead to a comprehensive reconsideration of investment plans, including low-carbon projects.

What’s more, the European Union has targeted wind and solar power producers with windfall taxes, too, arguing that they have raked in massive profits from producing low-cost electricity because prices are formed on the basis of gas prices, and these have been sky-high. This, too, has prompted a backlash.

All this is happening at a time when the International Energy Agency—a champion for a quick energy transition—forecast oil demand will this year grow by 1.9 million bpd while supply growth slows to 1 million bpd. It’s hardly the best time to discourage any energy investments.

By Irina Slav for Oilprice.com

More Top Reads From Oilprice.com:

• Why 2023 Will Be Another Strong Year For The Oil Industry
• EIA: Soaring Production Will Keep Natural Gas Prices In Check
• Saudi Arabia Is Open To Discuss Non-Dollar Oil Trade Settlements