This week, European Commission President Ursula von der Leyen did something that would probably have been considered the opposite of democracy just a few years ago. She proposed that governments put a cap on the revenues of certain energy producers and add a windfall profit for the oil majors.
Called “solidarity contribution” or “crisis contribution”, the objective of the exceptional tax is the same as that of the revenue ceiling: to manage energy expenditure in a context of galloping inflation and obtain additional money to distribute , according to the plan, between those who need it most.
Like all great plans, however, unintended consequences abound with this one, and one of the most serious is the discouragement of oil and gas investment at a time when global oil and gas investment is already below what that they should be in light of demand projections.
JP Morgan’s head of global energy strategy said so this week in an interview with Bloomberg.
“If you’re planning your investment budget, you have to think twice now that you have a new risk,” Malek told Bloomberg.
“It encourages the majors to return cash to shareholders when they use that free cash flow that could have been used to invest.”
According to its plans, the EU is seeking to ‘raise’ some $140 billion from windfall taxes on non-gas power generators and oil, gas and coal companies for their ‘extraordinary record war-benefiting profits’. and on the backs of consumers”, to quote Von der Leyen.
Industry reaction was swift: Austria’s OMV said the consequences of such measures could be huge, adding that it was unfair to base the proposed windfall levy on oil companies’ profits over the course of the year. of the past three years, as these were not normal times, Reuters reported, citing CEO Alfred Stern.
“We will keep an eye on that because it can already have a huge impact,” Stern told the media, noting however that the exact impact was difficult to glean because the proposal has not yet been fleshed out.
In Per von der Leyen’s State of the Union address, in which she listed the windfall tax among measures to deal with the energy crisis, the idea is to tax corporations oil and gas companies with 33% of current year earnings 20% higher than the company’s average salary over the past three years.
OMV’s Stern noted that the past three years included two pandemic years in which many companies in the oil and gas industries struggled to stay afloat, let alone turn a profit, as oil prices plummeted at $25 a barrel.
“The big oil, gas and coal companies are also making huge profits. So they have to pay a fair share – they have to give a crisis contribution,” the European Commission president said in her speech.
If what JP Morgan’s Malek predicts is correct, it would mean less energy security for the future with less new oil and gas production outside of Russia.
The key, Malek told Bloomberg, was whether the levy would stick around for years or be quickly removed once the money was collected.
“It’s not the absolute number, it’s the uncertainty, the unpredictability of it,” he said. “There is a risk that it will become recurrent.”
Von der Leyen assured the audience of his speech that the additional taxes were “all emergency and temporary measures”, adding that for long-term energy security the EU must reduce its energy consumption.
Reuters noted in its report on OMV’s reaction to the speech that analysts said the most likely targets of the new tax would be refiners in Europe because there is little upstream activity in the EU.
Yet integrated energy companies have integrated policies, and an additional tax on European refining may well impact future mining projects in, say, the Gulf of Mexico.
It should be noted that at present, the exceptional tax is only a proposal. It is certainly a top-down proposal, but it still needs to be approved by all EU members. According to an FT report on the subject, not everyone agrees with all the measures.
The report also quotes S&P Global’s executive director for the gas industry at the EMA, Laurent Ruseckas, as saying that the proposals put forward by Von der Leyen were “all extraordinarily complex” and “would be impossible to develop and implement. in time for winter, even if there was a political consensus behind them – which there is not.
“It makes sense to agree on EU-wide targets and measures, but without allowing national flexibility on how to achieve this we risk breaking the markets we are trying to fix,” said a European diplomat at the FT.
All of this suggests that Big Oil could still avoid the additional tax, although given its reputation as the big bad of climate change, the additional tax on the industry may be the only measure to receive broad support.
By: Irina Slav
Slave reports for Oilprice.com
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