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Jeremy Corbyn Is Coming for Your Old Profits

Chris Hughes

(Bloomberg Opinion) -- Britain’s opposition Labour Party is turning its sights on the country’s aging fossil fuel industry and raising the specter of a windfall tax. The oil and gas companies working in Britain’s North Sea are a soft target and taxing them more might be justified. But the real challenge for Labour or anyone else is to identify the U.K. industry’s role in the transition to cleaner forms of energy and the fiscal incentives that would deliver that.

The North Sea is a collection of mature, declining fields. While the London-listed oil majors BP Plc and Royal Dutch Shell Plc are still there, these operations make a relatively small contribution to their global profits. U.S. oil giants have a very minor presence. Big Oil’s preference is to go where the economics are more favorable — for example in U.S. shale.

The U.K.’s oil assets have nevertheless proved attractive for closely-held operators with specialist skills in extending the life of old fields. The emergence of this sector has brought investment that probably wouldn’t have been forthcoming from the fields’ former owners; and it’s kept the local industry and its workers going longer than might have otherwise been the case.

That spending has been encouraged by a looser tax regime, which has mitigated the deteriorating attractions of the assets. In 2011, the U.K. slapped a windfall tax on the North Sea producers, only to cut taxes again a few years later when the industry was grappling with a sudden fall in oil prices. As things stand, local producers pay more corporation tax than the standard U.K. rate, plus a supplementary levy.

Labour’s manifesto, published on Thursday, says it seeks to tax those companies that “knowingly damaged our climate.” At the same time, it promises a strategy that safeguards jobs. But it’s not clear whether this policy means a retrospective tax on the companies that enjoyed higher cash flows from the North Sea in the past — the party is preoccupied by historic profits that it believes are under-taxed — while going soft on the new industry now emerging.

The party’s aim is to create a fund that enables the industry’s workforce to reapply their skills and experience to developing green technologies. That’s a laudable goal but is easier said than done.

There are some specific environmental issues facing the North Sea sector. The infrastructure that crisscrosses the freezing waters is old and therefore its carbon intensity — the emissions generated in the extraction activity itself — is probably higher than in fields developed more recently. Compounding this, smaller players lack the scale economies of the oil majors that help fund investment in more energy-efficient operations.

There are no simple answers. Anything perceived as retrospective taxation would come at the expense of making the U.K. an unpredictable place to invest, and that could cost more than it generates by deterring investment from all sources.

One place to start would be to incentivize capital investments that reduce the carbon footprint of these aged operations, such as improved carbon capture technology. If the ambition is to raise revenue to build a new clean energy industry in Aberdeen, a progressive tax tied to the oil price might achieve that with fewer side effects. The risk is that arbitrary changes force U.K. households and companies that rely on fossil fuels, and are trying to cut their consumption, to purchase them from overseas sources over whose operations Britain has no say whatsoever.

To contact the author of this story: Chris Hughes at chughes89@bloomberg.net

To contact the editor responsible for this story: James Boxell at jboxell@bloomberg.net

This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.

Chris Hughes is a Bloomberg Opinion columnist covering deals. He previously worked for Reuters Breakingviews, as well as the Financial Times and the Independent newspaper.

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