Oil company profits double but are they taxed appropriately?

Shell last week reported an annual profit of almost $40bn for 2022 (£33.3bn). This is double their profits of $19.2bn (£16bn) for 2021 and smashed their previous record of $28.4bn (£23.7bn) set in 2008. Just today, BP also reported profits for 2022 of $28bn (£23.3bn), more than double the amount it made in 2021 and the highest in the company's 144-year history

These record breaking profits were made on the back of rising energy prices across the UK which have seen fuel prices rise by 11.5% and gas prices increase by an eye watering 128% in the 12 months to December 2022. That second figure may read as a typo but be assured, the increase in wholesale gas prices due to the ongoing war in Ukraine made up almost two-thirds of the $9.8bn of profit made by Shell in the final three months of 2022

Now, this does not mean that the increased prices Shell is charging to UK gas suppliers is due to the war in Ukraine interfering in the supply of gas from Shell to UK suppliers. The war in Ukraine has created a shortage in the supply of gas to Europe, mainly from Russia. This drop in supply means that more countries are competing for less and less total gas on the international market, which in turn means that Shell can increase the prices they are charging to UK suppliers to what amounts to extreme profiteering. The operating expenditure of Shell increased only 10% from 2021 to 2022, however, their profits increased by 107%. It is therefore clear that Shell has used the war in Ukraine as a cover to justify its price increases, not because it is actually more expensive for them to extract the gas but purely and simply because they can. 

When split into profits gained from oil production and those gained from gas, we can see that in 2022, 43.4% of Shell’s profits came from oil extraction, while 40.5% came from natural gas. However, in the final three months of 2022 the percentage of profit coming from gas extraction skyrocketed to 60.8%. At the same time, BP increased its profits from gas extraction by 113% in 2022, up from $7.5bn to $16.1bn.

How much of this extraction came from Scotland?

Neither BP nor Shell publish exact production numbers based on the country of extraction. However, we know that in 2021 Scotland produced 39.7 million tonnes of oil equivalent (mtoe) of crude oil and 2.9mtoe of liquified natural gas, accounting for 86% of the UK’s total oil and gas production. The most recent publication from the Scottish Government of oil and gas production for 2021 showed the oil and gas extracted from Scotland for 2021/22 had a monetary value of roughly £28.5bn. This figure is an approximation of the sale of the volume extracted sold at the market price at the time of production and for this reason, we can assume that the actual value gained to the companies selling the resources to be significantly higher.

So how much of this extracted wealth came back to Scotland and actually benefited our country? Well for that we must take a look at the Government Expenditure and Revenue Scotland (GERS) 2021/22. In 2021/22, Scotland generated only £3.2bn in revenues from the North Sea. Of this, £3.7bn was gathered through North Sea corporation tax and £72m through licence fees. That is higher than the £3.2bn Scotland received in North Sea revenues that year. This is because under the Petroleum Revenue Tax (PRT), Scotland actually paid out more than £550 million in tax rebates to oil and gas companies in 2021/22. This is therefore reported as a loss on GERS. 

The UK Government, in response to the falling oil price in 2015, bailed out the oil and gas companies by cutting PRT from 50% to 35% and then on to 0% by 2016. PRT has stayed at 0% since 2016, despite oil prices rising again as high as $123 per barrel in March 2022. This has allowed the oil companies operating in the North Sea to enjoy unfathomable profits from the highest oil price since 2014

Scotland suffers while Westminster baulks at taxing oil companies for political reasons

The oil companies profit from Scotland’s natural resources and give back a pittance in returns to Westminster. This is due to a combination of negligence, mismanagement and a political calculation that if oil is not taxed at source but at the pumps, then it lowers Scotland tax revenues, damaging the case for Scottish independence. However, faced with the climate emergency, we see that the UK Government has over several years paid companies to extract oil from the North Sea, in direct contrast to internationally accepted practices. A windfall tax has now been grudgingly accepted by Westminster and is expected to raise just £791m from Shell and BP for their 2022 profits

The people of Scotland are suffering through the worst cost of living crisis in recent memory. Inflation was 10.5% in the year running up to December, having peaked at 11.1% in October. The main driving forces behind this have been food and energy inflation. Food inflation hit almost 17% in December, with the price of the most basic goods like milk, bread and pasta rising the most. Findings from the Trussell Trust show that food bank usage among Scots has increased by 65% since 2014/15, with the charity handing out almost 200,000 food parcels in 2021/22.

Housing, water and energy bills remain the fastest rising items on the Consumer Price Index, up 26.6% in the year to December 2022. Scotland faces the second highest energy bills in the world, with analysis showing that the average Scot’s typical dual-fuel bills have increased from £1,375.97 in 2021 to £3,302.45 as of October 1st 2022. Rural areas have been hit the hardest. Argyll and Bute faces the highest costs of all 32 local authorities with average fuel bills up 140% from £1,842.06 to £4,421.49. 

What could be implemented?

The squeeze of inflation is being felt around the world at the moment, giving cover to many politicians and policy makers who can claim that there is not much one nation can do to combat price hikes and that countries are merely ‘price takers’ in international markets.

However, Norway has shown that this is not the case. As global energy prices began to skyrocket after the Russian invasion of Ukraine, the Norwegian Government focused on shielding its citizens from the vast majority of the increases. The Norwegian Government has given out roughly £1.9bn in state subsidies to help households and businesses with increased energy costs. In some cases the government is paying 90% of bills over a certain threshold

Given that the Norwegian energy industry is majority state owned, the Norwegian state has earned considerable income since the war in Ukraine. Oslo is expected to bring in about £90bn from the petroleum sector alone in 2022, with much of that income going into its ever-growing £1trn sovereign wealth fund. In addition to this, Norway has become Europe’s main supplier of natural gas since the EU cut ties with Russian gas. Norway is able to pass on the benefits of this to its citizens because its energy sector is state owned and therefore its profits are used to benefit the Norwegian people and not taken offshore by multinational corporations. 

Like Norway, Scotland is a resource-rich country. If Scotland had been an independent country this winter, with a wealth fund like Norway’s (as would be possible under independence), the state would be able to absorb much of the rise in energy prices and protect citizens from the worst impacts of global inflation. Outside of the UK, Scotland could finally return to taxing oil companies on their extractive practices and returning that wealth back to the Scottish people instead of having it dug up and removed from the country altogether. This income could then be used to lower the price of electricity for the whole nation by furthering investment in renewables. But even that is under risk from Westminster policy

Under the current constitutional arrangement, Scotland is being bled dry of its natural resources and seeing none of the benefits. A country as resource rich as Scotland should be thriving, but instead it is sinking under the dead weight of the failing UK economy. An independent Scotland would need to work closely with the oil companies and agree a sustainable approach to extraction and taxation. That would include a more stable tax regime, which would be welcomed by the oil producers but taxes would be higher. If there is a role for tax incentives, it would have to be linked to investment in renewable energy. This would make the big oil companies part of our plans to become a world leader in replacing oil, generating strong economic growth and creating higher paid, higher skilled and higher quality jobs, whilst helping to save the planet.