Windfall Taxes Sweep Through The Global Energy Sector
Over the past two years, global energy companies have enjoyed record profits amid high commodity prices, with the International Energy Agency estimating that net income by oil and gas companies doubled from 2021 to 2022. Those high oil and gas prices have translated into high fuel prices for consumers, drawing the ire of the public and governments everywhere and sparking populist moves in response. The European Union, the UK and India have already introduced windfall taxes on oil and gas companies. On September 30, 2022, the Council of the European Union agreed to impose a “temporary solidarity contribution” on energy companies that realize “above a 20% increase of the average yearly taxable profits since 2018”. This tax will be levied on top of whatever taxes these companies already owe in their individual countries. A windfall tax is a one-time surtax levied on a company or industry when unusual economic conditions result in large and unexpected profits. Others, such as the Netherlands, Norway and the United States are currently considering them. According to a recent Wood Mackenzie report, while 2022 was the year in which the idea of the windfall tax and the villainization of Big Oil reached a new peak, this year will likely see more momentum if oil prices remain high. If prices drop, windfall taxes could be eliminated; however, Wood Mackenzie views this as “unlikely”, noting at the same time that some windfall taxes have expiration dates and clauses for modification based on oil prices. Overall, WoodMac warns that windfall taxes will distort the market and even risk prolonging–or delaying–the energy transition. How? If fossil fuel prices are lower, demand will increase and render renewables less attractive. In the meantime, governments have found another way to benefit from soaring oil and gas company profitability–taxing share buybacks, such as has been done in the U.S. and proposed in Canada. Dividends could also be taxes more heavily. Both methods, suggests Wood Mackenzie, would actually “incentivize reinvestment, thus promoting jobs and additional energy supply”. “A tangle of long-term ambitions will drive upstream regulators and investors toward the big fiscal themes to look for in 2023, from windfall taxes to renewed interest in gas policy terms,” according to WoodMac’s 2023 outlook. The Windfall Tax Report Card–So Far United States Back in October, President Biden threatened to slap a windfall profits tax on American oil and gas companies if they fail to use their “outrageous” bonanza to expand oil supplies in a bid to lower fuel prices. However, he is yet to follow through on his threat but instead American companies have to face a different beast: buyback tax. As part of the new Inflation Reduction Act that President Biden signed in August is a new 1% tax on corporate share buybacks. Oil and gas companies will bear the brunt of the new tax because they have dramatically increased buybacks as a favored way to return excess cash to shareholders. “My message to the American energy companies is this: You should not be using your profits to buy back stock or for dividends. Not now, not while a war is raging,” Biden said in October. Biden has scolded U.S. oil producers saying they fail to appreciate the free-market capitalism windfall made possible by American democracy nor sympathy for their retail customers. In 2022, U.S. oil company share buybacks increased 1,043%, dwarfing the 64% increase for S&P 500 while dividends were up 33%, more than three times the rise for all the companies in the index. Total free cash flow of the 23 companies in the S&P 500 Energy Index increased 2.3 times to $201 billion, with free cash for Exxon Corp. (NYSE: XOM) and Chevron Corp. (NYSE: CVX) increasing 150% to $60 billion and $36 billion. Meanwhile, Valero Energy Corp.’s (NYSE: VAL) free cash flow grew five-fold to $9 billion from the previous four quarters. United Kingdom Back in November, the UK government announced plans to increase a windfall tax on oil and gas producers’ profits to 35% from the previous rate of 25%. The new rate, which will apply from 1 January 2023 until March 2028, is part of a raft of budgetary measures aimed at tackling the cost of living crisis and shoring up the UK’s finances. Normally, UK oil and gas companies operating on its continental shelf are subject to a 40% tax rate, much higher than the 19% rate on corporate profits for companies in other sectors. The new levy now means that companies like BP Plc.(NYSE: BP) and Shell Plc.(NYSE: SHEL) will now fork over 75% in taxes, up from 65% in 2022. Germany Starting December 1 2022, the German government introduced a 33% windfall profit tax that will potentially generate a revenue of between one and three billion euros. Dubbed the “EU energy crisis contribution”, the tax is likely to affect dozens of energy companies and will target their 2022 and 2023 profits. The new levy will affect oil, gas and coal companies whose profits for 2022 and 2023 exceed by 20% or more than their 2018-2021 average. However, the tax has a major drawback: according to Katharina Beck, spokeswoman on financial matters for the Greens, the planned levy can be circumvented on a large scale by companies moving profits abroad. “The draft of the finance ministry for windfall profit levy for oil and gas companies falls well short of what is necessary,” Beck said in a statement carried by Reuters. Finland In December, the Finnish government proposed a temporary windfall tax on profits from the country’s electricity companies as part of a European Union response to soaring power costs. The proposed 30% tax would apply to any profits exceeding a 10% return on capital in 2023, with the government estimating it could bring in between 500 million and 1.3 billion euros ($533 million-$1.9 billion). If the Finnish government goes ahead with its plans, it will join Germany and the UK as the other EU members that have introduced a windfall tax to energy and power
IOCL asks CNG firms to stop supply to 35 pumps
The Indian Oil Corporation Ltd (IOCL) has asked CNG distribution companies in Gujarat to discontinue CNG supply to 35 petrol pumps whose monthly sale of petrol and diesel is less than 1,00,000 litre. The IOCL has asked the dealers to furnish a bank guarantee for sale of CNG. In view of the development, the Federation of Gujarat Petroleum Dealers’ Association (FGPDA) has threatened to stop selling CNG at 600 pumps across Gujarat from mid-February. Petrol pumps sell CNG in the state under tie-ups between oil marketing companies like IOCL, HPCL and BPCL and gas distribution companies like Sabarmati Gas, Gujarat Gas and Adani Gas. According to FGPDA, IOCL shot off a letter to these gas distribution companies asking them to discontinue CNG supply to 35 pumps, without informing the dealers. Most of these 35 pumps are in remote and rural areas where CNG supply is essential. FGPDA president Arvind Thakkar said, “IOCL officials have not given any reason behind this action. They asked these pumps to furnish a bank guarantee for 20 days for CNG sale because the monthly petrol and diesel sale at these pumps is less then 1,00,000.” Thakkar said the petrol-diesel sale has nothing to do with CNG sale and these pumps have been selling CNG for the past 8 to 10 years. “There was no condition like this at the time of starting this facility,” he said. According to the dealers, they pay to the CNG distributor company the next day and there was no issue of outstanding. “The bank guarantee would require a huge investment for each dealer,’’ they said. CNG coordinator of FGPDA, Gopal Chudasama, said: “We are going to represent this issue to the state government as well as higher officials of IOCL on Monday. If the issue is not resolved, we will call a meeting of all CNG dealers and may discontinue selling CNG at 600 petrol pumps across state for an indefinite period.’’
Can India Take Advantage Of Its Enormous Green Energy Potential?
“The world needs India to avert climate catastrophe,” a CNN headline blared late last year, before asking the crucial follow-up question: “Can Modi deliver?” India aims to reach net-zero carbon emissions by 2070, but so far progress on climate goals has been uneven, to say the least. The South Asian nation’s decarbonization progress over the coming months and years can make or break the global fight to keep average temperatures at or below 2 degrees Celsius above pre-industrial averages. India currently produces the third-most carbon dioxide emissions in the world, after China and the United States. As India has industrialized and its population has continued to grow, the subcontinent’s energy needs have skyrocketed. According to figures from the International Energy Agency, Indian energy consumption has more than doubled since the year 2000, and over 900 million Indians have gained access to electricity over the last two decades. And the country is just starting its development journey. India’s federal power ministry projects that national electricity demand will expand by up to 6% every year for the next ten years. India is on track to overtake China as the most populous country in the world, and it has already established itself as a major economic and cultural force on the global stage. India also has some of the greatest potential for green energy production in the world, creating a massive opportunity for Modi’s India to place itself at the forefront of the green energy revolution and give the economy – currently bogged down by high energy prices on the global market – a major boost. According to a brand new report from the Global Energy Monitor, India is in the top seven countries for prospective renewable power. The country already has plans for gargantuan solar and wind farms in the works, and if the country’s planned buildout of 76 gigawatts of solar and wind power by 2025 comes to fruition, it will successfully avoid the use of almost 78 million tons of coal per year, leading to savings of up to 1.6 trillion rupees ($19.5 billion) annually. While these projects are a major step forward for India, and the savings could serve as a major incentive to keep going, getting to carbon neutrality by 2070 is going to take a lot more investment – and a lot more grit. While green energy is gaining a foothold in India, it’s going to be very, very difficult to wean the subcontinent off of coal. India depends on fossil fuels for 70% of its energy mix, with coal taking the lion’s share. According to figures from ember-data, India installed 168 gigawatts of coal-fired generation from 2001 to 2021, almost double the addition of solar and wind energy combined over the same period. At present, just 10% of India’s energy mix comes from renewable energies, and the country missed its 2022 target to install 175 gigawatts of renewable energy to the total level of domestic power production. Only four out of India’s 28 states met their renewable energy targets last year. What’s more, most of them failed by a discouragingly wide margin. “Most states have installed less than 50% of their targets and some states such as West Bengal have installed only 10% of their target,” the Associated Press reported this week. The country’s next target is to install a total of 450 gigawatts of clean energy by 2030, and meeting this is going to require a massive acceleration of India’s current rate of renewable capacity buildout. For all of India’s investing and pledging related to building out green energy, the reality is that India just isn’t ready to give up on coal. At COP26 in Glasgow, India led a last-minute charge to change language related to phasing out coal in the conference’s final joint agreement. This move highlighted the tightrope that Modi currently has to walk: India has to phase out coal for the benefit of the climate and its international diplomacy, but it also can’t sacrifice its own development and growth. For many developing countries, the current pressure to rapidly decarbonize their economies feels a lot like having to pay for the first world’s sins. Developed countries have burned fossil fuels with little to no recompense for over a century, and have robust economies to show for it. India wants its chance to do the same – an understandable enough sentiment, but a sentiment that could have devastating consequences for the entire world, now and in future generations.