This week saw the European Commission's President Ursula von der Leyen do something that would have probably been considered the opposite of democracy just a few years ago. She proposed that governments impose a ceiling on certain energy producers' revenues and add a windfall profit for Big Oil majors. Called "a solidarity contribution" or "a crisis contribution," the windfall tax's aim is the same as the aim of the revenue ceiling: manage energy costs in a runaway inflation environment and get some additional money to, according to the plan, distribute among those who most need it.
Like all grand plans, however, unintended consequences abound with this one, and one of the gravest is the discouragement of oil and gas investments at a time when global oil and gas investments are already lower than they should be in light of demand projections.
JP Morgan's head of global energy strategy said it this week in an interview with Bloomberg.
"If you're planning your capital budget, you have to think twice now that you have a new risk," Malek told Bloomberg. "It encourages majors to return cash to shareholders as they use that free cashflow that could have been used in investment."
Per plans, the EU seeks to "raise" some $140 billion from windfall taxes on non-gas electricity generators and oil gas, and coal companies for their "extraordinary record profits benefiting from war and on the back of consumers," to quote Von der Leyen.
Reaction from the industry was swift. Austria's OMV said the consequences of such measures could be huge, adding that it was unfair to base the windfall levy proposal on oil companies' profits from the last three years since these were not normal times, Reuters reported, quoting CEO Alfred Stern.
"We will keep an eye on that, as it can already have a massive impact," Stern told media, noting, however, that the exact impact was difficult to glean because the proposal has yet to be fleshed out.
Per von der Leyen's State of the Union speech, in which she listed the windfall tax among measures to cope with the energy crisis, the idea is to tax oil and gas companies with 33 percent of any current-year profits that were 20 percent above the company's average earnings for the last three years.
OMV's Stern noted that the last three years included two pandemic years when a lot of companies in the oil and gas industries struggled to stay afloat, let alone post a profit, with oil prices falling as low as $25 per barrel.
"Major 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's President said in her speech.
If what JP Morgan's Malek predicts is correct, this would mean less energy security for the future with less new oil and gas production outside Russia. The key, Malek told Bloomberg, was whether the levy would stay for years or be quickly removed once the money was raised.
"It's not the absolute number, it's the uncertainty, the unpredictability of this," he said said. "There's a risk this becomes recurring."
Von der Leyen has assured the audience of her speech that the additional taxes were "all emergency and temporary measures," adding that for long-term energy security, the EU needed to reduce its energy consumption.
Reuters noted in its report on OMV's reaction to the speech that, according to analysts, the most likely targets of the new tax would be refiners in Europe since there is little upstream activity going on in the EU.
Yet integrated energy companies have integrated policies, and an additional tax on European refining may well have an impact on future plans for operations in, say, the Gulf of Mexico.
It's worth noting that, at the moment, the windfall tax is only a proposal. It is certainly a proposal that comes from a high place, but it has yet to be approved by all EU members. According to an FT report on the topic, not all are on board with all the measures.
The report also quoted S&P Global's executive director for gas industry in EMA, Laurent Ruseckas, as saying that the proposals put forward by Von der Leyen were "all extraordinarily complex" and "would be impossible to work out and implement in time for winter even if there were political consensus behind them — which there isn't."
"It makes sense to agree to EU-wide targets and measures, but without allowing national flexibility on how to get there we risk breaking the markets we're trying to fix," a European diplomat told the FT.
All this suggests that Big Oil might yet avoid the additional levy, although given its reputation as the Big Bad in climate change, the additional levy on the industry might be the only measure to receive wide support.
By Irina Slav for Oilprice.com