Time to dip into Big Oil’s coffers

Just a quick glance at the financial results of the five oil giants will be enough to realize that last year’s energy crisis, which is still reverberating across global markets, has been a bonanza for them. While Russian players sold their products at a discount, BP, Shell, TotalEnergies, ExxonMobil and Chevron raked in $1,500 billion in combined revenue in 2022, a hefty 47% more than a year earlier (see Fig. 1).

Building on such impressive earnings, some governments decided to tighten the tax noose. In September 2022, the European Commission introduced a temporary minimum 33% windfall tax on profits for fossil fuel and refinery companies that exceed the four-year historical average by 20% (the relevant profits could be from fiscal years 2022 or 2023, depending on the country). This measure could bring in up to €25 billion[1] to be redistributed by member countries, with a certain portion to be channeled to the REPowerEU program. Some members of the bloc are taking an even tougher stance towards their taxpayers. Austria, for example, has introduced a 40% tax on excess profits, which can be reduced to 33% for companies investing in energy transition.[2] ExxonMobil has already labeled these measures as “counterproductive,” as they could undermine investor confidence and increase reliance on imported energy. The energy giant’s German and Dutch arms have filed a lawsuit with the European General Court in Luxembourg to challenge the legitimacy of this tax.[3]

Back in May 2022, the UK announced a 25% Energy Profits Levy (EPL) for oil and gas firms (including foreign companies) operating in the UK sector of the North Sea. On 1 January 2023, the levy was raised by 10 p.p. to 35% and extended to the end of March 2028.[4] This takes the overall levy rate for North Sea producers to 75%, once the 40% corporation tax charge is applied.[5]

TotalEnergies has estimated the negative impact of the EPL at $1 billion for 2022 (including $400 million for Q4 2022),[6] while BP has said it will pay $700 million for this levy for 2022,[7] and Shell has calculated a burden of $2.3 billion related to the EU windfall tax and the UK EPL.[8]

Though some of the Big Oil firms had to recognize write-offs after pulling out from Russia (e.g., TotalEnergies wrote down around $15 billion[9]), their combined net profits soared 84% YoY to $151.5 billion in 2022, while their free cash flow was 88% higher than a year earlier (see Fig. 2). It will be interesting to see how these five have fared against Saudi Aramco, which is due to release its 2022 earnings by mid-March.

Yet these allegedly well-intended regulators’ initiatives leave a bitter aftertaste with major taxpayers, such as ExxonMobil, who are trying hard to resist them, claiming that the extra tax burden will make them slash investments. Although Big Oil’s combined spending rose 30% in 2022 (see Fig. 3), investment shortage remains a risk for the oil industry. While global oil and gas investments showed a marked rise in nominal terms – from $368 billion in 2021 to $450 billion in 2022 – real-term investment remained at the level of 2005-08.[10]

Note also that such unfriendly moves could prompt major players to relocate their business to lower-tax jurisdictions, and their instigators might end up with nothing, just like the man and wife who killed the goose that laid the golden eggs.