Profits at the world’s biggest oil companies have soared to nearly £150bn so far this year as Russia’s war on Ukraine pushed up energy prices, according to estimates from analysts.
Britain’s Shell and France’s TotalEnergies on Thursday reported profits for the first nine months of 2022 of $59bn (£51bn). US rivals Chevron and ExxonMobil are expected to report year-to-date earnings approaching $70bn on Friday, while 2022 profits at Britain’s BP could break the $20bn mark on Tuesday.
The cumulative takings for the seven biggest private sector oil drillers during the first nine months of 2022 could hit $173bn (£150bn), according to analyst forecasts collated by S&P Global Market Intelligence and reported earnings.
Earnings have surged because of dramatic energy price increases after Russia’s invasion of Ukraine. The UK and EU have instituted windfall taxes on fossil fuel profits to try to support households struggling with higher bills, while campaigners in the US have called for Joe Biden to introduce a similar measure.
However, the oil companies’ latest financial updates covering the July to September quarter are likely to spur scrutiny of the effectiveness of windfall tax measures, after Shell said it would not pay anything under the UK’s levy that is meant to raise billions to support households struggling with energy bills.
Mathew Lawrence, the director of Common Wealth, a thinktank, said Shell’s zero windfall tax bill for 2022 showed the levy introduced by Rishi Sunak when he was chancellor in May was “not fit for purpose” and needed significant change.
“We have a new prime minister but the same old problem,” Lawrence said. “Energy giants are making enormous profits as millions of households face a desperate winter. Rishi Sunak should show he gets the scale of the crisis he has inherited – and helped create.”
Shell said Thursday it will still pay other taxes, including in the UK, and expects to pay an unspecified amount of windfall tax in early 2023.
Despite the admission, the Treasury said it expected the levy to raise £17bn over the 2022-23 and 2023-24 tax years. Last month it quietly raised its estimate on how much the tax will raise in the year to April – from £5bn to £7bn – to reflect higher oil prices.
The UK government is considering making changes to the windfall tax, with the chancellor, Jeremy Hunt, understood to be exploring the possibility of extending it for another two years beyond the original 2025 end date. However, Sunak has raised the possibility of cutting the tax if oil and gas prices return to “historically more normal levels”.
The new Conservative party chair, Nadhim Zahawi, said on Thursday that everything was on the table, but added that the government could not create a tax system that disincentivised investment.
In the UK the windfall tax only applies to subsidiaries extracting oil in the UK or on its continental shelf, meaning it does not apply to refineries, trading companies and petrol stations that have been an enormous source of profits for companies such as Shell during a period of high fossil fuel prices.
Even those oil companies that qualify for the levy can use other strategies that would minimise exposure to the tax. It only applies on profits, so operating companies that invest heavily in North Sea production can be loss-making even as other parts of their parent companies rake in billions of pounds. Shell’s UK extraction arm has not made a profit since 2017.
Sunak also introduced investment allowances that give a tax break worth £91 for every £100 oil companies spend in new North Sea investment. While Shell will pay no windfall tax related to the last quarter, the allowances still apply, meaning it could potentially reduce its tax bill in future years.
Energy UK, a lobby group that represents energy firms other than oil and gas producers, says the tax break will be worth £25bn a year for extractors. It argued that the same sum would help to fund the infrastructure for enough windfarms to power 7m homes in the UK.
Shell’s chief executive, Ben van Beurden, this month broke ranks with his industry by backing higher taxes on oil companies to support poorer households struggling with high inflation. The former BP executive Nick Butler, writing in the Guardian on Thursday, said additional taxation was justified and that incentives should be aimed at low-carbon energy investments.
The EU has its own €140bn (£120bn) energy windfall tax, the majority of which will be levied on electricity providers, which includes renewable producers, according to an analysis published on Thursday by the Brussels-based campaign group Transport & Environment.
Its oil campaign lead, Agathe Bounfour, said much of the EU windfall tax’s force was cancelled out by other subsidies for fossil fuel use. “European leaders can end this imbalance by removing regressive subsidies and getting oil companies to foot the bill,” she added.
A UK Treasury spokesperson said spending by oil companies would “support the economy, jobs, and our energy security”, adding: “Which is why the more investment a firm makes into the UK, the less tax they will pay.”