Interactive Investor

COP27: growing calls for massive global tax on Big Oil

9th November 2022 09:46

by Graeme Evans from interactive investor

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Huge profits driven by the war in Ukraine have already put oil companies in the firing line, but many countries are using the COP27 climate change conference to launch fresh attacks on the oil industry. 

Energy companies represented by oil well 600

Soaring prices and Europe’s energy trilemma mean the COP27 climate change conference is taking place with the world’s fossil fuel companies far from being in decline.

Seven years after the Paris Agreement was supposed to have signalled the demise of Big Oil, the quintet of BP (LSE:BP.), Shell (LSE:SHEL), TotalEnergies SE (EURONEXT:TTE), Exxon Mobil (NYSE:XOM) and Chevron (NYSE:CVX) have racked up profits totalling more than $58 billion (£50.2 billion) from just three months of trading.

Aided by this year’s surge in oil and gas prices, the shares of BP and Shell are up 46% and 68% since December 2015 and shareholders have banked considerable dividends.

The oil giants have played their part in driving the ongoing energy transition, but seven years on from Paris and the stark message from United Nations secretary general Antonio Guterres is that the world is on a “highway to climate hell with our foot on the accelerator”.

His address to COP27 in Egypt was followed by calls for richer governments and oil companies to pay higher taxes as compensation for their part in driving global warming.

Pressure for the energy giants to pay “their fair share” has also intensified in the UK and US since the recent bumper earnings raised the prospect that Europe’s Big Oil dividends and buybacks will grow to a cumulative $77 billion (£66.7 billion) next year.

Recent reports already suggest UK prime minister Rishi Sunak and chancellor Jeremy Hunt have drawn up a plan to raise £40 billion from a new windfall tax on oil and gas companies. The tax rate will jump to 30% from 25% and be extended to 2028.

And at COP27, Barbados prime minister Mia Mottley demanded oil companies pay 10% tax to fund loss and damage from rising sea levels and climate damage. Barbados belongs to a 39-nation Alliance of Small Island States speaking at Sharm el-Sheikh.

But the prospect of additional levies will put energy security in jeopardy if investors are deterred by uncertainty over future returns. North Sea-focused Harbour Energy (LSE:HBR) boss Linda Cook pointed out last week that some are already advocating geographic diversification.

Her message highlights Big Oil’s role in helping Europe to overcome the three major challenges around energy security, affordability and sustainability. It means firms have to provide the oil and gas the world needs today at the same time as accelerating the energy transition.

Bank of America said the demands of this energy trilemma continue to cast a shadow over the sector’s cost of capital: “We believe the oil and gas sector is asked to do all three things at once: Accelerate its pathway toward net zero, ensure security of supply while keeping energy affordable - without benefitting from 'windfall’ earnings.”

In its third-quarter results, Shell booked a charge of $361 million (£312.5 million) relating to UK Energy Profits Levy but at the same time announced another buyback worth $4 billion (£3.5 billion) as part of distributions worth 30% of cash flow from operating activities.

Profits of more than $30 billion (£26 billion) for the first nine months of 2022 were also a rise of 133% on a year earlier.

Shell boss Ben van Beurden accepts that the oil industry will be looked at for raising taxes but wants to ensure they are well designed.

On climate change, he argues that his company is aligned with the Paris goals but warns that setting more ambitious targets is counterproductive until its customers have changed the way they use energy.

The company points out that shrinking its customer base, mainly in marketing, would reduce its participation in the energy transition and hand over initiative to competitors who would likely continue to meet demand for oil and gas products.

Shell’s emission reduction targets mean that by 2030 it expects to be providing enough renewable electricity for 50 million households, with more than 2.5 million charging points for electric vehicles and eight times more low-carbon fuels. It also intends to increase the amount of biofuels and hydrogen in the transport fuels it sells to 10%, from 3%.

It adds: “We are partnering with customers, businesses and others to address emissions, including in sectors that are difficult to decarbonise such as aviation, shipping, road freight and industry.”

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