Why a windfall tax won't happen and not paying bills wont help.
In 2012 I entered the oil industry, a career which was to last almost a decade. It came to an abrupt halt in 2021. The company I worked for did surveys of existing oil and gas fields and also searched for new oil on behalf of a mixture of private and state owned companies. At the time my employer was around $300 million in debt. We thought the company had so much debt that it was better for the banks to plough a few more million into us to keep us going through the pandemic than to write off $300 million debt. Letting the company go bankrupt is exactly what they did. I was on a project which had been contracted out by Petronas (the Malaysian state owned oil company) to look for oil in Gabon, West Africa. We received an email for a videoconference with head office, in the conference they announced that the banks had decided to pull the plug on the company and that we were to stop operations immediately.
Over the years, I had been on projects for Shell (Dutch company) in Myanmar, Brazil and a few other countries. I'd been on projects in Uruguay for British Gas. In Russia and Trinidad & Tobago for BP, worked in Egypt for Italian oil giant ENI among many other companies all over the world.
The oil industry crashed in 2008, then again in 2015 which it never really recovered from due to oil price wars between various countries and other influences affecting the price. Covid hit in 2020, oil prices went negative for a while. In2020 over 100 oil and gas companies went bust in the USA alone. In 2021 many more went bust. The largest being Seadrill, a large American oil company which went bankrupt with debts of over 5 billion US$. The oil and gas industry is a rollercoaster of highs and lows. When times are good, they can see billions in profits, but when times are bad, they can see billions lost and companies going bust. So if we tax them when times are good, should we subsidise them when times are bad?
This might sound like I have my violin out for oil companies. Not quite, the company I was employed by went bankrupt and I decided to leave the industry. However, I understand that the picture is not always what Labour MP's and the BBC who are demanding windfall taxes paint it to be.
The oil and gas market is a bit like the housing market, those with the product sell it to the highest bidder. Oil and gas companies extract the product and sell it on international wholesale markets through intermediaries. Sometimes oil and gas can change owners several times before it reaches our suppliers. The intermediaries may hold onto it and wait for the price to go up. They may sell it on to another intermediary. It's up to our energy suppliers to eventually purchase the product. If we stop paying our bills, our suppliers don't have the funds to buy the fuels needed. Oil and gas companies will then sell it to companies and countries who will pay for the product. Take Sri Lanka for example where they ran out of fuel, or Germany where they have resorted to energy rationing. If we stop paying the bills, the retailers will ultimately go bankrupt as they cannot afford to purchase the fuel from the international suppliers, just as they did in 2020 when the likes of Bulb etc went. This will further push up prices.
The energy price cap is set to a limit which Ofgem believes will allow the energy suppliers (retailers) to purchase the fuel from the international market, and make a small profit for providing us with the fuel. It rises (or falls) in line with international fuel prices. There is an argument that the French has set their price cap much lower than the UK. The French are supplied by EDF which is state owned, it means that the government is either subsidising the company, or they are being forced to run at a loss. EDF has taken their owner, the French government to court for being forced to run at a loss. If we do tax cuts or one off payments to people, it effectively means that our government is subsidising (paying billions of pounds) to the suppliers. That's akin to polishing the brass on the titanic, prices will still keep going up as it doesn't solve the problem of lack of supply.
Just because BP has British in the name doesn't means it's British and we can tax them to the hills. In fact, a large percentage of BPs shareholders are US. It also doesn't mean that they extract the oil and gas from the UK. As previously mentioned I worked on projects for BP all over the world, in Russia, Angola, US. I worked on a project for British Gas in Uruguay. Other countries oil companies do the same. I worked for Petronas in Gabon, Mauritania and Suriname. So if we're going to do windfall taxes, can we really tax a company that produces most of it's oil and gas overseas? It's like government saying it's going to put a windfall tax on tomatoes, yet most tomatoes are produced in Spain, the retailers make very little profit from tomatoes. If we're going to tax the few who do operate in UK waters, we run the risk of pushing investors away. The UK oil and gas has seen decades of decline due to lack of government enthusiasm. Unlike our Norwegian counterparts, UK offshore infrastructure is in its dying days, if its future is to be sustained, it needs serious investment. If the government wants to tax it, it might be cheaper for companies just to shut it down. Then we'd rely even more on foreign imports.
The constant propaganda would have us believe that the fault of the energy crisis is on Russia. However, the below chart courtesy of Baker Hughes shows that when governments decided to lockdown and global infrastructure came to a grinding halt, oil prices hit zero, and consequently, the oil and gas companies decided to shut down their rigs. As you can see, the number of rigs producing is nowhere near pre pandemic levels. An oil and gas rig can be shut down overnight, but to get started again takes months, even years. Equipment has lay idle and requires a lot of maintenance to get up and running again. Staff have gone, some like myself may never enter the industry again. Oil and gas companies will want to recoup their losses during covid and decide to intentionally keep supplies low.
Whilst Russia is partly to blame, due to them cutting supplies off to Europe. The main reason we are in this mess is not the fault of the oil and gas companies, nor Russia. Remember, only 20% of the world has imposed sanctions on Russia, that leaves 80% of the world free to buy Russian gas. Yet almost every single country around the world is seeing record levels of energy related inflation.
It's through global covid measures which disrupted markets and a net zero agenda which has seen our own oil and gas infrastructure shut down over the last decade. Oil and gas fields like Cambo which could have ensured energy security for the foreseeable future have been refused permission to produce due to governments bowing down to environmentalists. Now it's not net zero if we're having to import oil and gas from Africa, Australia and the US. In fact, it's counter productive to net zero and only pushes the emissions elsewhere. A ship burns about 50'000 metric cubes of oil each day to transport those resources to us, a transit from the US or Africa is about 2 weeks. That's a lot of energy being burnt to supply us with goods. What would make sense is a government that promoted our own energy security through our own oil and gas whilst also investing into a green energy transition, because right now, we are not ready to move away from oil and gas.