UK mulls windfall tax
Business secretary Kwasi Kwarteng is considering recommending a windfall tax in the wake of the protracted price surge.
Replying to a question from parliamentary business select committee related to the one-off Spanish windfall tax on generators and traders, which will raise €3bn ($3.5bn), he said: "I think what they are doing in Spain is recognising that it is an entire system." He said he was keeping his options open, but that he was "not a fan of the idea." Any decision to impose a levy would be a matter for the finance ministry, Kwarteng's department says.
As wholesale energy prices rise, sellers gain at the expense of buyers, and this is forcing retailers into bankruptcy as well as cutting UK industrial output. Bankruptcies impose costs on the rest of the retail suppliers who have to source energy to meet the additional demand as well as honour any outstanding financial obligations.
Rising bills also force more consumers into greater poverty, requiring in some cases financial support. So there is an apparent logic in using "excess" profits to alleviate the effects of the losses.
Attention has turned to the producers as a possible source of cash but they themselves are not all making as much money as it seems. While there is a big gap between the cost of production and the rising hub price, many producers have had to sell their output forward with caps and collars to satisfy their financing requirements such as reserves based loans.
While this strategy kept them afloat last year – they sold their gas at prices agreed in 2019 before the pandemic – it also capped their earnings this year. Others however have fared better: according to The Times, Serica hedges only about a quarter of its gas.
A source at a UK gas producer told NGW that the sector was having to make major changes to its operations, in order to meet the net zero carbon objectives of the government. This includes electrifying platforms and investment in carbon capture and storage.
Anything that could threaten UK production would need to be very carefully managed, he said, based on the experience a decade ago when a levy led to a drop in investment and so less revenues for the government.And the less gas produced at home, the more is imported, at higher cost and often with a higher carbon intensity.
Playing both sides of the market, traders typically make money not from price rises, so much as from the volatility. This is capped to an extent by the prevalence of long-term contracts with their oil-indexation price clauses, Dated Brent is trading at a small fraction of the spot price of LNG in Asia, in terms of $/mn Btu, and leading to oil products displacing gas.
Settling at almost $27/mn Btu September 23, the SP Global Platts Japan-Korea Marker was equivalent to over $200/barrel of Brent crude. Not all traders though are domiciled in the UK.