Replacement of Energy Profits Levy with the Oil and Gas Price Mechanism

It will apply to upstream oil and gas companies operating in the UK/UKCS (broadly, companies which are subject to Ring Fence Corporation Tax) on the realised price the company receives for disposal of oil and gas above the relevant thresholds.  There will be two thresholds, one for oil and one for gas, which will apply per financial year. The thresholds for 2026/2027 will be $90 per a barrel for oil and 90p per a therm for gas. The thresholds will be adjusted going forward using the Consumer Price Index. There will be no additional deductions for exceptional costs which companies may suffer during periods of high prices.  The government opted for a revenue-based model (RBM) over a profit-based one, saying that RBM is better at linking the tax liability to exceptional market conditions.

The details are yet to be worked out. The response document says that the government's ambition is for the tax to apply on a transaction-by-transaction basis (which would broadly require the thresholds to be applied to each transaction individually). However, the government acknowledges that this approach presents practical challenges, in particular in relation to tracking hedging outcomes. The government will work with the sector to iron out the details before publishing draft legislation.

Authored by Philip Harle.