June 2022

First Oil: A tale of two “windfalls”

While the upstream market looks its best in three years, governmental interference continues to cause headaches. Herewith, we offer two examples from opposite sides of “the pond”—the U.S. and the UK.
Kurt Abraham / World Oil

Well, folks, we’re trying to remain positive, and it looks like our initial 2022 drilling forecast, issued in February, is holding up fairly well. But while the upstream market looks its best in three years, governmental interference continues to cause headaches. Herewith, we offer two examples from opposite sides of “the pond”—the U.S. and the UK. In this “tale of two windfalls,” poor decision-making and ignorant rhetoric preclude supply solutions. 

Biden unable to state the truth. The White House clown show continues unabated. President Joe Biden refuses to take responsibility for anything related to the high fuel and commodity prices, much less runaway inflation. He has the temerity to stand at a podium and state that inflation is lower than in all the European countries when the complete opposite is true, save for the UK. There also is a video clip of him on the shoreline at Rehoboth Beach, Del., dismissing a woman’s concerns about inflation being out of hand, telling her that a recession is not inevitable and to quit parroting made-up facts and Republican talking points. Really? 

He also wrote a letter to U.S. refiners on June 15, chastising them for “historically high” refining margins and calling on them to be “patriotic” and invest more in expanding capacity. Large integrated companies, particularly ExxonMobil and Chevron, were understandably indignant and fired back at Biden. 

Stephen Schork, founder and principal of financial analysis firm, The Schork Group, Inc., offered a splendid defense of ExxonMobil while appearing on the Fox Business Channel. “Yes,” he said, “ExxonMobil made a $5.5 billion profit in Q1, but they also paid $2.8 billion in taxes. And their profit was just 6.2 cents on each dollar of retail sales. Imagine that you’re buying a 20-gal tank of gasoline at $5.00/gal. It’s costing you $100, but out of that, Exxon keeps $6.20. So, New York state on June 1 upped its gasoline tax to 29 cents—on a 20-gal tank, New York is walking away with $5.80. Now, you add the 18.3-cent/gal federal gas tax, and they’re collecting $3.66. So, on that $100, $6.20 goes to Exxon, and $9.46 goes to government. That is not a windfall profit.” 

Boris gets another chance to muck up UK further. British Prime Minister Boris Johnson may have survived a no confidence vote on June 6 (the 78th anniversary of D-Day in World War II), but that doesn’t mean he won’t make additional stupid decisions. We refer to the May 26 imposition of a “windfall tax” on UK producers’ profits. Apparently, Johnson and his cabinet have learned nothing from the mistake of then-President Jimmy Carter and the Democrat majority in Congress during 1980, when they foolishly imposed a windfall tax that was really an excise tax. 

But that lesson seems to not deter Johnson and his court jester, Chancellor of the Exchequer Rishi Sunak, M.P. To them, it’s all about appearing to do something for the common folks, even if it seriously harms the UK’s oil and gas sector. Indeed, Offshore Energies UK said on June 19 that the windfall tax may already be undermining the major energy investments that Britain needs to sustain demand. “It follows reports in The Sunday Telegraph,” said OEUK, “that Equinor…is considering abandoning its £4.5 billion investment in Rosebank field, near the Shetland Islands. The paper also reports that Shell has separately told analysts it is less likely to develop the £2.0 billion Cambo project in the North Sea….” Nice going, Boris. 

Furthermore, said OEUK, “the UK’s oil and gas operators…were already paying 40% on profits—the highest rate of any sector. The new levy means they are paying 65%—a rate which makes investing in new gas and oil fields in UK waters far less attractive.” So, the industry is now stuck with this tax, thanks to the Conservative Party, which had a golden opportunity on June 6 to rid itself, and the country, of the P.M.’s ongoing circus and bring in some serious leadership that can solve problems. But they didn’t do it.  

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Kurt Abraham
World Oil
Kurt Abraham kurt.abraham@worldoil.com
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