{"id":1568,"date":"2022-09-19T17:05:06","date_gmt":"2022-09-19T17:05:06","guid":{"rendered":"http:\/\/roydadnaft.ir\/English\/?p=1568"},"modified":"2022-09-19T17:05:10","modified_gmt":"2022-09-19T17:05:10","slug":"the-unintended-consequences-of-the-eu-energy-emergency-plan","status":"publish","type":"post","link":"https:\/\/roydadnaft.ir\/English\/1568\/","title":{"rendered":"The unintended consequences of the EU energy emergency plan"},"content":{"rendered":"
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This week saw the European Commission\u2019s President Ursula von der Leyen do\u00a0something\u00a0that would have probably been considered the opposite of democracy just a few years ago.<\/p>\n\n\n\n

She proposed that governments impose a ceiling on certain energy producers\u2019 revenues and add a windfall profit for Big Oil majors. Called \u201ca solidarity contribution\u201d or \u201ca crisis contribution,\u201d the windfall tax\u2019s aim is the same as the aim of the revenue ceiling: manage energy costs in a runaway inflation environment and get some additional money to, according to the plan, distribute among those who most need it.<\/p>\n\n\n\n

Like all grand plans, however, unintended consequences abound with this one, and one of the gravest is the discouragement of oil and gas investments at a time when global oil and gas investments are already lower than they should be in light of demand projections.<\/p>\n\n\n\n

JP Morgan\u2019s head of global energy strategy said it this week in an\u00a0interview\u00a0with Bloomberg.<\/p>\n\n\n\n

\u201cIf you\u2019re planning your capital budget, you have to think twice now that you have a new risk,\u201d Malek told Bloomberg. \u201cIt encourages majors to return cash to shareholders as they use that free cashflow that could have been used in investment.\u201d<\/p>\n\n\n\n

Per plans, the EU seeks to \u201craise\u201d some $140 billion from windfall taxes on non-gas electricity generators and oil gas, and coal companies for their \u201cextraordinary record profits benefiting from war and on the back of consumers,\u201d to quote Von der Leyen.<\/p>\n\n\n\n

Reaction from the industry was swift. Austria\u2019s OMV said the consequences of such measures could be huge, adding that it was unfair to base the windfall levy proposal on oil companies\u2019 profits from the last three years since these were not normal times, Reuters\u00a0reported, quoting CEO Alfred Stern.<\/p>\n\n\n\n

\u201cWe will keep an eye on that, as it can already have a massive impact,\u201d Stern told media, noting, however, that the exact impact was difficult to glean because the proposal has yet to be fleshed out.<\/p>\n\n\n\n

Per von der Leyen\u2019s State of the Union speech, in which she listed the windfall tax among measures to cope with the energy crisis, the idea is to tax oil and gas companies with 33 percent of any current-year profits that were 20 percent above the company\u2019s average earnings for the last three years.<\/p>\n\n\n\n

OMV\u2019s Stern noted that the last three years included two pandemic years when a lot of companies in the oil and gas industries struggled to stay afloat, let alone post a profit, with oil prices falling as low as $25 per barrel.<\/p>\n\n\n\n

\u201cMajor oil, gas and coal companies are also making huge profits. So they have to pay a fair share \u2013 they have to give a crisis contribution,\u201d the European Commission\u2019s President said in her speech.<\/p>\n\n\n\n

If what JP Morgan\u2019s Malek predicts is correct, this would mean less energy security for the future with less new oil and gas production outside Russia. The key, Malek told Bloomberg, was whether the levy would stay for years or be quickly removed once the money was raised.<\/p>\n\n\n\n

\u201cIt\u2019s not the absolute number, it\u2019s the uncertainty, the unpredictability of this,\u201d he said said. \u201cThere\u2019s a risk this becomes recurring.\u201d<\/p>\n\n\n\n

Von der Leyen has assured the audience of her speech that the additional taxes were \u201call emergency and temporary measures,\u201d adding that for long-term energy security, the EU needed to reduce its energy consumption.<\/p>\n\n\n\n

Reuters noted in its report on OMV\u2019s reaction to the speech that, according to analysts, the most likely targets of the new tax would be refiners in Europe since there is little upstream activity going on in the EU.<\/p>\n\n\n\n

Yet integrated energy companies have integrated policies, and an additional tax on European refining may well have an impact on future plans for operations in, say, the Gulf of Mexico.<\/p>\n\n\n\n

It\u2019s worth noting that, at the moment, the windfall tax is only a proposal. It is certainly a proposal that comes from a high place, but it has yet to be approved by all EU members. According to an FT\u00a0report\u00a0on the topic, not all are on board with all the measures.<\/p>\n\n\n\n

The report also quoted S&P Global\u2019s executive director for gas industry in EMA, Laurent Ruseckas, as saying that the proposals put forward by Von der Leyen were \u201call extraordinarily complex\u201d and \u201cwould be impossible to work out and implement in time for winter even if there were political consensus behind them \u2014 which there isn\u2019t.\u201d<\/p>\n\n\n\n

\u201cIt makes sense to agree to EU-wide targets and measures, but without allowing national flexibility on how to get there we risk breaking the markets we\u2019re trying to fix,\u201d a European diplomat told the FT.<\/p>\n\n\n\n

All this suggests that Big Oil might yet avoid the additional levy, although given its reputation as the Big Bad in climate change, the additional levy on the industry might be the only measure to receive wide support.<\/p>\n

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