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Shell to pay £1.7bn in UK and EU windfall taxes

A truck driver stands by the gas container of his truck at a Shell gas station in Berchem in Luxembourg on August 6, 2022 in Berchem. - With world energy prices on the rise, and holidaymakers from northern Europe heading for southern France and the Mediterranean the Shell filling station in Luxembourg -- reputedly the biggest by volume in petrol sales in the world -- is doing strong business with motorists and truckers kee to fill up in the low tax grand duchyt. (Photo by JOHN THYS / AFP) (Photo by JOHN THYS/AFP via Getty Images)
In October, Shell reported it had not yet paid any windfall tax in the UK despite making record global profits of nearly $30bn in the first nine months of 2022. Photo: John Thys/AFP via Getty

Oil major Shell (SHEL.L) expects to pay around $2bn (£1.7bn/€1.9bn) over the fourth quarter of last year, due to windfall taxes in the European Union and the UK, meaning it will pay UK tax for the first time since 2017.

The company revealed the figure in an update on its fourth quarter performance, in which it said gas trading results are expected to be "significantly higher" than in the previous quarter.

It comes after bosses at the London-listed oil company said in October they had not paid any UK windfall taxes due to heavy investment in the North Sea.

“The Q4 2022 earnings impact of recently announced additional taxes in the EU (the solidarity contribution) and the deferred tax impact from the increased UK Energy Profits Levy is expected to be around $2bn,” the company said in a trading update.

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This $2bn would be on top of $360m in expected windfall tax charges Shell had already disclosed to investors, bringing the total to nearly $2.4bn.

This will be the first time the oil company pays tax in the UK in over five years. In recent years the company has received tax refunds on investments made in the UK North Sea and decommissioning activities, which have been higher than any tax owed.

Shell  A view of part of the Etap platform (Eastern Trough Area Project) in the North Sea, around 100 miles east of Aberdeen, Scotland, as David Cameron visited the oil and gas platform as the focus of the Scottish independence debate shifted to the future of North Sea production.
Shell has not paid any UK windfall taxes due to heavy investment in the North Sea. Photo: PA

In October, Shell reported it had not yet paid any windfall tax in the UK despite making record global profits of nearly $30bn (£26bn) in the first nine months of 2022, because the scheme allowed tax relief on extra drilling activity.

In the third quarter, Shell benefited from an 80% investment allowance linked to the UK windfall tax. This allowance was also significantly reduced as part of the autumn budget.

In May, the UK government announced the windfall tax on the profit of oil and gas companies, with the new chancellor announcing in November this will be hiked from an original 25% to 35%.

The EU agreed in September that oil and gas companies will pay a levy on surplus profits made in 2022 or 2023. The “solidarity contribution” will see firms pay 33% of profits above their average taxable profits.

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Energy companies’ revenues have soared following Western sanctions blocking access to Russian supplies.

In total, Shell said it now expects to have paid between $4.3bn and $4.7bn in global taxes over the fourth quarter.

On Friday, the oil giant also revealed that trading in its chemicals business is expected to have been “significantly lower” in the final quarter of 2022 compared with the previous quarter.

It added that its liquefied natural gas (LNG) production over the quarter was impacted by major outages at two plants in Australia.

“In its usual teaser of quarterly results Shell has a classic good news/bad news combination to offer shareholders," Russ Mould, investment director at AJ Bel, said.

“First the good news: the company’s large liquefied natural gas business is expected to have delivered a very strong performance despite lower output on plant outages. This demonstrates just how robust LNG pricing is right now as countries scramble to replace Russian gas.

“Now for the bad news: lower oil prices will hit the oil products part of the business and Shell has quantified the material impact of freshly introduced windfall taxes in the UK and Europe ⁠— which are now expected to run into the billions.

“It would be disingenuous for Shell to gripe too much about these new levies given recently departed Ben van Beurden argued they were ‘inevitable’ back in October. Though Shell subsequently said it would review £25bn worth of investment in the UK and it will be interesting to see the stance new CEO Wael Sawan takes on the issue.

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“Sawan faces a tough task as he looks to lead Shell through the next phase of the energy transition amid the sometimes competing aims of energy security and lower emissions.

“His predecessors’ big bet on natural gas could prove to be a positive legacy as gas may provide a staging post as the world moves from more polluting fuels like oil and coal to renewables and other forms of clean energy.”

The group is due to publish its full results for the 2022 financial year on 2 February.

Watch: Shell to review £25bn investment in UK projects after windfall tax extended