UKH

So Shell executives are partying wild. But how do you explain the profit surge? I am not here to argue the right and wrong but to try understand the underlying mechanism.

Are they selling yesterday cheap oil reserves at today's high price? And then at some point, there will be actually less oil available and prices will reflect the actual scarcity?

And would then profits decrease (less to sell even at high price)?

Or?

Thanks a lot!

Sébastien

Are you aware that the oil and has prices have increased a tad? thats where the profit has come from...hasnt got anymore expensive to extract...unless I have eluded your point 😊

Part of it is down to the poor results last quarter. Shell severely underperformed compared to predicted earnings by a long way in Q3 and Q4 so the media reporting "triple" is from a low basis but headlines need to provoke a response.

Russia/Ukraine has also made everything o&g a higher price which certainly helps the balance sheet look positive for players in the industry. BP had a similar positive results earlier this week.

Price increased supposedly explained by scarcity. If I sell 1000l at 1 GBP then 500 at 2 GBP, it does not double the profit. However if I sell 1000 l at 2 GBP pretending I only have 500l available...

Short answer is that Shell’s profits haven’t tripled.

One segment, that makes up a quarter of shells profits has tripled from a low base.

Classic BBC/Guardian reporting.

BP also were reported to have significantly increased profits, despite swinging to a loss.

Why we try to create politically motivated attacks on our golden geese I’ll never know.

Well BP said it posted its biggest quarterly profit ever. So I presume in real value.

I've a bit of an insight as I used to work for Shell. Basically cost of production are fixed whilst revenue/ unit (eg barrel) is variable. Exploration costs can be delayed in the short term but need to be spent to keep find reserves for the future. In recent years Shell and other Oil majors have bee taking huge cuts to their costs in order to remain viable as oil and gas revenues were  low because supply was so prolific and other energy sources were also coming on stream. So I would argue that the current profits are a short term gain after a couple of decades of having financial headwinds. The current Russia crisis highlights that the oil majors need the drill bit in the near future to reduce our dependence on Russian oil and gas until renewables fill much more of our energy requirement. A lot of that renewable investment will be from the likes of Shell and current profits are required to fund fossil fuel exploration as well as investment in R&D of renewables. 

https://www.bp.com/en/global/corporate/investors/results-and-presentations/...
 

BP - a $20.4bn reported loss.

A bit careless to lose that much in three months.

I think your example presumes that shell is the only producer of oil.

In reality the oil scarcity is caused by the Western world deciding to not buy oil from Russia. Shell on the other hand are still presumably producing roughly the same amount as last year, and reaping the benefit of oils increased unit price.

The loss is a result of a non cash write down on its investment in Rosneft of $24bn. The increase in underlying profits from Oil and Gas is real.

not really. They lost that in the time it took to decide to get out of Russia; their operating profit in Q1 22 was 3x what it was in Q1 21.

Are you sure you are referring to Shell? They had an exceptionally strong Q4 21; they are significantly ahead of Q1 21 (also had a $4bn write down in Q1 22 due to terminating Russian investments), but behind Q4 21.

https://www.shell.com/investors/results-and-reporting/quarterly-results/_jc...

Yes, this is an odd comparison. The BP loss is entirely accounting based, due to the Rosneft write off, so its ok to report underlying profits as having increased (because its true...). The Shell one is odd. I wouldn't mind being a pound behind them, but their performance isnt nearly as strong as has been made out in the most recent reporting quarter.

Edit to add - and Shell have significantly changed the structure of their reporting, so whilst they have provided recalculated comparisons, anything below consolidated level is going to be a bit iffy.

"Why we try to create politically motivated attacks on our golden geese I’ll never know."

People aren't keen on the way fossil fuel extractors carry on, in the same way they don't like how our economy is propped up by other 'golden geese' ... selling arms to authoritarian regimes, or the City laundromat for gangster oligarchs. It's about the ethics. If we talk about Shell, for example, are you familiar with their activities in Nigeria over the years - perhaps specifically the name of the environmental activist Ken Saro-Wiwa?

What were you saying about politically-motivated attacks?

They also said they lost $20 billion on their investments in Russia.  They've got operating profit from the high oil prices and huge capital losses.

Oil is a cyclical industry and the people in the North Sea need to make out like bandits in the good years to make up for the bad ones and motivate future investment.

BP has been a disaster for Scotland, it puts all the top jobs in London, donates to Tories and helps them push unionism and loses its f*cking shirt buying into Russia and polluting the Gulf of Mexico. We'd be better off with something like Norway's Statoil partly owned by Scottish Government, top management in Scotland and focussed on the North Sea and Scottish wind/hydro for the long term.

On the face of it this seems a reasonable argument until you realise what it means is that the oil companies should be allowed to continue to screw consumers and wreck the planet so they can maintain an oligopoly once this becomes unsustainable. If investment in renewables is required no reason why any windfall tax could not be used for that purposes with public bodies.

Also, you said Shell et al had faced headwinds "because supply was so prolific and other energy sources were also coming on stream" but aren't they supposed guardians of these alternative energy sources?

Just like the investment in PPE or track and trace?

You're going to have to expand on this comment as I'm not sure what you are trying to say

A windfall tax would generate say £1 billion. Hardly worth bothering with. You are going to need alot more than £1 billion or so.It is small change

1. It could generate more than that across all companies 

2. £1 billion would make a significant contribution to consumers bills which was the original (and main) proposition. It was Jim that said Shell et al need to keep hold of the cash for our benefit. I was just pointing out that we don’t owe them the means to maintain their uncompetitive position in a future energy market, there are alternatives. 

I'm saying with regard to PPE and track and trace amidst a host of other projects that public bodies have an appalling record in the UK on delivery and efficiency of large projects.

In addition,

1)how much of Shell's profits were generated in the UK? Shell and other oil major are huge global concerns operating in virtually every country.

2) Do you know how much of the energy price increases are due to Brexit? Here's a clue https://energy.ec.europa.eu/topics/international-cooperation/key-partner-co....     e.g EDF has raised its energy prices in France by just 4%, compared to the 54% increase consumers in UK have now been hit with.

3) Shell has been investing in renewables R&D for decades now .. here's one of their deliverables   https://www.maritime-executive.com/article/shell-signs-contract-for-green-h...

4) The Oil & gas market is a commodity market where the Top 10 Countries with the Highest Oil Production (barrels per day)

United States - 11,567,000

Russia - 10,503,000

Saudi Arabia - 10,225,000

Canada - 4,656,000

Iraq - 4,260,000

China - 3,969,000

United Arab Emirates - 2,954,000

Brazil - 2,852,000

Kuwait - 2,610,000

Iran - 2,546,000

So in summary,

1)if the UK govt tried to windfall tax Shell or BP then what exactly would it tax, probably the square root of nothing as most of the pump price goes to the Govt anyway in customs duty and VAT. 

2) Significant energy price rises are due to Brexit

3) Huge investment is required for renewable development along with the involvement of many governments.

4) Profit is required to maintain R&D, in the absence of profits R&D is the first to get cut back. 

Really? It would barely make any difference at all.

I would not have this govt in charge of a jumble sale but because they criminally fvcked up test and trace is not an argument for anything other than getting rid of them. It's interesting that you use T&T as an example as this was out sourced to private business whereas the vaccine roll out (considered a raging success) was manged by the NHS. Neither of us have the time to go through all the arguments about whether public ownership is intrinsically inefficient but if you have had to travel on a train recently, rung up British Gas or tried to get a phone line installed you would have some examples of privatisation not being the panacea for all ills.

Nope but if we could transfer £200 from Shell's profits to some poor bastard who's contemplating suicide because they cannot see how they are going to cope I'd see that as a win. Because the figures are of a magnitude a hedge fund manager would snort at does not mean they should be ignored, I mean, the tax I pay is not going to make a difference in the scheme of things, maybe I should ask HMRC not to bother collecting it?

I'm no defender of Brexit but the main reason for this is because the French govt forced EDF to cap prices at 4%, something it was able to do because it is in public ownership (I don't know if it is thriving or not but it is doing well enough to own parts of companies that are making huge profits in the UK).

I'm not sure what to make of this, if they don't they have no business left. They are not being benevolent, they will continue invest in renewables R&D like their life depends on it because it does! That doesn't mean UK consumers need to subsides their existential crisis, this is another example of the risks of a free market being socialised but the profits being privatised.

Right, I have an exam starting in 1hr and then I am going out to Ogwen, if you see me replying to one of your posts again please tell me to get on with something else!

I think I have answered this above but £1 billion would give 25% of UK households £200 which is the amount Sunak decided was enough to get them out of the energy crisis (until they have to pay it back). 

i am; please direct this at our resident Tory fanboy VS.......i'm one of the so called woke lefty pinko commie fag subversives (c. Kenny Everett, late 70's quote).

A windfall tax could easily generate a couple of £bn per quarter; Shell alone are providing for over £2bn for Q1 at existing rates. If the oil price is maintained throughout 2022 (reasonably likely) then it wouldnt harm their investment plans at all if there was a windfall tax, despite what the PM of channcellor say. They could of course use the additional income to accelerate their investment in the development of renewables / alternative sources, but its clear from their accounts (see link above) that they aren't intending to do this, as the only standout is that they are significantly increasing their dividend proposed and their share buyback schemes. At this present time, the UK would be much better served by using the money to help out the ever increasing number of citizens who are unable to pay their bills.

And when those oil companies lose money ( which they appear to do regularly)are you going to give it them back....

The Uk would be better served by insulating houses....

Thats selective. Why not give 5% even more...And what about those who do not get anything back.

Should we windfall tax any company that makes profit? Food producers? Tescos? 

I think they are aprticularly poor example of this; PPE and track sn d trace were particularly efficient if your aim was to transfer public funds to your mates.

Yup, but they are UK corporate taxpayers. Look at their provision for tax in the accounts.

Hardly any. The reason france can hold down the increase is because its funded by the taxpayer, and so the losses incurred by this artificial cap can be met from general taxation. its nothing to do with brexit (apart from the depreciation of the pound against the dollar and euro), and everything to do with the ownership structure of the industry. The other reason france can hold prices down is because they have a much higher use of nuclear, the price of ewhich has not risen. note also that EDF are building our newest nuclear facility with chinese money because we apparently cant afford it.......and other countries in the EU have had price rises similar to the UK; its a national political decision, not a brexit thing.

They'd be taxing the production and upstream / refining bits, not the retail element.

nope. see above.

Yup. Cant argue there.

Also partly yup. Pity Shell seem more willing to threaten to cut this rather than their dividend or share buyback........

I presume you are an international corporate tax lawyer and fully understand the international corporate tax implications.  If so you will know the corporate tax provision in a multinational is the sum of all the various national tax liabilities and not necessarily the tax due in the country where the accounts are published. As I've worked in the past on cases where national governments have investigated transfer pricing etc in order to challenge national tax calculations , I have a limited understanding, but obviously defer to your superior knowledge.

Article in NYT today on this very subject.
 

Ah sorry, I think I replied to you quoting him, rather than him. My error.

That's an easy fix: give councils and housing associations a billion of the windfall  to priority insulate property rented by the poorest 5% of households (where it hasn't already been done)....at a £1000 each household.

The idea a billion is nothing is almost as ridiculous as some of the recent tory boy pronouncements ( like inflation being worse than inaction leaving the poor not being to afford food and heating). A billion in the UK certainly wouldn't stop company investment, especially, as Ian says, the bumper profits look set to run for a few years according to analysts and investment is in the company's best interests. Their diversification also means they are less subject to lean oil profit years.

In France EDF has been hit for over €8 billion to keep consumer costs low.

Not an international tax lawyer, nor specialist tax accountant (which would be of much mre use than a lawyer in this case), but worked in senior finance positions in international companies. Shell's UK tax provision for Q1 22 is between 2 and 3 bn (according to their financial statements issued to the markets in the last few days), and they are UK incorporated.

We've all done it......

Windfall losses? They get that snyway, as losses can be set off against profits from other years (subject to some limits).

Hell yes. With continued payback no matter what the source of your energy.

Obviously a windfall tax is going to affect future investment. The North Sea is already a high cost area to extract oil.  If you do a windfall tax you are saying to companies that *every* time the oil price is high their tax bill is likely to go up and slice off a chunk of the profit.  Nobody is going to assume you will only do it once and it will only last a few months. They're going to change their models to assume they can never make more than X% profit without getting f*cked with tax.

The better way to deal with this after independence  would be to have something like Statoil developing fields in the North Sea as well as wind and hydro and the Scottish Government automatically getting a cut when energy prices are high from the shares that they own.

Not as a general rule, this oil company one is purely short term as they are making superprofits through a situation they have no control over. But the concept is a potentially good one. Perhaps we could have a sliding scale (we used to have a small co rate and a large co rate, which was a bit crude). Given there is relatively little risk in running a company supplying basic essentials, perhaps they should be on a higher rate of tax if their profits exceed a certain percentage (however calculated) than companies that genuinely generate wealth / value added. They can avoid the increased rate by keeping margins lower for consumers......

However on the other hand, the last thing we need is a more complicated tax regime; its bad enough as it is.....for both individuals and companies.

Risk, if the government pulled it's carbon neutral finger out there would be oil producers going bankrupt left right and centre. 

Perhaps a windfall tax that companies can offset if they invest in green schemes this year, the quicker we lose any dependency on Russia the better? 

FTFY. 

If done correctly, windfall taxes dont do that. I've repeatedly given the example above of Shell returning cash to shareholders through increased dividends and share buybacks. They are not investing any more as a result of the increased profits. They could have been investing loads more in anything they wanted over the last few years, renewable or fossil, as they are currently sitting on a cash pile of £36bn. I've no problem with a cash reserve at all, but that is excessive even for Shell.

By the time indef2 comes I hope all the talk of oil wells is capping them, not developing more. 

doubt it; there are enough oil consumers around the world to absorb the oil we dont use. They are all global giants.

now there's a good idea. Invest in renewables / insulation, or we'll tax you. The quicker we reduce dependency on oil the better, and the chance of doing a Norway with a sovereign wealth fund has long passed.

I think a windfall tax would be relatively short sighted.

Why would you look to mess up a companies cost of capital when it comes to future investment just so the government can make a quick buck. It will inevitably harm investment in the future more than the revenue generate on the tax due to the risk premium allocated to UK projects.

None of the factors playing out today were known when the wells were drilled. Any advocate for additional taxes in the good times must surely also support a subsidy in the bad times?

Political meddling with the energy markets doesn’t work. Take America for example. Biden is desperate for the frackers to get stuck in to bring down domestic fuel prices. Despite the higher prices they so far refused to increase rig count due to the anti-oil and gas narrative taken by the administration in the past.

The reality is we’re going to be dependent on oil and gas for a while longer and the co2 is no different if the Saudis dig it up or we dig it up. It’s preferable that we dig it up because at least we make some money from it.

In that case you should be aware that legislation to apply retrospectively is not generally considered a good idea unless it is to mitigate tax avoidance. You should also be aware that it is relatively easy for multinationals to change their tax domicile. In fact, Shell has just done this moving from the Netherlands to the UK, meaning that the UK now  gets between 2 and 3 Bn ( according to you above) that they wouldn't have got last year. So you take your choice, slam some more tax on and perhaps risk getting nothing whilst making a political statement. You should also note that the major beneficiaries of Shell share holdings are pension companies.

The down side is in reality the money will be used on what buys more votes in the next GE, not what best serves the country long term or those most in need right now.

I think that Ukraine changes the balance on that.  Scotland should be developing more fields and it should be part of the negotiations to rejoin the EU: we can provide an alternative to buying from Russia or Saudi. As long as the total amount of oil/gas purchased does not increase there's no negative ecological impact from purchases that would have gone to Russia going to Scotland.

Scotland can easily promise that it will control fuel bills in Scotland using extra tax revenue when oil prices are high. There's 10x fewer people to subsidise in Scotland than the UK.  

This whole energy price thing is entirely an English problem which is being exported to Scotland because we let the English control us.

The downside of developing more fields off Scotland is that the oil price will need to remain high for the development to be economic.

I was just about to make the same point. Somewhere in the notes to the accounts there should be a figure for UK tax + overseas tax, but b*ggered if I can be bothered to look for it. BTW I'm the CFO of a listed multinational group (albeit a tiny bit smaller than Shell...) so I do know vaguely what I am talking about!

Don't think price is determined by scarcity.. at least not in the short term!

Price is determined by what people will pay. Note: https://en.m.wikipedia.org/wiki/Tulip_mania if buyers believe the price will rise, then so it shall. Utility, scarcityand other factors may win in the end but they're not good indicators for shorter term fluctuations like this 

Ha haa I was waiting for your Scot NAT spin on this

i agree; its a very short term solution and its sad that we have arrived at the point when it has to be even considered as a means to help those with an immediate and desperate need.

higher overall tax would; a one off tax on excess profits wouldn't as it would be out of money not planned for.

Absolutely; and that is available via tax losses, and has been given via investment support in the past (but again, and frustratingly, via piecemeal one offs rather than sustained support in investment, and both governing parties have been guilty of this). I'm also aware that the oil co's will pay tax on the excess profits at their marginal rate, so there is going to be some upside to the exchequer; such a pity that this will be used to give tax reductions pre election, instead of investing further in infrastructure and public services.........

Agree there. We do need (should have had) something like Statoil in norway as mentioned by Tom above.

didnt have to wait long.......

This is where people need to look at what "earnings" are, in terms of like for like operations or EBIT or EBITDA or whatever, but this is never going to be considered in a BBC political rant. Apples will be compared to Oranges if it fits their narrative 

Nobody is going to believe it is a one-off tax. They are going to think that every time they make more than X% profit they are likely to get f*cked by a tax. That's the only prudent assumption if you are looking at the long term economics of a large investment and chopping off the top of the upside in good times isn't going to help a cyclical business that also has bad times.

I think one of the things to look at for an independent Scotland with new oil fields would be a long term deal with the EU or large countries within the EU which guarantees a certain percentage of output in exchange for a guaranteed minimum price and perhaps some co-financing of the development. One of the outcomes of the Russian situation may be more interest in long term deals which provide security of supply.

You mean in France that EDF which is owned by the Gov the Gov is paying the difference from tax revenue???Either way its not really a long term solution( as demonstrated by the caps in the UK), because something else has to give.

£1billion in Uk economic terms is not big money.

We agree on the insulation issue. Any rebate off this years bills is a short term marginal fix  for everybody.I would far prefer a sustainable approach to addressing this.

Those care homes where heating is on all the time are going to be taking a financial hammering on this issue.This is going to spill over in other areas. You see it in schools already where power costs are hitting budgets and so on.

And meanwhile on the Motorways everybody still tanks along at 70mph without a care in the world.

Yes that EDF...a benefit for the less well off in France.... what's your immediate solution for those people here?

Modern cars do well enough at 70 and tbh the bigger problem is efficiency losses due to low speed and especially stop-start congestion. Having average speed controls on motorways,  removing most cars from congested city centres and having better value, well linked, pubic transport are way more important than worrying about those going a steady 70 on a major road.

https://www.mpgforspeed.com/

I'd agree with those pointing out that petrochemical companies won't be a cash cow but a billion across a sector recieving huge unexpected revenue gains, when we are facing a national emergency, isn't excessive nor likely to cause them to tax register elsewhere.

There is not any simple quick fix solution ( outside  Putin disppearing) other than a universal credit increase .

Its an emergency in every economy unless you are one of those with oil and gas fields. But even then say in the USA there are huge price hikes.Nobody as far as I can see has any real quick fix solutions-- or else everybody would be doing it.

Shell just moved its HQ and everything to London( unitl recently it was split due to some longstanding shareholding structure)and it could easily change its mind and move back to Amsterdam.So not sure your comment on that are right.

At least count our blessings we are not in Germanys's shoes and reliant on Russian oil and gas

Germany has in the last weeks managed to reduce its reliance to 12 percent or so but I think the Germany knockers in the media and in politics haven't acknowledged this, unexpectedly.

or it might have been oil, but they've certainly made an effort

For oil yes. But not gas which is the real issue for them.

nevertheless they are trying to bring about a huge ship and anyone shouting about that taking too long is being unrealistic.

The only examples I know of are when labour introduced a windfall tax last century. It was a one off. What happened to all those companies? Did they depart these shores? Did they go under? Or did they carry on making a pretty penny?

A very different set of circumstances. Tom is spot on with this.

A one off tax on oil majors would damage investment and potentially where they chose to to have their HQs.

If the average shell/bp employee is paying 20k in PAYE and theirs 10k of them that’s a lot of lost tax for the revenue.

Did you really just write that? Oil markets are almost entirely political meddling.

OPEC literally meets to decide what level of meddling is required....most often by their state owned oil producers.

I agree. Make taxes as fair as possible, but don't use windfall taxes, because that's moving the goal posts.

That's a bloody big HQ if there's 10k of them.

Must be 9.5k of them just counting money

https://www.shell.co.uk/about-us/who-we-are.html

6k for shell? The oil and gas industry isn’t exactly a bad payer.

(before you’ve ask they’ve sold all of their petrol stations who just have the branding).

And all of them will still be liable for UK tax if they work in the UK regardless of where the HQ is, hence my earlier comment.

To be fair I get your point about HQs relocating, but I also feel uneasy about corporates making billions off a war in Ukraine whilst a lot of people are falling into fuel poverty. A windfall tax would be a sticking plaster, but on balance I'd prefer that than nothing