Sanjoy Sen is a chemical engineer. He contested Alyn & Deeside at the 2019 general election.

The North Sea windfall tax is proving a headache. The Cabinet is rumoured to be split: Kwasi Kwarteng (needing investment) is in firm opposition, whilst Rishi Sunak (needing revenue) seems not to have ruled it out.

Labour, meanwhile, finally has a policy to attract householders reeling from soaring bills. And in Aberdeen, where things are actually supposed to happen, confusion reigns.

Since the taps started flowing in sixties, the North Sea has coughed up over £300 billion in tax revenues. (Unsurprisingly, opinions vary somewhat on how well it has been spent.) In that time, successive chancellors have adjusted the offshore tax regime in response to global oil price movements that they can’t predict, let alone control.

But what is the impact of constant tweaking – and are there alternatives which could deliver higher returns? And perhaps even de-politicise the issue?

How does tax impact the North Sea?

Anyone who has worked in North Sea oil understands how quickly things can change – and the importance of continuity. The late noughties was a period of high oil prices (over $100 a barrel by 2008) prompting a flurry of activity; not bad for an ‘ultra mature’ sector once predicted to be finished by the millennium.

Such a booming sector would have been irresistible to any chancellor, let alone Gordon Brown, who launched his Supplementary Charge in 2002. George Osborne ratcheted this further and by 2011, British fields were subject to a 62 per cent marginal rate – as a minimum.

Older fields (think Brent, Forties, Ninian) were also subject to Petroleum Revenue Tax and paid out at an eye-watering 81 per cent. Even the Guardian got worried about falling investment in fossil fuels.

But by 2015, the barrel price had dipped below $40 and tax rates went unchanged. Contracts were cancelled and redundancies swiftly followed. Prior to the recent upturn, things have been tough in Aberdeen for almost a decade. As recently as 2020, the future of the entire sector was in doubt, with many of my former colleagues forced to relocate or retrain.

(As an aside, it’s perhaps worth reflecting how a slightly earlier downturn might have impacted the SNP’s economic argument ahead of the independence referendum.)

Needless to say, prolonged heavy taxation did erode industry’s appetite for investment, especially in exploratory drilling, the lifeblood of any production basin. Whilst the major Laggan-Tormore gas discovery came on-stream in 2016, little else has followed.

And recently, environmentalism has further deterred new investment, almost forcing Shell out of Cambo. The North Sea is well past its millennial peak and has its work cut out to deliver its remaining barrels quickly to improve national energy security.

How do we tax North Sea oil – and do others do it better?

As the North Sea faltered, tax rates were finally trimmed and currently stand at (a still substantial) 40 per cent. Corporation Tax is levied at 30 per cent offshore, considerably higher than the mainstream rate (19 per cent) and is ring-fenced against losses elsewhere.

So, with oil (and gas) prices rocketing, the Chancellor stands to take a handy £8 billion this year.  Given the current headlines, a further windfall slice might be tempting.

But previous experience encourages caution in taking more and more. The Government needs major players to deliver on investment pledges, such as BP’s £18 billion and Shell’s £25 billion, needed for both oil extraction and the energy transition.

Multi-nationals can invest anywhere and the UK needs to remain competitive – and predictable.

Whilst the uncertainty of when rates will change (and by how much) has created issues in the North Sea, the basic principle of taxing profits remains the most progressive.

By contrast, a plethora of alternatives have been deployed globally to extract value from natural resources. Some countries have opted for state participation and production sharing contracts, although the record of national oil companies is patchy to say the least.

Others have auctioned off production rights, trading long-term value for up-front income. Royalties (essentially a share of every barrel produced) can prove sub-optimal as they fall on revenues, not profits; widely used elsewhere, the UK has long discarded these.

Whilst not a windfall tax, the Australian system includes a feature with a broadly similar effect. Targeted at offshore mega-projects, the Petroleum Resource Rent Tax ‘super tax’ applies once certain thresholds have been cleared. Its key advantages are that it only targets developments that can afford to pay more and kicks in when appropriate, not as a knee-jerk reaction to events.

Needless to say, it isn’t much loved by the owners of mega-projects, nor by those who don’t understand why all fields aren’t paying it all the time.

But whilst this discussion focusses on raising oil revenues, not using them, it’s impossible to ignore the global poster boy, Norway. And whilst there is much that is positive in their oil model, myths abound.

The trillion-dollar savings fund is so carefully protected that other taxes (on income and purchases) need to stay high and thus drive up living costs. And most Norwegians still pay to see their GP.

Meanwhile, its world-leading electric vehicle take-up is subsidised by those horrible hydrocarbons: 100 barrels of crude (emitting 40 tonnes of CO2) are exported to pay for an EV that saves just one tonne.

The UK’s arrangements for oil and gas taxation have been far from perfect but in many respects are the least-worst option. They would a work a lot better if the rises weren’t so dramatic and, more importantly, the cuts weren’t so slow.

But they’d work better still if we left the politics out.