Why Are Shell And BP Shares Not Affected By The Windfall Tax Threat?

Shell (LON: SHEL) and BP (LON: BP) shares seem entirely unaffected by the threat of a windfall tax upon energy companies in the UK. This also seems very odd, as we saw Drax shares drop 13% yesterday merely on the threat that one might be imposed. The entire political aim of the windfall tax – if there is going to be one of course – is to tax more heavily those excess and unearned profits of the fossil fuel producers. So, why is it that actual fossil fuel producers seem to be shrugging off the threat while a power station operator suffers substantially?

The answer comes in one of those little market wrinkles that politics so often doesn't understand. Now this isn't a political statement – we are doing investment analysis here, not politics. But we need to understand the politics in order to be able to work through to the effect upon investments.

The end of lockdown, the events in Ukraine, inflation itself, all have led to a significant increase in energy prices. This then gets politicians shouting that their constituents are being made poorer – on the obvious grounds that they are – and therefore something must be done. A popular something is that the extra profits the fossil fuel companies have been making should be taxed away in order to compensate the constituents. Whether we agree with this or not isn't the point – that's what is actually happening.

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So, the incentives for the windfall tax are that companies like BP and Shell, which are indeed making stonking profits from the energy price rise, should end up paying more tax. This can then be recycled into greater benefits for the poor to pay their heating bills.

Well, yes, except the British Treasury (or HMRC) only taxes those profits which arise from doing business in Britain. Refining has long been a low profit business, so too the actual retailing of petrol and serve. The big profits are made in the original extraction of the oil and or gas. Both BP and Shell have such operations around the world and yes, some in Britain. But not much of their business of extraction is in Britain. The North Sea is mostly in the hands of smaller independents these days – experts at wringing the last out of wells. There's simply not much extraction profit made by the majors – which of course includes BP and Shell – within the UK tax jurisdiction. So, an excess profits, or windfall, tax on UK operations doesn't make all that much difference to the global multinationals.

At which point the political impetus might be thought to fade away a little but then that's politics. The actual truth of any windfall tax on energy companies in the UK is that it just won;t have much effect on the multinationals. They're companies that are listed in London, yes. The HQ is in London, yes. But their operations are global and any windfall tac is likely to be on only the domestic to the UK operations. So, such a windfall tax wouldn't affect Shell and or BP very much.