BP will be taxed £2 billion on its North Sea operations this year - but should it pay more?

Watch ITV News economics editor Joel Hills' full report

The sun is shining and BP, like all the energy giants, is busy making hay.

Russia’s invasion of Ukraine has caused the market price of oil and gas to leap.

BP shareholders are enjoying the lion’s share of the booty, but there’s something in it for the taxman too because, unlike Shell, BP is paying the Energy Profits Levy this year.

The windfall tax is levied on profits and is designed in such a way that BP - and every other energy company - has to give almost £2 to the Treasury for every £3 it makes producing gas and oil in the North Sea.

BP expects to pay £2.17 billion in tax on its North Sea operations this year - £700 million of this is as a result of the Levy which came into effect at the end of May.

A tax rate of 65% on profits may feel lofty but Labour believes the energy goose can be plucked more aggressively without too much hissing.

Exhibit A: BPs returns to shareholders.

The company has made global profits totalling $22.8 billion in the first nine months of this year.

Of this, an extraordinary $13.2 billion has either been paid out to the company’s shareholders ($9.3 billion in share buybacks) or is on its way to them. The balance has been used to reduce debt.

BP is a company which could undoubtedly afford to pay more tax. The issue is that BP trades in more than 70 countries and governments everywhere would like a piece of the action.

Labour would backdate the UK’s Energy Profits Levy to the beginning of 2022 and abolish the investment reliefs energy producers can use to reduce their tax bill.

Doing so would undoubtedly raise more tax today, but it would also reduce profitability and therefore the incentive for BP and others to invest in the North Sea, at a time when the government is keen to ensure it fully exploits the UK’s reserves of oil and gas.

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There are trade-offs here which should be recognised. The chancellor will have a chance to rethink the design of the windfall tax at the Autumn Statement in two weeks time.

He now knows that doubling the levy would raise an extra £700m this year alone.

Mind-blowing sums of money have fallen into BPs lap.

Interestingly, the company has chosen not to use any of the billions it has been gifted to increase funding for renewable forms of energy generation.

There’s nothing wrong with companies reducing their debts and rewarding shareholders in good times, however BP is an oil company and the world is close to “irreversible” climate change, according to the United Nations (UN).

BP is investing in low carbon technology - it’s building wind farms in the North Sea and carbon capture and storage technology in Teesside - but this was a chance to move towards its target of Net Zero by 2050 with a greater sense of urgency.