BP profits explained and where that money goes

Calls for a windfall tax on oil and gas companies have been made again on Tuesday after BP presented its highest profits for eight years.

The oil and gas giant reported that profits hit nearly 13 billion dollars (£9.6 billion) – in the company’s preferred measurement, the highest since 2013.

PA takes a look at why BP made so much money, whether it increases calls for a windfall tax and how much the company actually pays already.

Why did BP make so much profit?

Gas prices are soaring around the world. The gas that BP was selling for 3.37 dollars per thousand cubic feet just over a year ago was fetching 6.94 dollars in the last three months of 2021.

Oil has seen a similarly massive rise, from 36.51 dollars per barrel a little over a year ago to 71.63 dollars towards the end of 2021.

Perhaps unsurprisingly, BP has increased the amount it produces of both to cash in on the boom.

– What is BP doing with all its extra profits?

Shareholders are the big winners, with BP announcing it has spent 4.15 billion dollars (£3.1 billion) on buying up shares. The fewer shares in circulation, the higher the share price is expected to go.

The dividend for shareholders for each share they own also increased, meaning the company paid out a further 4.3 billion dollars in dividends.

Money was also used to pay down BP’s debts.

– How much tax does BP pay?

This depends on how you calculate this. Those inclined to be uncharitable to the company could point to its production taxes.

In the UK companies that need to pay to decommission old oil platforms in the North Sea are able to claim back some of their costs from the Treasury.

That means that in 2020, the latest year with data available, BP received 48 million dollars (£35.4 million) from the Treasury in production taxes.

Critics will also point to corporation tax. To ensure that the money from North Sea oil goes back to the British people, companies have to pay 40% in corporation tax on their operations there – twice the usual rate.

But in 2020 BP paid no corporate tax from its North Sea business, in part because it was investing in the area.

This is not to say that BP paid no tax at all in 2020. It paid 311 million dollars (£229 million) in corporate taxes, property taxes and employer taxes.

If you count the amount that BP collected from others and paid to the Treasury, including excise duties, employee taxes and sales taxes, that adds another 2.2 billion dollars (£1.6 billion).

– Why do some say BP and others should pay a windfall tax?

The same spikes in gas prices that are helping BP are harming normal people.

Energy bills are set to soar for around 22 million households across Britain from the beginning of April.

The 54% rise in gas and electricity bills is going to cost the average household around £700 every year.

The Government is stepping in with some support. But many in the Opposition believe that a special tax on the profits of BP and others could let the Government funnel more cash to households to help them through the crisis.

– Why do others say they should not pay a windfall tax?

The argument put forward, including by Chancellor Rishi Sunak, is that any windfall tax could reduce investment in renewable technology and potentially damage chances of reaching Net Zero.

Others point out that the energy sector had a terrible 2020 and reported huge losses.

Michael Hewson, chief market analyst at CMC Markets UK, said: “It’s important not to understate how bad 2020 was for the oil and gas industry, as demand collapsed, and oil companies cut production as storage and refinery capacity ran out.

“There is certainly a case for criticising the amount of money these businesses set aside for investors and shareholders relative to investment in renewables, however rather than calling for a populist windfall tax, which would also deter investment, perhaps it would be better for governments to make investment in renewable energy more attractive by way of tax breaks in the areas of blue and green hydrogen.”