Exxon Sues EU Over Windfall Profit Levy

Energy prices in Europe rose sharply earlier this year, stoked by Russia’s decision to throttle natural-gas supplies to the continent after its invasion of Ukraine prompted Western countries to impose sanctions. Natural-gas prices have declined and are now near their level before the war began.

Exxon said its German and Dutch subsidiaries, Mobil Erdgas-Erdöl GmbH and ExxonMobil Producing Netherlands BV, filed a lawsuit on Wednesday with the EU’s General Court in Luxembourg that seeks to annul the EU’s windfall profit levy on oil-and-gas companies.

The lawsuit was earlier reported by the Financial Times.

The suit challenges the authority of the Council of the European Union to impose what the company says is a direct income tax. The Council represents the EU’s 27 member countries’ governments and is supposed to give national guidance to EU decisions. Almost all EU tax decisions require unanimous approval from member states. Earlier this year, discussions about the planned levy carefully avoided referring to it as a tax, EU officials and diplomats said at the time.

The EU imposed the windfall profit levy using an emergency tool, known as Article 122, that allows it to set policy without seeking the involvement of the bloc’s legislature, the European Parliament.

Exxon said the lawsuit challenges the Council’s legal authority to impose the levy because taxation power historically has been reserved at the national level for member states. It said the European Commission, the bloc’s executive body, and the Council were wrong to use Article 122 to accelerate approval of the levy.

A spokeswoman for the Commission said it maintains that the measures fully comply with EU law.

The new levy could cost Exxon more than $2 billion through the end of 2023, depending on how provisions are implemented, the company said in regulatory filings last month. For years, Exxon has warned such policy changes could backfire by reducing incentives for oil companies to make investments.

A spokesman for Exxon said the company recognizes the energy crisis in Europe is weighing on families and businesses but added the levy would be counterproductive. He said Exxon has been among the biggest investors in European refining over the past decade and its expansions have helped it achieve higher production rates.

“This tax will undermine investor confidence, discourage investment and increase reliance on imported energy and fuel products,” Exxon spokesman Casey Norton said. “European industries already face a very real competitiveness crisis and governments should be supporting the production of reliable and affordable energy.”

The company’s legal challenge is aimed “only at the counterproductive windfall profits tax, and not any other elements” of the EU’s plan to reduce energy prices, Mr. Norton said.

The EU defined excess profit as taxable profits that are more than 20% above the average profit of the previous four years. The money collected, which the commission estimated could total €25 billion, equivalent to about $27 billion, could be used to help vulnerable households, companies and energy-intensive industries, the bloc said.

Exxon posted nearly $20 billion in profit for the third quarter, a second consecutive record for quarterly earnings, due to the loftiest prices for oil and natural gas and widest refining margins in years. It plans to repurchase $50 billion in shares through 2024.

Energy prices surged following Russia’s invasion of Ukraine in February. In Europe, profit margins widened sharply for electricity generated using sources that remained less expensive than natural gas, which in part prompted calls for the windfall levy.

Analysts expect Exxon to report record annual profit of more than $58 billion this year, up from $23 billion last year, according to FactSet. About 26% of Exxon’s revenue came from Europe last year, compared with 49.1% from the Americas and 19.2% from the Asia-Pacific region, according to FactSet.

Major oil companies including Exxon have reduced their presence in Europe over the past decade as the region’s big drilling areas, such as in the North Sea off Norway and the U.K., have dwindled and no longer have the scale to compete in their portfolios. Exxon has sold assets in Italy, Germany, Romania, the U.K. and Norway over the past four years, as it worked to shrink its global footprint.

It plans to spend far more of its annual budget in the Americas next year, with major oil-and-gas projects in the Permian Basin of West Texas and New Mexico, and in Guyana and Brazil.

Write to Kim Mackrael at [email protected] and Collin Eaton at [email protected]

Energy prices in Europe rose sharply earlier this year, stoked by Russia’s decision to throttle natural-gas supplies to the continent after its invasion of Ukraine prompted Western countries to impose sanctions. Natural-gas prices have declined and are now near their level before the war began.

Exxon said its German and Dutch subsidiaries, Mobil Erdgas-Erdöl GmbH and ExxonMobil Producing Netherlands BV, filed a lawsuit on Wednesday with the EU’s General Court in Luxembourg that seeks to annul the EU’s windfall profit levy on oil-and-gas companies.

The lawsuit was earlier reported by the Financial Times.

The suit challenges the authority of the Council of the European Union to impose what the company says is a direct income tax. The Council represents the EU’s 27 member countries’ governments and is supposed to give national guidance to EU decisions. Almost all EU tax decisions require unanimous approval from member states. Earlier this year, discussions about the planned levy carefully avoided referring to it as a tax, EU officials and diplomats said at the time.

The EU imposed the windfall profit levy using an emergency tool, known as Article 122, that allows it to set policy without seeking the involvement of the bloc’s legislature, the European Parliament.

Exxon said the lawsuit challenges the Council’s legal authority to impose the levy because taxation power historically has been reserved at the national level for member states. It said the European Commission, the bloc’s executive body, and the Council were wrong to use Article 122 to accelerate approval of the levy.

A spokeswoman for the Commission said it maintains that the measures fully comply with EU law.

The new levy could cost Exxon more than $2 billion through the end of 2023, depending on how provisions are implemented, the company said in regulatory filings last month. For years, Exxon has warned such policy changes could backfire by reducing incentives for oil companies to make investments.

A spokesman for Exxon said the company recognizes the energy crisis in Europe is weighing on families and businesses but added the levy would be counterproductive. He said Exxon has been among the biggest investors in European refining over the past decade and its expansions have helped it achieve higher production rates.

“This tax will undermine investor confidence, discourage investment and increase reliance on imported energy and fuel products,” Exxon spokesman Casey Norton said. “European industries already face a very real competitiveness crisis and governments should be supporting the production of reliable and affordable energy.”

The company’s legal challenge is aimed “only at the counterproductive windfall profits tax, and not any other elements” of the EU’s plan to reduce energy prices, Mr. Norton said.

The EU defined excess profit as taxable profits that are more than 20% above the average profit of the previous four years. The money collected, which the commission estimated could total €25 billion, equivalent to about $27 billion, could be used to help vulnerable households, companies and energy-intensive industries, the bloc said.

Exxon posted nearly $20 billion in profit for the third quarter, a second consecutive record for quarterly earnings, due to the loftiest prices for oil and natural gas and widest refining margins in years. It plans to repurchase $50 billion in shares through 2024.

Energy prices surged following Russia’s invasion of Ukraine in February. In Europe, profit margins widened sharply for electricity generated using sources that remained less expensive than natural gas, which in part prompted calls for the windfall levy.

Analysts expect Exxon to report record annual profit of more than $58 billion this year, up from $23 billion last year, according to FactSet. About 26% of Exxon’s revenue came from Europe last year, compared with 49.1% from the Americas and 19.2% from the Asia-Pacific region, according to FactSet.

Major oil companies including Exxon have reduced their presence in Europe over the past decade as the region’s big drilling areas, such as in the North Sea off Norway and the U.K., have dwindled and no longer have the scale to compete in their portfolios. Exxon has sold assets in Italy, Germany, Romania, the U.K. and Norway over the past four years, as it worked to shrink its global footprint.

It plans to spend far more of its annual budget in the Americas next year, with major oil-and-gas projects in the Permian Basin of West Texas and New Mexico, and in Guyana and Brazil.

Write to Kim Mackrael at [email protected] and Collin Eaton at [email protected]