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4 January 2023

Exxon’s EU windfall tax lawsuit and why it won’t matter

US oil major ExxonMobil has begun legal proceedings against the EU claiming Brussels has “breached its authority” in imposing the tax on oil majors’ supernormal profits.

Oil majors American and otherwise are widely expected to report record profits this year on the back of oil and natural gas prices exploding from Russia’s war in Ukraine. Exxon is expected to report above $50 billion in profit throughout 2022, while Chevron is expected to report over $35 billion for the year.

Exxon has a history of combative language and thinly veiled threats when attempting to protect its profits. Just two months ago when the idea of a levy was being floated in the US, Exxon’s CEO Darren Woods heavily implied that the imposition of a windfall tax was heavily politically motivated, and that it would carry long-term consequences that he chose not to elaborate on. He then went on to say that since Exxon had raised its dividend rate it had done its part in helping the American people, which remains an utterly disingenuous statement that really sums up the company’s weak leadership.

Similar excuses are being made here, Exxon’s spokesperson Casey Norton said that the company would factor in the tax when considering multi-billion-dollar investments in the EU. In these volatile times it’s good to see some things don’t change. Threatening that a company will forego profitable investment opportunities out of spite is about as empty a threat as it comes outside of heavily monopolistic markets.

Exxon’s lawsuit will go through to the European General court (EGC), which might not take very long to throw it out. The European Union’s legal system isn’t quite as favorable to the litigious as the US’, which will prove problematic for Exxon if it is hellbent on the removal of this tax, which we find unlikely.

It’s difficult to see this as more than a feeble attempt at strongarming the bloc so that Exxon can hold onto more of its profit. But it also has the added effect of showing Exxon fighting for its profits, even if it knows the attempt is futile. Some within the company wouldn’t want to see this money vanish without putting up a fight. In early December during an investor call Exxon’s Chief Financial Officer Kathryn Mikells said European windfall taxes could cost the company up to $2 billion through the end of 2023, not a small number by any means until you look at the company’s profit.

The lawsuit claims that the European Commission does not have the authority to unilaterally impose a “solitary contribution” upon companies opposed to a tax, as it would require approval from the European Parliament, which was bypassed in this instance. While this makes sense, the Commission invoked Article 122 of the EU treaty, allowing it to bypass the European Parliament in an emergency.

It’s incredibly difficult to argue that the Commission hasn’t followed its own laws here considering how all-encompassing Article 122 is, and the limited scope of the lawsuit.

The Commission also said that it will “take note” of this lawsuit, which is easily the most diplomatic ways of saying it’s going to be thrown out posthaste. Even if this lawsuit passes the EGC, the European Parliament will then need to vote to pass the windfall tax which probably wouldn’t draw too much ire considering the situation, until Exxon gets its hands on some politicians at least.

This whole event feels as if Exxon doesn’t realize that it’s dealing with Europe, litigation for the sake of litigation doesn’t work in Europe as it does in the US, so all this does for Exxon is give it some legal fees to deal with and put its name in a bad light. If the company’s intent is to hemorrhage less money then pursuing litigation against the Commission isn’t the way to do it.

Chevron on the other hand is taking the far more reasonable approach of accepting its fate, something Exxon will eventually resign itself to. While the company also warned that taxing profits would disincentivize investment last October, it has yet to pursue futile legal action like its rival. The company’s begrudging acceptance of the policy shows at least some recognition of the EU’s relative strength and that the company is unwilling to follow others off a legal cliff.

Both companies will still have made record profits last year, regardless of windfall taxes and levies that get imposed.