NORTH SEA OIL

HC Deb 16 March 1973 vol 852 cc1726-36

4.7 p.m.

Mr. William Hamilton (Fife, West)

The House owes a debt of gratitude to the Public Accounts Committee and to my right hon. Friend the Member for Birkenhead (Mr. Dell) for the thorough way in which they have exposed the gross dereliction of the protection of the public interest by successive Ministers and civil servants engaged in one of the biggest sell-outs in British history.

Seldom has there been a quicker response to a report from a Select Committee than that made by Her Majesty's Government to the recent PAC report on North Sea oil and gas. In the course of his Budget Statement the Chancellor was, curiously, locking the stable door after the horse had very nearly bolted. He went nowhere near to answering the criticisms, still less to dealing with the recommendations of the PAC. That may come later in the official reply by the Treasury to the report of the Committee as a whole.

Meanwhile we must examine with care and a large degree of reservation exactly what the Chancellor did and did not say. My right hon. Friend spoke exclusively on this subject in the Budget debate and did so more courteously and in a more restrained fashion than is my custom or intention today. The Chancellor said during the course of his speech: the losses"— and he referred to them as notional losses— which have already accumulated amount to £1,500 million. This means that, unless we make a change, the first £1,500 million of profits from North Sea oil would effectively be exempted from corporation tax. He went on to say that: we should get little tax revenue from North Sea oil production even by 1980."—[OFFICIAL REPORT, 6th March 1973; Vol. 852, c. 263–4.] He made it clear that changes would be made in the Government's tax proposals to ensure that that did not happen.

So far, so good. I do not think that there were many objections on this side of the House when the Chancellor of the Exchequer promised that there would be consultations with the oil companies to resolve the difficulties. We shall have to wait until those consultations are completed before a further statement can be made to the House. But up to now the Government—and by that I mean not only Ministers but officials—have been outsmarted by the oil companies whose record in matters of tax payment over the years is not one of which they can be very proud.

The Chancellor assured the House that the Government had under consideration the question of licensing terms and their share of the profits. It is therefore impossible today to make a final judgment on these matters. No one can yet say with certainty what the size of the North Sea oil bonanza will be, how long it will last or what the taxpayer and the Government will get out of it.

I went along to the Shell Centre on Wednesday 7th March, the day after the Budget, where a film was shown indicating the great difficulties and natural hazards of exploring the North Sea. Our pre-film briefing was designed almost to persuade us that the oil companies were engaged in a philanthropic exercise and that they were about to claim charitable status.

No doubt, at the outset of the venture, great risks were involved in charting the unknown, and the recent Shell-Esso blank in the block for which it paid £21 million in the fourth round indicates the risks which still exist. There have been other strikes in the Brent and Auk fields, and the oil companies expect to take the bad with the good, but I think that it was right and proper that at the beginning generous incentives had to be given to those with the expertise to explore, find and produce as quickly as possible as much oil and gas as they could in view of the instability of our sources of supply in the Middle East and the precarious balance of payments situation. Therefore, the original decision to allocate licences at ministerial discretion rather than by a system of competitive bidding was probably right.

I need not go through the four rounds of licensing in detail; they are well documented. The first round was conducted purely on the discretionary basis. The second round, which took place in 1965 when the Labour Government were in office, showed no substantial change in the methods of allocation or in the financial terms and conditions. However, three additional considerations were taken into account by the Labour Government, one of which was to facilitate more participation in the venture by public enterprise. In the event, the public sector interest increased from just over 9 per cent. in the first round to 15.5 per cent. in the second.

Up to then, no gas or oil had been found, but early in 1966 gas was found in substantial quantities in the southern part of the North Sea and therefore a major review of future licensing policy became urgent. The result was that it was decided that the granting of future licences in the Irish Sea would have to provide for participation by the gas and coal industries. It was not 50 per cent. participation, contrary to what has been said by some of my party leaders. Nowhere was it mentioned that 50 per cent. participation by the gas and coal undertakings was obligatory. Up to that point, the primary hope was to find natural gas.

There was little activity up to then in the northern basin of the North Sea, and the discretionary system of licensing was still adhered to. The result was that the third round in June 1970 showed a marginal increase in the public sector—70 per cent., I think it was, as against 15.5 per cent. But the Norwegians struck oil in November 1969 in the Ekofisk block and that suggested the presence of a significant oil-producing basin. Subsequently Phillips and BP and Shell found oil, too, in territory leased in the second and third rounds.

At that time there was increasing pressure from Libya and the OPEC countries which impressed upon the Labour Government the need for greater urgency in stepping up the search for indigenous fuel. The position had changed, however, in these two respects—the discovery of oil in the northern basin of the North Sea, and the pressure from the OPEC countries.

The fourth round of licensing in 1971–72 was, therefore, arranged in completely different circumstances from those in which the previous three had been decided. Nevertheless the fourth round was still on the discretionary basis, apart from the experiment of offering 15 blocks on a competitive basis to test market valuation of the territories and to gain experience, and the Public Accounts Committee went into that fourth round in great detail because it was a critical round.

It was in that round that the, to me, completely incomprehensible and indefensible action was taken of having simultaneously an auction of the 15 blocks and a discretionary allocation of 421 blocks. If one wanted to learn from experience from the auction system one ought to have had some delay between that and the allocation of the other blocks. I simply quote the Committee's report at paragraph 97(11) on page xxxiiii: We are surprised that, when the results of the tender competition (resulting in successful bids totalling £37 million) were known on 20th August 1971, the questions of reconsidering or withdrawing the invitation for the discretionary allocation were not discussed interdepartmentally or put to Ministers for a policy decisions. That sums up the criticism of the Department for its behaviour in that fourth round. If the tender system had preceded the discretionary allocation, the terms could and should have been hardened. This has been underlined by the announcement of the recent oil strike by the Occidental Oil Company—approximately 60 per cent. United States-owned, I think—south-east of Orkney where, for a licence fee of £6,250, it has discovered a field from which, it is estimated, the output will be 35,000 million gallons of oil. It got that for a licence fee of £6,250—I presume plus £10,000 a year up to a maximum of £72,500 in the seventeenth year which, I think, it can reclaim back when it starts making its profits.

The situation now is that the production licences seem to have been given away for a mess of pottage. The terms for each round of licensing have remained unchanged although the situation has dramatically changed. They have remained unchanged since the first round in 1964, except for minor provisions to provide for inflation. The licences still remain valid for 46 years, with no provision for variation or renegotiation of the financial terms.

Only in 1972 was a thorough examination made of the opportunities open to British industry and employment through the International Management and Engineering Group report. It is easy now to lecture with the benefit of hindsight. The Public Accounts Committee had this very much in mind. I am not being unfair when I say that the generosity of the first and second rounds was probably understandable and right; that the third round, under the Labour Government, was probably too soft; and that the fourth round, looking back now, almost certainly was a give-away. We ought now to try to put that right.

I want to give the Minister time to reply, so I conclude with the 64,000-dollar question: what can we salvage from, not the wreck, but the consequences of the mishandling of this whole operation?

I briefly put a few propositions to the Government to indicate the thinking on the Opposition side of the House and in the Labour Party. The licences already awarded cannot be revoked, especially where exploration has already started, but it seems that the rest can and should be revoked in the light of the very changed circumstances, which are very different from those in 1964. The overriding national interest seems to require no less than that. Also, we want a completely new and tougher licensing system. The royalty must be higher—although our 12½ per cent. royalty at present is somewhere in the middle of the international range. Nevertheless it should be jacked up to about the 16⅔ per cent. American level. The rental must certainly be much steeper. Even if one takes account of inflation, it should be very much higher now than it was in 1964.

Certainly the duration of the licence should be shorter. I think that there is only one other country mentioned in the appendices to the report of the Public Accounts Committee where the duration of the licence is as long as 46 years. Some licences are very much shorter than that and come up for quinquennial reviews and the like. There should also be suitable break clauses incorporated.

There must be a stronger State right to what the Norwegians call the carried interest. The Chancellor made the point, with which we agree, that the United Kingdom tax rates should apply to all operations in British waters, with no offsets for losses incurred elsewhere in the world. The most important point is the one which the Chancellor studiously ignored, the main recommendation of the Public Accounts Committee: namely, that a quantity or barrelage tax ought to be imposed. Profits have not begun to accrue to the oil companies, nor are they likely to accrue before 1975. Therefore, it is not too late to have discussions with the oil companies on the matter and their reactions can be taken into account when the next round of licensing occurs.

Another point to be taken into consideration is not so much the recommendations of the Public Accounts Committee as its observations that the Department should have access to the licensees' costs. There is an unfair balance of information between the Department and the oil companies. I would go further than the Public Accounts Committee and say that the State should now seek to have a controlling interest in BP. We have already got 49 per cent. That share ought to be stepped up. I do not go along with a nationalisation, which is nonsense, but we can get a large element of State participation without going that far.

The Government should think about establishing in Scotland an oil development agency which would be Government-financed and would help British firms to exploit the opportunities for exploration, discovery and production. Such an agency would work out long-term plans for developing a British oil supply capacity to serve oil activities elsewhere in the world.

There should be a State-sponsored oil supply industry board on the model suggested by IMEG. I do not know whether the Government have had time to consider all the implications of the IMEG report, but I believe that such a board should have its own funds and should sponsor research and development work connected with deep-water oil production technology. That research would be done in our universities and colleges.

The present administrative machinery for dealing with this problem seems to be too diversified among Government Departments. There is a responsibility for these matters in the Department of Trade and Industry, in the Scottish Office, the Department of the Environment and the Treasury. I do not know whether a Department for North Sea oil should be set up, but at least it will be agreed that the administrative machinery is far too complex and there is a lack of liaison between suppliers of oil. The Government have expressed their concern about small firms, and there should be adequate liaison between engineering firms dealing with oil products, the sort of liaison which the supply of sophisticated materials to oil companies requires.

I think I have said enough to indicate that the Opposition have a real measure of concern about this matter, and I am glad to have had this opportunity of expressing our views.

4.28 p.m.

The Minister for Industry (Mr. Tom Boardman)

I am obliged to the hon. Member for Fife, West (Mr. William Hamilton) for his reasoned arguments on this very important subject. Its importance is recognised by hon. Members on both sides of the House, although the solution to the problem that has been posed cannot clearly be developed here in the short time at my disposal.

I should like to remind the hon. Gentleman of the pamphlet recently published by the hon. Member for East Stirlingshire (Mr. Douglas) entitled "A Way for Oil" in which he said: There is room for continued public debate about the best method and approach to the North Sea finds. No one in the Labour Movement can claim to know all the answers to such a complex problem.… This probably applies to both sides of the House. The hon. Gentleman went on to say: Dogmatism is not likely to produce the correct climate to solve the problems for the benefit of the people whom we seek to serve. The hon. Member for Fife, West also sought to correct an impression which has been given credence by the Leader of the Opposition who has claimed that when the Labour Government were in office they insisted on 50 per cent. participation by the public sector. That, of course, was not so and I was glad to hear the hon. Gentleman confirm it.

I understand the hon. Gentleman's desire to raise this whole subject and I am sure he will not expect me to deal in detail with all the points he has raised.

The report of the Public Accounts Committee was extremely interesting and valuable. The Government, in accordance with custom, will give the House their considered detailed views on that report and no doubt we can then have a debate long enough to deal adequately with this complex subject. In the few minutes that I now have available to me I shall be able only to sketch the picture to the House.

The Public Accounts Committee made a number of detailed recommendations concentrating on two main areas: tax yield from the North Sea and general licensing policy. I shall concentrate on those two matters.

First, on the tax aspect the Committee recommended that the Government should take action substantially to improve the effective tax yield from the Continental Shelf. My right hon. Friend the Chancellor of the Exchequer said in his Budget speech that he accepted the recommendation in relation to the set-off of losses made by oil companies from their trade in other parts of the world. We had the subject of oil company taxation under study before the Committee reported. We recognised that some companies had been building up tax losses in this country because of the operation of the "posted price" system in the Middle East. Accumulated tax losses built up by companies in that way total about £1,500 million, and the current estimate of the rate of loss in 1972 is about £470 million a year. Without a change in the law these losses and others built up before North Sea oil starts to flow would have substantially reduced the liability to United Kingdom tax of North Sea profits. As my right hon. Friend the Chancellor of the Exchequer said, we shall take steps to prevent this happening, and there will now be consultations with the industry to determine how best to do so. Therefore, on the first recommendation by the Committee, action is in hand.

The hon. Gentleman said that this action had been taken after the horse had bolted. I refer him to what my right hon. Friend the Chancellor said in his Budget Statement at column 264 when he referred to profits from the North Sea not arising until 1975. The horse has not yet bolted; it is still firmly in its stable.

Secondly, on general licensing policy, the Committee recommended that, before further licences are issued, all aspects of our licensing policy should be reviewed in the light of its report. As the Committee was told, we already had a major review under way. The review is now well advanced and we shall make a statement to the House as soon as it is completed. So action on this recommendation, too, is already in hand.

Since the review is not complete, I cannot anticipate its conclusions. All aspects of our policy are under consideration and we shall take full account of the detailed comments made by the Public Accounts Committee which went into the matter with such care.

I should like to emphasise that I have an open mind on future policy. It is often forgotten how successful past policy has been in achieving the main object it set itself of rapid exploration and development of our Continental Shelf resources.

I do not want to dwell on the past, because it is the future with which we are now rightly concerned. However, it is worth reminding the House that more than twice as many wells have been drilled in the United Kingdom's sector of the North Sea than in all the others put together. As a result our sector should provide more oil in 1980 than all the others. This has been achieved in an area unproven for oil until just over a year ago. This is very far from saying that we could or should continue in the 1970s the policies of the 1960s. I recognise that conditions since have changed radically now that the North Sea has been proved to contain large quantities of oil as well as gas.

In the review we have set three main objectives for Government policy: continuing rapid exploration of the Continental Shelf; a fair opportunity for British industry to compete for orders for North Sea equipment and services—unfortunately I have not time to deal with IMEG and so on—and a fair return to the nation as a whole from the depletion of a national resource.

Past policy has already achieved the first objective. The Government have taken action before and following the IMEG report to achieve the second. The policy review is now examining whether more should be done to achieve the third.

The Public Accounts Committee said that the review should aim to secure for the Exchequer and the economy a better share of the take from Continental Shelf operations. As I said earlier, the House will not expect a definitive statement on the Government's views today. I hope that we will have a publication and debate in due course upon them.

There are many other matters to be taken into account. We are naturally looking at the experience of other countries, although we must take into account our continuing need for exploration which is greater than that of most other oil-producing countries, which are already assured of producing more than they need for their own purposes. We also take full account of the Public Accounts Committee's recommendation, as of the other more detailed recommendations which I have not had time to discuss today, and we shall take it into account in the review.

The hon. Gentleman referred in passing to the problems and difficulties of forecasting and to the announcement yesterday by Shell that the first well drilled in the famous block 211/21, for which Shell and Esso paid over £21 million in the 1971 auction, has not found oil. That well cost over £2 million to drill. It is a matter of regret that no oil was found, but it underlines what the Department has been saying about the difficult and complex geology of the North Sea. It also underlines what I have said about the difficulties of forecasting.

I am sure that the hon. Gentleman will have read a very clear article by Adrian Hamilton in today's Financial Times about the problems involved in deep water research and difficulties in any accurate forecast being made until a well has been drilled and the oil found. I should like to quote two extracts from that article. After referring to the problem, Mr. Adrian Hamilton said: The problems of interpreting seismic information in this area are by no means slight. When referring to drilling, he says: Drilling, despite what all the armchair critics would suggest, is neither a predictable affair nor a cheap one. It is a complex matter. The forecasting of oil is not an exact science. It is fraught with problems. The difficulties are magnified when forecasting offshore reserves of oil, when much less factual information is available than is the case on land, where economics permit many more test borings to be carried out in a given area. That is obviously not possible offshore, where the cost of drilling is so many times more expensive. The industry must rely more on seismic surveys, and less on factual information, from a few widely scattered wells. The result is that initial forecasts of reserves in place are less reliable. When more information is gained about a field as a result of production experience, estimates of reserves are revised.

Criticisms are raised occasionally about the uncertainties concerning the figures quoted on the reserves in place and the reserves that can be brought ashore. The hon. Member for Fife, West knows that there may be a great variation between the reserves in place and the proportion that can eventually be brought ashore. It is important to recognise that revisions of the original estimates can be downwards as well as upwards. Forecasts of the reserves in place are one thing and how much is economically recoverable is another. There can be a variation in the proportion to which I have referred—

The Question having been proposed after Four o'clock, and the debate having continued for half an hour, Mr. DEPUTY SPEAKER adjourned the House without Question pin, pursuant to the Standing Order.

Adjourned at twenty-three minutes to Five o'clock.