§ Order for Second Reading read.
§ 4.7 p.m.
§ The Paymaster-General (Mr. Edmund Dell)
I beg to move, That the Bill be now read a Second time.
Within the United Kingdom Continental Shelf there is currently progressing an investment programme so large that it is probably unprecedented in this country in a single industry within such a time scale. The railway boom of the nineteenth century may have constituted a comparable concentration of activity. For this the resources and the money have to be found. A great part of the investment is currently private risk capital of multinational provenance and, even on the assumption that the negotiations on participation are successful there will remain a vast private investment in what remains an undertaking with a high level of technical risk. It would have been so much more convenient, so much less costly in resources and money, had a beneficent deity located these resources of oil and gas on shore rather than under some of the world's less hospitable seas. But, lest I be misunderstood, may I make it clear that I have no complaint.
In my speech in the Budget debate I tried to place in a cautious perspective the contribution of North Sea oil to our economic outlook. I said that it was a valuable bonus giving us security of supply and relief to our balance of payments. It will add to available resources and thus will ease some constraints on economic policy. It is certainly not an increment to be lightly dismissed. It has not been a frequent occurrence in our history that any one industry could make within such a time scale such an important contribution to the economic well-being of the country. But North Sea oil is not a solution to our economic problems. It is not, in particular, the solution to our problems of industrial competitiveness. The question is what happens to this increment to productive potential.
The first point is that not all of it will benefit this country unless the measures in the present Bill are enacted. Many of 460 the original licensees are subsidiaries of foreign-owned companies, and there could be a large balance of payments loss through remittance overseas of their share of excess profits unless corrective action was taken. So one of the Government's first priorities is to ensure that the new tax arrangements will protect the balance of payments by ensuring that the Government retain a significant part of the earnings of North Sea oil operations in this country. In fact, the only way of doing this is by increasing the Government's share of the profits.
This Bill achieves that through the introduction of a new tax, the petroleum revenue tax, and the tightening up of the corporation tax régime which accompanies it. In this way, the Government's command over the use of these additional resources is reinforced and their freedom of manoeuvre is increased. It is as though the "tax" which the people of this country are currently paying to the oil-producing countries through the medium of the present high price of oil was diverted to the Government of the United Kingdom.
The second priority, of course, is to increase the nation's revenues and to secure for the community a reasonable share of the profits of North Sea oil. We would patently not do so under the arrangements hitherto in force. We have a clear duty to provide for the public as a whole to receive a fair share of the benefit from the arrival of North Sea oil, and this is reinforced by the balance of payments considerations to which I have referred.
I have mentioned foreign-owned companies. There is one point which I must make absolutely clear. The petroleum revenue tax is completely non-discriminatory as between licensees controlled in the United Kingdom and those controlled in other countries. All will pay the tax on exactly the same basis.
In arriving at the total proportion of North Sea revenues which should accrue to the public—what has come to be called the "Government take"—there is a delicate balance to be struck. Besides securing for the community a reasonable share of the profits, we need to ensure a fair rate of return to the oil companies whose risk capital and skill and experience are crucial to the development of these resources.
461 It has been suggested in some quarters that there is something inherently contradictory about the concept of fairness both to the oil companies and to the citizens of the United Kingdom and that, as the prime necessity in this situation is to leave the oil companies with an adequate incentive to do their essential job, the Government must lean towards favouring them rather than their own people.
There is no doubt at all that until this country has considerably increased its own technical capacity in oil exploration and production—and probably even beyond that point—we shall be greatly dependent on the oil companies. Therefore, we have to make sure that they are not deprived by taxation of the level of profit necessary to make this investment attractive to them. Equally we have to make sure that the level of profit retained by them after tax is not excessive for that purpose.
The people of this country also have their legitimate claims on the benefits from the exploitation of their raw material resources. This is admittedly a difficult balance to strike and is one reason for deferring for a little the decision as to the rate of petroleum revenue tax.
This Bill attempts to achieve the right structure of taxation. The rate of tax will come later in the 1975 Finance Bill.
The structure as it will exist following this Bill is not, I think, excessively complicated. Perhaps I might remind the House that under the proposals now before it, the Government take would in future have three components. First, there will be the royalties, provided for in the Continental Shelf Act 1964, which are a condition of the licences issued to the oil companies. The second component is the new petroleum revenue tax. The third component will be corporation tax at the standard rate, but with the system of assessment strengthened by the changes in Parts II and III of the present Bill.
In due course there will also be the profits of direct Government participation in North Sea licences. I do not propose today to discuss participation in any detail. The negotiations led by my right hon. Friend the Chancellor of the Duchy of Lancaster will begin tomorrow. There is only one point that I need make at this 462 stage. Those negotiations are self-contained and will take account of the fact that it is our intention that the Oil Taxation Bill should have been enacted before the Petroleum Bill, providing for participation, has passed through Parliament.
However, I want to emphasise that the Government are very conscious of the combined impact of their various measures, fiscal and non-fiscal, including such matters as depletion controls and other oilfield regulations. Some of these can, of course, have an effect on the profitability of the companies.
My right hon. Friend the Secretary of State for Energy will be announcing shortly what use he intends to make of the new powers he proposes to seek. This will, I hope, remove some of the more exaggerated fears. But I can say now that before the final decision on the rate of PRT is taken we shall consider very carefully the impact of such non-fiscal measures along with all the other factors like costs and price which go to determine profitability.
But for our present purposes this afternoon, it is enough to regard the new PRT and the strengthened corporation tax provisions as standing on their own, and viable in their own right. Their combined effect will be to produce a fiscal régime which would be appropriate, whether or not there was State participation, and on whatever scale that were negotiated.
I believe that the principle of taxing the profits of North Sea oil in some special way has never been controversial between the political parties in this House, and the need to do so has certainly not been diminished by the fivefold increase in world oil prices which has transformed the expected profitability of North Sea operations, although, of course, it was never in question that over a period there were likely to be increases in the price of oil as it was at the beginning of 1973.
The question is how can this most appropriately be done bearing in mind, on the one hand, the expected high profitability of this venture taken as a whole and, on the other, the considerable and continuing uncertainties relating to the costs of development in particular fields, and future movements in the price of oil.
463 I therefore now proceed to discuss the reasoning underlying the Government's decisions on some of the distinctive features of the petroleum revenue tax. I do not deny that many of these decisions are controversial and I have already said that the Government will listen carefully to representations about them, just as we did to certain earlier representations made by the oil industry which led to a number of changes in the original proposals.
But I commence this discussion with two features of petroleum revenue tax which I have already described as fundamental to its conception—that is the priority of PRT over corporation tax and the field-by-field basis.
First, PRT is to be a prior charge on North Sea oil profits, and will be deductible in computing income for corporation tax. It would have been possible to introduce a new tax on North Sea Oil profits which was entirely independent of corporation tax, and it might have been administratively simpler to charge the tax on that basis. The reason we decided to make petroleum revenue tax the prior charge was that the tax has been specifically designed to bring the money in faster than would corporation tax, which under our system is paid later than in many European countries. The average delay in this country in corporation tax payments is about 18 months. PRT will be paid four months after the end of any chargeable period, and a chargeable period is six months.
Moreover, there are provisions restricting the possibility of delays in payment arising out of disagreements about an assessment. Given the importance of securing not only a fair but a prompt take for the nation from North Sea oil profits, it is therefore right to make petroleum revenue tax the prior charge and to have a correspondingly reduced corporation tax liability. It is also appropriate as a concept that a tax tailored, as is this tax, to the special situation of the oil industry should take precedence in the taxation of that industry.
Moreover, one effect of the decision to make PRT a prior charge is to make revenue from the North Sea oil more independent of the level of corporation tax. Many factors having little or no 464 relationship to North Sea profitability might determine or influence changes in corporation tax.
The CBI has recently been advocating a cut in corporation tax to 35 per cent. for reasons of industrial confidence. The Chancellor did not accept their arguments, but there could well be domestic circumstances in which a Chancellor of the Exchequer might wish to make a significant change in corporation tax and might feel inhibited if that change implied at the same time a very substantial change in North Sea revenues. Making PRT a prior charge reduces this problem considerably, though it does not, of course, eliminate it. For all these reasons we decided that it was reasonable to make PRT the prior charge.
The field-by-field basis also has the effect of accelerating the take as compared with a company-by-company basis. A company basis would defer payment because a company would be able to set expenditure on developing a later field against profits from a field already in production. Though companies will still be able to do so for corporation tax purposes, provided the second field is within the ring fence, there is no acceptable reason why Parliament should agree that the yield from the new PRT should be thus deferred and the deferment could be substantial.
The companies will obtain relief for capital and operating expenditure on the field as it is incurred, and—as one important exception to the field-by-field basis—there will be relief for abortive exploration and development expenditure incurred outside the field.
§ Mr. Peter Rost (Derbyshire, South-East) rose—
§ Mr. Dell
It might be easier if I finish this section of my speech relating to the field-by-field basis, after which I will readily give way.
These allowances in themselves already involve considerable deferment of the Government take. They will assist the companies with their cash flow and, where necessary, in raising finance from the banks and other institutions. To accept even longer deferment by agreeing to a company-by-company basis would be unreasonable. It is a matter, as I have said, of striking the right balance.
465 Perhaps I should point out that there was one way recommended to us in which the Government could have speeded up their take even further than they have done under the provisions of this Bill. The Public Accounts Committee recommended that the Government of the day should consider a system of quantity taxation among other methods of substantially improving the effective tax yield from operations on the Continental Shelf. What the Committee specifically had in mind was a barrelage tax.
As the PAC recommended that this proposal should be considered, naturally I considered it. From the point of view of the Government, a barrelage tax would have the considerable advantage of greatly advancing Exchequer receipts. Instead of waiting for calculations of profits, the tax would be charged on quantities landed. However, the Government came to the conclusion that this would be to over-load the front end, that it would be unreasonable and might prove to be too great a disincentive to the companies.
We therefore adopted the structure proposed in the Bill, which represents a reasonable compromise between the delays of a corporation tax-type tax, charged on a company basis, on the one hand, and the front-end loading of a barrelage tax on the other.
Some companies have nevertheless suggested that the field-by-field basis will deter future development. I do not believe that it will, provided that the overall tax régime is reasonable, and of course an important element in that will be the rate of tax and the consequent return on investment net of tax. In considering this structure, the companies should remember they will not pay a penny of tax on any field until their allowances for capital expenditure on that field are exhausted.
§ Mr. Dell
I do not know what the hon. Gentleman would suggest to meet this point, unless the Government were 466 to make a grant for the purpose. The hon. Gentleman knows that the ring fence in respect of corporation tax operates only one way, which might be helpful to certain companies in that position. But it is not unusual in this country's tax history that a company that makes a tax loss without profits to set it against loses its tax loss.
The early relief for capital expenditure is a very advantageous feature of the tax from the companies' point of view. They will be able to set against their profits 100 per cent. of abortive exploration expenditure and 150 per cent. of capital expenditure on development, production and transportation, together with 150 per cent. of abortive development expenditure—one of the provisions introduced into the Bill following representations from the industry. A feature of this kind is, of course, particularly valuable in an industry in which large gross profits make it possible to absorb large allowances of capital expenditure in a short time.
The industry will, no doubt, at this moment be making its own calculations of the return on capital at different rates of tax, after taking account of these allowances. In making these calculations, they will no doubt also bear in mind that, under existing corporation tax provisions, they are allowed 100 per cent. of their capital expenditure in the first year and that under the Bill they will also be allowed proportionately allocated interest as a deduction against corporation tax as well.
§ Mr. Patrick Jenkin (Wanstead and Woodford)
The right hon. Gentleman just used a very interesting phrase—"proportionately allocated". It has been assumed that the provision under Part II about interest requires that the loan shall have been specifically raised for the purposes of this development and that it cannot be apportioned between this development and some other activity of the company.
§ Mr. Dell
The right hon. Gentleman will find, I think, if he examines the Bill, that what I have said is correct.
Taking PRT and corporation tax together, it is clear, even without knowing the rate of PRT, that the Government will be allowing as a deduction from the oil 467 companies' tax liability a very high proportion of their capital expenditure.
It has often been said that large capital allowances have little effect as investment incentives because business men typically are innocent of the accountants' arts and therefore do not appreciate the real extent of the advantage that these allowances provide. Although I had some momentary doubts when I heard some of the off-the-cuff comments last week, when the Bill was first published, I cannot believe that such a charge can be brought against any of the companies operating on the Continental Shelf.
The 150 per cent. allowance against PRT of which I spoke includes an uplift or supplementary allowance of 50 per cent., but no allowance will be made for interest. There are various reasons for the disallowance of interest. One is the Government's wish to keep the new tax as simple and as clear-cut as possible, and to avoid the complexities that are inevitably introduced if interest is allowable for tax purposes. A further reason is the protection which this technique offers against erosion of the tax base by the making of inappropriate or excessive payments of interest.
This matters more for PRT than for corporation tax, because for corporation tax purposes an overpayment of interest may simply mean a correspondingly larger payment of tax by the recipient of the interest; but because PRT is confined to the profits from oil production there could be no question of a corresponding receipt to set against an overpayment which reduced the PRT base. This is a problem which, in theory, it would be possible to tackle by specific legislation, but it would undoubtedly be a great complication for the companies as well as for the Revenue, and this is something which we are anxious to avoid.
The question has been raised whether 50 per cent. of capital expenditure is an adequate substitute for relief for interest actually paid. I believe that in most cases it will be, but I understand that some companies feel that it will be less than their financing costs. This question is not one which can usefully be discussed in generalities, and if the industry generally, or some companies in particular, would like further consideration to be given to the amount of the uplift, we 468 would have to ask for figures as a basis for consideration.
§ Mr. John Nott (St. Ives)
The right hon. Gentleman knows my interest in this subject. Since the major proportion of the borrowing for the North Sea will be in foreign currency, will he tell the House now the answer to one question? If, for instance, there were to be a shift in the sterling-dollar parity, and therefore the interest charges in sterling terms were to be much greater than is now expected, would the uplift be changed to meet the currency realignments?
§ Mr. Dell
We should consider that situation. The hon. Gentleman must bear in mind that, at any rate in my judgment, subject to anything that the companies wish to present to us by way of their calculations, the capital allowances under the Bill are very generous. Therefore, before I enter into any commitment of that kind I should wish to see the calculations of the oil companies themselves as to the actual value to them of these capital allowances, which I believe are considerable, and against that background it is not appropriate at this point to enter into further commitments.
§ Mr. T. H. H. Skeet (Bedford)
Could I follow that point? The right hon. Gentleman has said that the uplift of 50 per cent. could be lowered in a subsequent Finance Bill. Although it is in lieu of interest, how can this possibly assist the small company in raising finance in the market?
§ Mr. Dell
We have said that the uplift will be 50 per cent. In a moment I shall discuss our view of the stability of these arrangements, but I have made this offer to companies which feel themselves disadvantaged by these arrangements—that, if they come with their evidence, we shall look at it.
We have been asked why we had to have special rules for PRT instead of applying the familiar corporation tax principles to the new tax. The reason is that the new tax is tailored to the special circumstances and needs of one homogeneous industry. In a tax concerned only with one homogeneous industry it is possible to have specific provision about the inclusion of receipts and the allowance of expenditure. Corporation tax on the other hand covers all trades 469 from a sweet shop to a steelworks and it would be totally impracticable to draw up a specific list of allowable expenditure covering such a wide variety of trades.
What the new PRT rules produce is, of course, a computation of profits on generally conventional lines, and there are distinct advantages, when, as in this case, it is practicable, in having rules so that taxpayers know where they stand. There is also merit, since we are having a new tax on Continental Shelf oil profits, in making it clear that it is a tax in its own right and not, in substance, an additional slice of corporation tax.
During the Budget debate, I indicated in reply to the hon. Member for the City of London and Westminster (Mr. Tugendhat) that the Government intended there to be a single flat rate of PRT. It would, of course, follow that there might have to be special provisions for so-called marginal fields which could not hope to pay tax at the single flat-rate level. Some commentators and, I think, some companies criticise the concept of a single rate and would prefer a graduated or variable tax. I do not believe that anyone attracted to this solution should underestimate the problems.
There would, for example, be problems in devising satisfactory criteria, and we might still have to make special provisions for marginal fields. Should the permitted rate of return go up or down as capital expenditure increases relative to profits? One could, of course, decide on a fixed rate of return on capital and then, by means of a variable tax, take from the companies all profits above that level.
One could devise a progressive tax on the profitability of an enterprise. This is a proposal that was in fact made some years ago in relation to Middle Eastern oil production. The argument was that capital expenditure was determined far more by geological factors than by management efficiency, though it was admitted that there had been notable reductions in costs over previous years which would not have taken place if a firm maximum rate of return on investment had been set for the industry.
There is advantage in leaving some incentive to efficiency in the industry, particularly perhaps in the North Sea, where costs per barrel of oil are so much greater than in the Middle East; and 470 there is danger in a system which could have many of the characteristics of a cost-plus system, eliminating or at least reducing incentive to economy. Would it not simply turn the companies into agents of the Government for the purposes of oil production and tax collection with a commission related to the size of their capital expenditure as their reward at the end of the day?
Nevertheless, this is not a question on which the Government have finally made up their minds. We shall certainly listen to what is said during these debates and to representations made to us by the industry. The consultations which we are now having with the industry may reveal insuperable difficulties in a single rate, but I must make it clear that the Government have a strong preference for a single rate of PRT. It will be simpler to operate and it may be another advantage of the levels of capital allowance which we are permitting, that it will make it possible to operate a single rate with results satisfactory to both Government and companies. But I am not dogmatic about this. I look to the debate and to the consultations to determine whether we are right in what I have described as our strong preference.
This leaves us with the problem of the marginal field. In terms of profitability there is likely to be a whole spectrum of fields in the North Sea. Some, even after taxation, will produce very substantial profits. That is the justification for this tax. Other fields will be less profitable. There are possibly some even now that are wholly uncommercial, that is to say, they are not worth private investment whatever the tax position. There may be some fields where PRT at a standard rate would make the difference between a field justifying private investment and not justifying it. Indeed, there may be fields in which even corporation tax alone at its present level might make that difference. These are the marginal fields.
It is no part of the Government's intention to allow their tax proposals to deter development. We need to get as much oil as possible from the North Sea in the next few years, provided it can be justified against the costs of extraction. This is one reason why we have opened up detailed consultations with the oil companies. We have invited the oil companies to 471 let us know the facts about any marginal fields there may be, that is to say, the fields that, in the opinion of the oil companies, would be rendered uncommercial by the application of the provisions of the Bill. We need to know which fields they are, how much production is involved and just how unprofitable they might be. When we have this information we shall be in a better position to see whether any changes are desirable to ensure production from marginal fields, and what forms any concessions might take.
§ Mr. Rost
Would the right hon. Gentleman accept that in addition to there being marginal fields, there are also marginal companies, in the sense that many of the smaller exploration companies, particularly those with outside non-oil interests, raise their finance more on short-term loans, whereas the majors are inclined to raise their finance on long-term loans? Is he taking that into account?
§ Mr. Dell
Yes. I am aware that there are marginal companies, and I am interested to hear the hon. Gentleman inform me that there are marginal companies engaged in the North Sea. But I have made an open offer to the oil industry. If the companies wish to provide information that they think should influence the final form or rate of this tax, I am open to receive it. I think that has been made sufficiently clear.
I now return to the subject of marginal fields rather than marginal companies. Before the House is asked to approve the rate of PRT next spring, the Government will complete their review of the position in the light of their discussions with the oil companies. If the need for special treatment for marginal fields is established, proposals for the necessary legislation will be brought forward at the appropriate time either at the Report stage of the present Bill, if we can, or in subsequent legislation.
In giving this assurance the Government genuinely have an open mind on the question, recognising that there may be a problem here. But it is a problem that can be assessed only when we have further facts from the oil companies. We will not be forced prematurely to a conclusion either as to the need or to the method of meeting it. We must proceed step by step, assessing first the effects of 472 the tax in the light of the information for which we have asked, and then proceeding to select the most appropriate solution.
There are, of course, many techniques available for dealing with this problem. About them I will say simply this: some people may be tempted to blame PRT for preventing the development of fields which are in any case uncommercial and others to use the marginal field problems as a way of securing changes in PRT which would be contrary to wider national interests. We must be very wary of solutions to the marginal field problem which would have the effect either of eroding the overall tax base, even of profitable fields, or of deferring the payment of tax by profitable fields.
There has been some criticism of the fact that the rate of PRT is not included in the Bill but is left for determination in a later Finance Bill. Some criticism has been to the effect that we are rushing ahead too fast in imposing a new tax even before the oil is flowing ashore. Other criticism has been to the effect that we have been too slow in that we have not decided the rate as well as the structure of the tax.
As for the alleged rush, it is clearly desirable that we reduce as rapidly as we can the uncertainty under which the industry has been labouring for some time, in particular, since the previous administration made clear that they accepted the PAC recommendation that they should take action substantially to improve the effective tax yield from operations on the Continental Shelf, and even more since the dramatic increase in oil prices a year ago.
With regard to the delay in announcing the rate of petroleum revenue tax, I believe that no apology is required. In the first place, there would have been some difficulty in announcing a rate of tax before the House had finally agreed the appropriate structure. But the decision as to the rate of PRT will be one of the most important tax decisions made by any Government since the war. The sums of money involved are very large and a modicum of caution is not out of place. It was for this reason that, as I announced during the Budget debate, the Government intended to enter into what is, I believe, a unique consultation where tax matters are concerned.
473 I said that I intended to have further early and detailed discussions with the oil companies about their present and future level of costs, and about the effect of the tax proposals on the future profitability of North Sea operations. As I put it to the companies, the consultation is about the data underlying the decision as to the rate of tax.
This process of consultation has now begun. The success of the consultations, of course, depends on the willingness of the companies to co-operate. But after the meeting I had with them on 19th November I have little doubt that they will do so. I can assure them that the information they supply will be treated as strictly confidential. Only when the process of consultation is completed will the Government decide the rate of tax. So we are not rushing to judgment. I hope, moreover, that it will be possible to make an announcement of our intentions to the House well before the introduction of the 1975 Finance Bill.
While I cannot at this stage say anything about the likely rate of petroleum revenue tax, I can indicate our views on one associated question which is of vital importance to the companies, that is, the duration of a rate once fixed. This is, of course, a matter for Parliament, and no Government can enter into any binding commitments in relation to a matter which is subject to Parliamentary determination. Our policy would, however, be to avoid frequent changes of the rate but to be prepared to review the rate of tax if substantial changes in the situation were to occur. One such change would be a significant shift in oil prices. We should certainly be prepared to look at the impact of the tax if that were to happen. Indeed, I can speak more generally and I assure the House, as I have assured the industry, that if there is a substantial change in the circumstances relating to the extraction of oil on the Continental Shelf, the Government will be ready to review the rate of tax.
I have said nothing about the changes which the Bill makes in the corporation tax treatment of North Sea oil profits. I think that I discussed these in sufficient detail in the Budget debate and there is no need to repeat what I said there. I should, however, before concluding, refer briefly to an article in today's Daily Telegraph by the right hon. Member for 474 Wanstead and Woodford (Mr. Jenkin), which I read with great interest. It was a long attack on the policies of this administration in respect of North Sea oil, ending with the sentence:The Socialists are indeed gambling with our life-blood.That, I remind the House, comes from the spokesman of the party whose Government in August 1971, in the fourth round of licensing, the most damaging episode in our post-war industrial history, did not gamble with the life-blood of our country but gave it away for a pittance. It comes from the spokesman of a party which, two-and-a-half years thereafter, could not make up its mind on how to rectify its own errors, which had made no statement at all before going out of office except to reject the idea of a ring fence, thus permitting more of our life-blood to drain away.
§ Mr. Dell
I know that the right hon. Gentleman says "No, no, no." Unfortunately, the words of the then Financial Secretary to the Treasury are clearly on the record. He was also the spokesman for a Government who at the time they went out of office had not ruled out participation—though we do not hear much about that now—participation for which, no doubt, they would have been prepared to pay, though listening to what the right hon. Gentleman says on that topic, we are fortunate that the financing of the payment is not in his hands.
If the whole idea of participation is, as the right hon. Gentleman now says, so absurd and so costly, why had they not ruled it out when they went out of office? The difference, apparently, is only the difference between a minority and a majority interest.
I shall not ask the right hon. Gentleman for a little uncharacteristic humility on this topic. At any rate, he will understand if we do not regard his criticisms as the best informed we are likely to receive.
Finally, may I invite the House not to underestimate the problems of enacting a structure of taxation appropriate to the exploitation of North Sea oil? The Bill that the Government have presented to the House encapsulates our view as to the right structure but we will listen to 475 criticism. At any rate, we can take one comfort. The decisions, though difficult, about this tax are taken in the comfort of offices, on the green benches of the Chamber, and in the more moderate ease of a Committee room upstairs.
May I end by paying tribute to those who will not be taking part in our deliberations but will be actively engaged in the dangerous business of bringing the oil ashore for us to consume and to tax? Their way of life appears no less risky than visiting the moon, but I suggest that it will bring rather more benefit to mankind, and, more specifically in this case, to the people of Britain. I think that today these men, of different nationalities, should not be forgotten.
§ 4.46 p.m.
§ Mr. Patrick Jenkin (Wanstead and Woodford)
The House will have listened to the Paymaster-General's speech with great interest because much of what he said will have been refreshingly new to the House and to the country outside. He has displayed this afternoon a remarkable flexibility, compared with his attitude only a week ago when he introduced the Bill and gave a Press conference, and with the attitudes prevailing on the benches opposite during the last two or three years. What we heard today was in remarkable contrast to all the heady accusations made by Lord Balogh, and even by the Prime Minister, who apparently spent much of the election period making fun at the expense of the international oil companies.
The right hon. Gentleman was at one point, I thought, donning the mantle of Pooh-Bah when he said that he, as Paymaster-General, had seriously considered a proposal for barrelage tax put forward by a Select Committee under the chairmanship of the right hon. Member for Birkenhead! I am glad that he rejected it, as we rejected it, as I think it would be unduly harsh and difficult to operate.
However, a view persists on the benches opposite—and we had it at Question Time on Monday—that the history of North Sea oil is one of almighty scandal, unrivalled since the South Sea Bubble. It would perhaps be right—particularly as the right hon. Gentleman allowed himself for a few moments to don horns and a tail and appear in his earlier self—to say a word about the matter. The truth 476 is entirely the contrary. This has been one of the most outstanding success stories in the post-war period.
A brief 10 years ago there had not been one cubic foot of gas discovered in the Continental Shelf; there was not one barrel of oil whose existence was even suspected. Today, Britain is virtually self-sufficient in natural gas, and we confidently look forward to self-sufficiency in oil by 1980. From nothing, the oil industry—both the United Kingdom firms and the international industry—has reached the point where it is now investing over £500 million a year or more in United Kingdom waters. If I may say so, I liked the parallel with the railway boom of the 19th century. It has many features in common with that boom.
Moreover, this investment is being carried out in the face of physical conditions—wind speeds, wave heights, ocean depths, distances from the shore—which have absolutely no parallel in the whole history of oil exploration. The industry has had to pioneer new techniques in deep water diving, sub-sea completions, pipe jointing, and so on. The industry has risked huge sums. "Risked" is the right word, for when it started no one knew that anything was there. It costs up to £2 million to drill a dry hole. It costs £30,000 a day to hire a pipe-lay barge.
British Petroleum recently installed—we all marvelled when we saw it on television—two of these vast steel jackets which, in themselves, are miracles of engineering. Their subsequent operations of the piling, fixing the modules on top and the setting up of the equipment to drill the production wells are costing that company £110,000 a day merely to keep the men and equipment there. Allowing for bad weather, the actual operational days have been costing them £400,000 a day.
The North Sea has attracted oil companies and, more important, their scarce equipment and their skills from all over the world. Even now, things may go wrong. We saw in the papers how the French accidentally dropped one of their jackets, destined for the Frigg field, some miles short of its destination. They face the most formidable problems in refloating it and locating it in its intended position. This may put into perspective the achievements of the oil companies based in this country.
477 In the face of this swift development and this astonishing technical expertise, it is simply an insult to the firms and to the Departments under whose aegis they have operated to characterise the whole exercise, as some have done, as a giant swindle or, as did the Minister of State, Lord Balogh, as "the Great Oil Bungle". I recognise that the attacks refer, not to the technical achievements of the companies, but to fears that the industry would be allowed to get away with vast profits—I shall come to that in a moment—and that the people of Britain would have no return from all this activity.
§ Dr. Colin Phipps (Dudley, West)
There is one aspect to which the remarks of Lord Balogh apply. I think the right hon. Gentleman would accept that the previous Conservative administration had to stop transfers in licences taking place at the end of last year because of the bargaining, bartering and outright selling of licences which was taking place by companies which had no pretensions of being bona fide explorers in the North Sea but were merely small outfits, generally foreign, which were given these licences by the Conservative Government and were then selling them on, pocketing the money and going back to Houston.
§ Mr. Jenkin
I have no doubt that when one is dealing with an entirely new industry advancing at an enormous pace, anybody who has the ability to see nits as they come over the horizon can pick out individual points where things may have gone wrong. But to characterise the whole enterprise as a giant oil swindle is to insult all concerned.
Let me put it on the record: no vast profits have been earned; there have been no profits at all yet from oil, because the oil has not begun to flow; only fair and reasonable profits have been earned from gas. No foreign companies have salted away the nation's heritage. On the contrary, they have invested huge sums of their own capital; they have provided vast quantities of sophisticated equipment; they have brought skills and know-how that it would have taken us years and years to develop ourselves.
Nor is it true that foreigners are preponderant. In July the Secretary of State for Energy—no doubt, he, too, with the Foreign Secretary, is attending another place—said in reply to a parliamentary 478 Question that the British share of the proven oil reserves in the North Sea amounted to 50 per cent. of the total. That share will have risen since then as a result of the discovery by BP of the Magnus and Andrew fields.
§ Mr. Jenkin
I am coming to the position of the previous Government. The right hon. Gentleman seems to have gone on perpetuating the myths which he absorbed while Chairman of the Public Accounts Committee and to have taken absolutely no note of anything that has happened since.
Of course, it is true that with the rise in the price of oil since 1970–71 the potential profitability is greatly enhanced. With the benefit of hindsight, one must say that it is just as well that it has risen, because if oil were still available at the 1970–71 price it would be doubtful whether any of the North Sea fields would now be economic. As it is, the United Kingdom is one of the few nations in the world which can confidently look forward to self-sufficiency in oil within a few years.
I hope that the House will feel it right that I have spent a moment or two in reminding ourselves of what an immense amount has been, is being and, pray God, will continue to be achieved—almost the whole of it by private enterprise. Britain's position today, bleak as it undoubtedly is, would be utterly catastrophic if none of this activity had taken place.
I agree with the Paymaster-General that this oil gives no permanent salvation for the British economy. We must still correct the deep and long-standing deficiencies in our performance. Indeed, I see the rôle of oil rather like the place of manna in the book of Exodus. In no sense did it relieve the wandering tribes of Israel from the need to find the promised land and work out their own salvation. What it did was to keep them alive at a critical juncture in their history so that they could continue the search. So, too, with our oil. When it flows in quantity, it will be a vast relief to the 479 balance of payments and a significant boost to the economy. But it is no automatic passport to eternal and effortless prosperity.
However, given that it will relieve our balance of payments and provide opportunities to get our economy right, two things are essential. First, further delays must be kept to the absolute minimum. As I said in the debate on the Queen's Speech, every day's delay in reaching self-sufficiency costs this country £10 million across the balance of payments. Second, there must be no avoidable discouragement put in the way of further exploration and investment. The life of an oilfield may be as little as six or seven years for a small one, perhaps up to 20 years for a large one, and even then with only four or five years at peak production.
If the United Kingdom is to enjoy a period of self-sufficiency lasting more than a mere decade or so, we need a sustained effort in drilling for new discoveries, exploiting the smaller and more marginal fields, and engaging in secondary and tertiary recovery, with the higher operating costs that that implies.
Neither is it true, as Lord Balogh has said, that North Sea investment is investment virtually without risk. There are still huge areas unexplored. Nobody knows the extent of the hydrocarbon deposits, if any exist at all. I note with interest that the Under-Secretary, the hon. Member for Lanarkshire, North (Mr. Smith)—I am glad to see him here today—said at the conference on the environment on Monday that further discoveries would undoubtedly be made and it was hoped that some of these discoveries wouldeventually prove to be of the same order as those finds we have made so far.I hope he is right. But he cannot be certain, as I am sure he will be the first to admit. Adrian Hamilton, who was reporting on that conference, detected some element of whistling in the dark, and in his report he commented thatMr. Smith's remarks came at a time when the Government is known to be becoming increasingly concerned at any possible slow down in the rate of development or exploration off shore.I think that the whole House will have recognised echoes of that concern in the Paymaster-General's speech today. We 480 welcome it. If the Government are at last beginning to realise the risks which their policies may be running, it is not a moment too soon. If Ministers are now aware of the deepening anxieties in the oil industry and in the financial institutions which lie behind them, perhaps that is the beginning of wisdom. But it remains to be seen whether this newfound concern is reflected in the changed attitudes and policies.
I have laid stress on this aspect because it is the background to the Bill. The Bill is only part of the Government's total approach which I do not intend to discuss, or seek again convincing arguments for participation which we have never yet had from any Minister. Neither do I intend to explore the question of non-fiscal controls, even though I am tempted by the astonishing proposition made on Monday by the Secretary of State for Energy, who said:… we can have an effective depletion policy only on the basis of public participation."—[OFFICIAL REPORT, 25th November 1974; Vol. 882, c. 5.]That statement is sheer nonsense. Participation is wholly irrelevant to the proper control of depletion. But those arguments must await the further Bill to be introduced next year. Examination of the Bill shows, as the Paymaster-General said, that all the policies are interdependent, and we must remain constantly aware of the rest of the Government's package.
I turn to the Bill. The Paymaster-General will no doubt recognise where the Opposition have stood and where we stand today, but I want to make the Conservative Party's position crystal clear.
First, we accepted, more than two years ago, well before the Select Committee's report, the need for additional and effective taxation of profits from the Continental Shelf. I say that advisedly. I was a Minister at the Treasury at the time, and I have since taken the trouble to remind myself of what we were engaged on then.
In his Budget Statement on 6th March 1973, Anthony Barber made that position abundantly clear when he said thatprofits from North Sea Oil will probably not arise until 1975, but I can assure the House that the Government already had under consideration the other important questions affecting licensing terms and the Government's 481 'take' from operations on the United Kingdom Continental Shelf to which the PAC has drawn attention"—[OFFICIAL REPORT, 6th March 1973; Vol. 852, c. 264–5.]The argument that the previous Government were heedless of the need for a higher "take" until the quadrupling of oil prices forced it to their attention is without foundation. I hope that we shall hear no more of it.
§ The Minister of State, Treasury (Mr. Robert Sheldon)
The right hon. Gentleman will.
§ Mr. Jenkin
If the hon. Gentleman is determined to conduct this debate on the basis of myths, we shall not arrive at the kind of truth that the Paymaster-General was seeking, nor will the hon. Gentleman get the kind of response that he seeks from the oil companies. I advise him to pay attention to what has been said and not go on wallowing in the propaganda of Transport House.
§ Mr. Sheldon
Does the right hon. Gentleman consider that the conclusions reached by the Public Accounts Committee, an all-party Committee attended by many Members of his own side, belong to the realms of propaganda, too?
§ Mr. Jenkin
That Public Accounts Committee made two recommendations. Surely the hon. Gentleman knows what they are. One recommendation was substantially to improve the yield. That aspect was under study, and was reinforced by what my right hon. Friend the then Chancellor said in March 1973. The second recommendation was to look at the question of the artificial losses, a suggestion that we had under consideration. My right hon. Friend Mr. Anthony Barber accepted it within days of the issue of the Public Accounts Committee report.
Those were the only recommendations made by that Committee. Both dealt with matters that the Conservative Government had firmly under review. I say that advisedly. I was Chief Secretary to the Treasury at the time. To go on pretending that nothing was happening until the right hon. Gentleman produced what, I agree, is a good and well-constructed report is to wallow in myth. I hope that the Minister of State will not do that.
§ Mr. Dell
There is no need to pretend that the Conservative Government did not have these matters under consideration. If I may speak from memory, and without authority, if the PAC had found out that the Tory Government did not have those matters under consideration, that would have been a further subject of criticism. The main burden of the Public Accounts Committee's report was the utter incompetence shown by the Conservative administration during the fourth round of licensing.
§ Mr. Jenkin
With respect to the right hon. Gentleman, the whole of the superstructure of myth that has been built round that statement rested on the proposition that the oil companies were going to get away with murder, until the right hon. Gentleman came into office. That is wholly untrue, and I hope that both sides of the House will accept that.
Thirdly, we had certainly not ruled out the concept of the ring fence for corporation tax purposes. Whatever may have been said by my hon. Friend the Member for Worthing (Mr. Higgins) during the Public Accounts Committee debate—and here again I speak from personal knowledge—as recently as February, this year during the last weeks of the Conservative administration, Mr. Tom Boardman, my successor as Chief Secretary to the Treasury, and Mr. Barber, the then Chancellor, were discussing exactly how a ring fence might properly be set up.
My hon. Friend the Member for Worthing (Mr. Higgins) said this in a debate on a report from the Public Accounts Committee:it will be difficult to deny to the oil companies normal reliefs which are available to groups of companies".—[OFFICIAL REPORT, 3rd December 1973; Vol. 856, c. 1029.]But no decision had been reached.
If the Paymaster-General persists in taking that—the tail end of a long Public Accounts Committee debate—as an important statement of policy on tax, he is deluding himself. It is certainly not the Opposition's intention to challenge the main concept of the ring fence during debates on this Bill, although we shall wish to examine the details with great care.
Fourthly, we do not challenge the need to deal with artificial transfer prices. 483 Originally, we thought that the concept of an administered price might be one way of dealing with it, but the Opposition are certainly prepared to consider the extension of Section 485 of the Income and Corporation Taxes Act.
I repeat that if debates on the Bill are to proceed sensibly and rationally all parties should start by recognising the extent of the common approach which exists now and which has existed on this important matter for a number of years.
For this reason, it is not my intention to advise my right hon. and hon. Friends to divide the House tonight. This is the Second Reading. We accept the principle of additional taxation and, if properly levied and accompanied by proper regulatory controls, it renders nationalisation, the BNOC and all the other Socialist nonsense totally unnecessary.
However, there the kissing has to stop. I entertain the gravest doubts if, in the PRT, the Government have chosen the right instrument to achieve their purpose. The central features of the PRT are, first, the flat-rate tax somewhat qualified by what the Paymaster-General said this afternoon, and we welcome his more open mind. I think that a flat-rate tax would be wholly unsuited to the infinitely variable circumstances of the Continental Shelf, but I shall return to that point in a moment. It draws no distinction between the high-cost, low-profit marginal field, and the low-cost, high-profit prolific field. If it leaves a reasonable profit from the high profit field it simply makes the marginal field uneconomic, and vice versa.
The second feature is that the PRT is to be a prior charge—that is to say, before corporation tax. So it could be paid by a concern even if it had no profit on its offshore operations—that is, profit as normally computed for corporation tax purposes.
Thirdly, the PRT would be levied field by field and so paid by a company with revenue from field "A" with no regard for the need for a cash flow to finance investments in field "B" and to explore for oil in fields "C", "D" and "E". There may well be a case for separate computation, field by field, but it is far from clear that it is right to treat each field as a separate taxable entity.
484 Fourthly, by departing from the normal corporation tax expense rule, the Government will levy tax on profits without allowing for the costs necessarily incurred in earning those profits. The proposal to disallow interest on finance raised for investment, as it stands at present, spells ruin for many of the smaller companies which depend heavily on outside finance.
Again, the Paymaster-General indicated that he has a less than closed mind on this, which we welcome, but it is not a question of increasing the uplift. That will be no solution to companies which have incurred interest over a long period—possibly seven or eight years—before they earn a profit. There is no alternative to allowing at least an option for interest payments to be allowed in place of the 50 per cent. uplift. As provisions stand in the Bill, they operate entirely capriciously between different companies with different financial arrangements.
Then there is the question of the rate. The right hon. Gentleman went to great lengths to explain why he will not tell us now—we are grateful for the consultation—but, in an article in The Guardian this was described aseven less than Hamlet without the Prince. It is Hamlet without Gertrude as well. …People simply cannot do their sums until the rate is known and the uncertainty caused by the absence of the rate is one of the major reasons for the hesitation and anxieties now so apparent. However, it appears that the Government do have some idea about the rate.
What did the Sunday Times mean by saying:The Treasury is coyly circulating worked examples based on rates of 45 per cent. and 65 per cent. This produces a Government take of 75 per cent. to 80 per cent. of oil revenue, but based on highly favourable assumptions.We are entitled to know a little more about those figures. Perhaps the Paymaster-General will not be altogether surprised that one or two of my hon. Friends and I have been able to get hold of the figures that the Treasury has prepared. The assumptions are highly questionable; for instance, the figures assume that the oilfield has a 20-year life, but that is to say it is a major and very exceptional field.
The figures do not take into account the fact that the Bill disallows interest 485 but simply takes costs as they stand. They include all the onshore expenditure, much of it expressly disallowed in the Bill. The figures assume the 50 per cent. uplift on all expenditure. As the right hon. Gentleman knows, the Bill specifically restricts the uplift to only certain expenditure.
The most questionable of all the figures assumes that the price of oil and the cost of development will move in parallel with the rate of inflation. Offshore costs have doubled in the past two years and oil prices might well fall.
All I would say about the right hon. Gentleman's figures at this stage is that if he is going to base his ideas of PRT rate on those figures, he is quite right to be coy about them. But they show a disastrous failure to understand the complexities of the oil industry, which is perhaps more serious.
Regarding the basic flaws in the Bill as drafted—the flat-rate, field-by-field prior charge—this is, quite shortly, the wrong structure. It is a structure which forces one to conclude that the Government place a higher priority on securing revenue for the Exchequer than on securing oil for the country. But it is not as simple as that, as there is more than a risk that if the Exchequer is too greedy for cash, it will end up by getting neither the oil nor the money.
I was glad to hear what the right hon. Gentleman said about the question of balance. This is vital, but the Bill as it stands does not have the right balance. If it is unamended, it will put dangerously at risk the future of our oil supplies. I repeat, the central reason is that the flat-rate prior charge tax will make the marginal fields uneconomic.
This is no empty threat. I beg the Government to believe what work is already slowing down on fields hitherto regarded as commercial. If I am asked which fields, I will tell the Government, "Go and talk to the companies that are involved in the Hutton and Heather fields and see what they have to say". Companies cannot be expected to invest if they do not see an adequate return at the end of the day. For pity's sake do not let us have a repetition of what the Chancellor of the Exchequer did with the whole company sector in the earlier part of this year—swingeing tax increases 486 in March that only had to be cancelled out by tax reductions in November as liquidity crashed.
For oil, the consequences would be infinitely more serious. The delays would be enormously costly to the balance of payments, and the withdrawal of rigs and other equipment would be virtually irreversible. Exploration, appraisal, delineation, production platforms, pipelines—there is a rhythym and momentum in the development of these oilfields that is vital if it is to be carried through successfully. The huge variations in the size of reserves of different fields, in the nature of the geological structures, the distance of the fields from land and the distances from other fields—all these lead to huge differences in costs and, therefore, of profitability.
For instance, the range of capital costs necessary to bring ashore a barrel a day ranges from about £750 at the low end to getting near to £3,000 for every barrel-a-day production. That is a factor of between four and five times in differences in the capital cost and, of course, with even larger differences in profitability.
A flat-rate prior charge tax is the wrong weapon. Instead a variable excess profits tax should have been introduced. Such a tax would be levied on excess profits above a given standard. It could be levied at progressive rates as profits exceed the standard. One standard by which to set thresholds, obviously a difficulty referred to by the right hon. Gentleman, might well be a given return on the firm's investment in the field. Profits in excess of that would trigger off the next slice and so on up the scale. Or it could be triggered off by the return on investiment by all the firms engaged in a particular field.
§ Mr. Russell Kerr (Feltham and Heston)
Allowing that many of the companies engaged in the exploration and development of these fields are multinational corporations, is not the hon. Gentleman being a little optimistic in suggesting that the tax-gatherer will be able to get his hands on the profits which they are making?
§ Mr. Jenkin
There is absolutely no reason why the Government cannot set up the machinery with this tax, and nothing we would seek to do would 487 weaken that machinery because if taxation is to be the principal weapon it must be effective. But there is no reason why it should kill off the oilfields, and that is what I am afraid of.
As the Economist said in an article last week:A variable rate would allow the Government to cream off the fat profits from the low-cost prolific fields without penalising the development of the marginal fields. A flat rate usually accomplishes neither of these aims. Fat profits are made on the prolific fields and the poorer fields go undeveloped.A variable tax, if properly devised, would be a far more flexible weapon. It would be a much more equitable tax and might well in the end raise more revenue. There are two grounds for believing that. It would ensure a proper take from the high-profit low-cost fields, higher than could be achieved with a flat-rate tax. It would ensure that the more marginal fields, as they were discovered, would be brought into production and the Government would get some revenue from them.
The Government have shown themselves today not to have a completely closed mind on these matters. That is a welcome change. I urge Ministers, whatever their preferences, not to be stiff-necked about this. It is only eight or nine weeks since the consultation on the details of the tax started in earnest with the letter from the Inland Revenue, and only 15 days since the Bill was published, giving the industry the details of the tax. The structure of the tax is one of the three or four key components in a policy which will determine not only the success or failure of the oilfields but the success or failure of the Government's entire economic strategy.
There are many features of the Bill which we shall want to discuss in Committee, in addition to questions of basic structure. We shall press for loan interest to be deductible. We shall press for disposals and purchase of oil interests to be included. We shall seek to preserve the hallowed principle of the confidentiality of the affairs of the individual taxpayer. We shall seek to ensure that the smaller British independent companies, such as Berry Wiggins (Sea Search) Ltd., Cluff Oil Ltd., Phipps Oil Ltd.—I am glad to see the hon. Member for Dudley, West (Dr. Phipps) is in his place—Tricentrol 488 North Sea Ltd., will not be driven to the wall, but can make a proper contribution, indeed, thrive and prosper, as part of the nation's energy industries.
We shall not be a factious or destructive Opposition but I warn the Government that I do not see how we can possibly complete the Committee stage before Christmas. It is not that we cannot sit long enough, but that the industry does not have long enough to consider the whole affair and consult with the Government so that the Government may bring forward the necessary amendments. It is far too important a matter to rush through in a matter of weeks.
If the Government, despite representations, remain stiff-necked and adamant in the face of convincing evidence that a tax in this form and with these features, at any likely rate that could be imposed, would cause severe damage to the national interest, then we shall have no alternative but to press our opposition to the limit. I hope it will not come to that, for there is much common ground. But if it does, that is where our duty will lie.
§ 5.19 p.m.
§ Mr. David Steel (Roxburgh, Selkirk and Peebles)
The right hon. Member for Wanstead and Woodford (Mr. Jenkins) will forgive me if I say that he wasted an unconscionable part of his speech in trying to go back over the history of the previous Government, what they did or did not do, and what various people said they had or had not done. If we are to concentrate our minds on the maximum benefit which may be derived for this country, from now on we ought to get on to discussing the future and forget about the past.
My colleagues and myself have consistently, from the beginning, taken the view that successive Governments have not been as alert as they should have been in their forward planning, both in the general development of oil and in the public benefits that could be obtained from a financial point of view. Indeed, the Paymaster-General will accept that the Public Accounts Committee went back not only over the period of the Conservative Government but over the period of the previous Labour Government as well. Therefore, I think it best that we let all that go to one side and set about now in Parliament to try to get the policy 489 which will put right the neglect of the past. My colleagues and 1 welcome this measure and we shall support it, although, naturally, we have questions to raise.
In bringing forward an Oil Taxation Bill it is extremely important that we reaffirm in Parliament, and, perhaps more important, reaffirm outside Parliament, that revenue from the North Sea and, indeed, the development of the resource itself, will not, as the two Front Bench speakers have said, be the salvation of this country. I wish that we could maintain that stance in all political walks of life outside the House as well. I believe that the Chancellor of the Exchequer, in the heady days of February, was guilty of giving the impression that if only somehow we could muddle through until about 1980, everything in the garden would be lovely. Of course it is not true, and the fact is that, through our overseas borrowing, we have mortgaged our future and mortgaged the benefits which we shall derive from North Sea oil to such an extent that I do not think anyone can argue the case that oil will be the solution to all our ills.
What I say in a United Kingdom context I say in a Scottish context as well, and I think that hon. Gentlemen in the Scottish National Party are guilty of the projection to the public of the view that somehow there is a magic solution lying under the North Sea. I think that all we can do is to accept that this find and its development will give this country a breathing space and thereby enable us to get out of our industrial and economic problems. If we make use of it, well and good. But if we do not, we shall be no better off at the end than we were at the beginning.
I believe it right that we should take account of the obvious difficulties outside the control of the Government in the international pricing of oil. Just as a year ago the price of oil went up artificially for political reasons, so, equally, the price of oil could come down artificially for political reasons, or, if not come down, at least remain stable, which in the nature of inflation comes to the same thing. Therefore, with the rising cost of development, I think we need to be acutely aware of the danger of working out sums on paper about the possible 490 benefits to this country in the present situation when we do not know what the situation may be in a year's time.
§ Mr. Russell Kerr
I agree with the general tenor of the hon. Gentleman's remarks that we ought not to regard this as an Eldorado just around the corner. But, equally, is he aware that it has recently been estimated that the present level of manufacturing profits in this country over the past couple of years will probably be more than matched by the net profits of North Sea oil beyond 1980?
§ Mr. Steel
Yes. The hon. Gentleman is adding to the line of argument that I am adducing.
I agree, however, with the case made from the Opposition Front Bench against the inflexibility of the Bill and, indeed, I thought it rather extraordinary that the Paymaster-General appeared, even before the Bill has had its Second Reading, to concede that point. If the Bill were as flexible as his speech, we might be a good deal happier, but the proposal in the Bill for a flat rate of tax is not realistic. I think that the geographical, geological, financial and technical conditions facing operators in, say, the Forties Field or the Argyll Field make a nonsense of the fiat-rate tax.
In his speech this afternoon the Paymaster-General said more or less, "Never mind what it says in the Bill. We shall introduce a whole series of exceptions and a marginal tax". In other words, before we have even got the Bill on the statute book the Government are considering ways of minimising the basic damage done here. I suggest that it would be far more constructive to consider whether the approach is right in the first place. I am advised that one small operator sold out in the Argyll Field to a larger operator because of the restrictive financial policies being pursued by the Government. We would far rather see in the Bill a sliding scale—admittedly it would be difficult to work out—with rates which could range as widely as from 20 per cent. to 80 per cent. I believe that both Norway and Canada have had experience of scales of that kind.
In giving a general welcome to the Bill, may I say that the policies adopted 491 over the past few years which were scrutinised by the Public Accounts Committee of which the Paymaster-General was Chairman when it reported, have served to illustrate the appalling ignorance that has existed in Government circles about all the matters relating to the oil industry. It has become obvious that the Government have been far too dependent on the oil companies for information in the past few years and they have been unable to take in all the data that have been provided.
We have all argued all along that the Government would have been in a better position to influence events in the North Sea—the rate of development; the scale of development; the places of development on shore, and so on—if they had recruited a small team of world-class oil experts modelled on, say, the Alberta experience and the conservation division there.
In our view, it would be much more sensible to spend, say, £1 million on recruiting a couple of dozen top quality international experts and giving them all the facilities they need than to proceed with the proposal for setting up a cumbersome international oil corporation at unknown expense.
The Liberal Party has never been doctrinaire on the question of public ownership. We have always accepted that in the matter of oil there could well be a case for participation. The case has to be made out on pragmatic grounds, and I do not think that it has been. We believe that the combination of a properly qualified staff, imaginative development legislation and a flexible tax policy, properly combined, is the right way to harvest the benefits from the North Sea for our people.
§ Dr. Phipps
I endorse the hon. Gentleman's remarks about the nature of the staff available to the Government. Will he accept that there is a distinct difference between the duties of such staff advising the Ministry and those advising a company with a direct working participation in oilfields? They are in a position to know more about the actual workings and are not there to give the kind of advice to Governments that a specific Government Department requires. There is a place for both, and the Government have tried to develop their oil policies in that 492 direction. Will the hon. Gentleman accept my endorsement?
§ Mr. Steel
I accept that reservation, except to say that if, right at the beginning, the Government had set out to recruit unashamedly from the oil companies and others in this field, they would have been better advised. But I am going back over history again, which I said we should not do.
The present Government's approach will not strike the correct balance between the commercial interests of the oil companies and the national interest. We have to remember, when looking at the rigorous taxation that might be imposed on multinational companies, that we also have our own British multinational companies exploring in Alaska and elsewhere, and other people will be looking at the sort of taxation we levy on their companies. One of the companies in which the Government have a direct interest is British Petroleum.
I regard this part of the Government's policy as basically correct. I hope that it will be improved during the Bill's passage through the House, but we still have doubts about the wisdom and effectiveness of the total package of Government policies, of which this is an important part.
§ 5.29 p.m.
§ Dr. Colin Phipps (Dudley, West)
I am grateful, Mr. Deputy Speaker, for having caught your eye. The competition on this side of the Chamber has not been particularly strong today.
I should begin by announcing interests of my own. They have already been referred to by the right hon. Member for Wanstead and Woodford (Mr. Jenkin). I do not know whether he was correct in referring to Phipps Oil or the hon. Member for Dudley, West's Oil. I am a director of two companies involved directly in the North Sea, and a director of a third, a consultant company, advising companies involved in the North Sea.
I wish to refer to the effect of the Bill as drafted not only upon the international companies but upon some of the smaller, indepedent companies that have been developed in Britain during the past few years.
493 I welcome the principle of the Bill, but I should like to examine it in the light of certain objectives which I believe the Government have, and in the light of the effect that the Bill is likely to have upon these objectives.
I would name these objectives as, first, encouraging the most rapid development and exploitation of our resources; secondly, assuring a proper United Kingdom participation, both in terms of national participation and fiscal participation; thirdly, encouraging the continued presence of the international oil industry; and fourthly, further to encourage the development of an independent British—not merely Scottish—oil industry within the United Kingdom. To some extent, these four objectives are incompatible with certain elements of the Bill, and it is to that that I should like to address myself.
I had thought that I fully understood the principle objectives of the Bill when I listened to my right hon. Friend during the Budget debate. I then made the gross error of getting a copy of the document, and I confess that beyond about page 5, when I got to the fifth schedule five times removed from Clause 1, understanding left me. Therefore, I have referred to an excellent document put out by the Inland Revenue on the Bill, but I may thus be misinterpreting some of my right hon. Friend's points because I have not understood the complexities of the Bill as thoroughly as I might have done if I had studied it in its full form.
First, I should like to deal with the question of one field, taking the taxation on a field-by-field basis, because I believe that this has a direct relevance to one particularly contentious point, which is the disallowance of interest. If one considers the taxation in terms of one field, one realises that it is difficult not to make the assumption that the capital invested in that field is in its nature loan capital. It does not matter whether it is a wholly-owned field of a larger corporation. It is the fact that one is considering one field that is part of a much larger complex. It means that, in terms of the company that owns that field, one is looking at what is, in essence, a loan situation.
There are a number of difficulties inherent in the disallowance of loan interest. 494 The companies that are seeking to develop a field must, by and large, borrow virtually 100 per cent. of the moneys that they require for field development. Therefore, they have to approach various financial institutions—in particular, the banks—to obtain sufficient capital to finance the development of their fields. The financial institutions, very properly, will want to have some form of security if they are to make such a loan.
I accept that the fact that we do not know the rate of the tax complicates this matter, but, even if the rate were known, we are in a situation in which a bank or financial institution lending money does not know for certain that a company will have enough cash left over after paying the PRT to have an adequate profit to finance its on-going purposes.
It is a high-risk development. Banks are aware of the fact that if they put their money into developments of this kind it is at high risk. They are, therefore, likely to ask more than standard rates of interest, but even if it were 12½ per cent—and let us assume that that is the rate of interest levied—a company that was benefiting from a 50 per cent. uplift could, in effect, be saying that it was in the position of being able to offset that interest for a period of four years, for four years at 12½ per cent. would add up to 50 per cent.
The point which will concern the companies and the lending institutions is what happens to the interest after the fourth year. As I understand my right hon. Friend's statement—and I hope he will correct me now if I am wrong—this interest will be allowable against corporation tax. I gather that my right hon. Friend agrees and that we shall have the situation where the interest will be allowable against corporation tax. After the fourth year companies will effectively not be able to allow interest against the PRT. I think the banks will view such a situation with considerable nervousness because they will be in the position of not knowing what final cash flow will be available to cover their interest payments. There is a strong case for considering putting interest as an allowable item prior to PRT.
I think I understand my right hon. Friend's reluctance to do this, particularly 495 when it may be concerned with an inter-company transaction where the rate might be at 17 per cent. or some such high level. Nevertheless, I would have thought that that was controllable, and my personal preference would be to see the interest allowable and controlled prior to the tax being levied.
I turn now to consider the offsetting of allowable exploration expenses. It is not clear either in the Bill or in the Inland Revenue document what these would comprise. Do they comprise expenses incurred within the whole of the ring fence of the United Kingdom, or merely exploration expenses incurred in the discovery of a specific field?
I can assure my right hon. Friend that it will be extremely difficult to distinguish between exploration expenses incurred in discovering a particular field and those incurred within the whole of the United Kingdom. It might be possible to distinguish as between the Celtic Sea and the North Sea. But within the North Sea that is not possible because all the information gathered there from exploration activities, whether geophysical or drilling information, is part and parcel of the data available in determining where oil accumulations are likely to lie and in selecting drilling points.
It will be unreasonable to restrict offsetting abortive exploration expenses within the ring fence so that they are allowable only if they are directly related to the accumulation which is being exploited and developed. This will involve considerable problems of definition. Perhaps I have misunderstood this aspect of the Bill, but it is not clear whether all abortive exploration expenses within the ring fence will be allowable. I believe they should be.
§ Dr. Phipps
I am grateful to my right hon. Friend for that explanation. It was a point I had not fully understood in the Bill.
The question of the ring fence has different implications for multi-national companies than it has for the small British 496 independent companies attempting to establish themselves in the industry. I read the report of the Public Accounts Committee with great interest and I thought that the conclusions that my right hon. Friend and his colleagues came to were fully justified in terms of multi-national oil companies operating internationally. But I would suggest that this kind of special transfer pricing and other such expedients which have been used by the multi-national oil companies are no different from expedients used by any multi-national companies.
This is not specifically an oil problem, although it has specific oil applications particularly because of such things as offset prices. It applies to multinational companies in general. By tackling the problems of oil companies specifically we shall be inhibiting the small independent British oil companies, the kind of companies with which I am involved.
Perhaps I may develop a little the philosophy of oil exploration, and in so doing illustrate what I mean. Oil exploration, in spite of the extremely highly developed technological methods now available, still has a quite definite success ratio. That ratio varies internationally from about 1 in 6 to about 1 in 10, and it is the aim of all multinational oil companies to try to cover this difference as much they they can.
There is something of an assumption on both sides of the House that all the oil companies in the North Sea have to do is drill a hole and find an oilfield. It is felt that the difficulty then arises in finding money to develop it. The problem, in fact, is finding an oilfield to start with. Many companies drilling in the North Sea will never find oil. The international industry is well aware of this and so it tries to cover the difference, and if the odds are 6 to 1 against or 10 to 1 against they need six, 10 or preferably more opportunities, not only in different geological environments but in different political and tax environments.
It is not enough for the small British independent company which enters the oil business to have an interest in just a couple of blocks in the North Sea. That would be putting all its eggs in one basket. If there is to be a genuine British oil industry it has to try to operate 497 as closely as possible the way the international industry operates. This means that small British companies must obtain a spread of interest, preferably international. Admittedly, they cannot do it on the scale on which the major companies can do it, but they can do it on a smaller scale with, say, a 5 or 10 per cent. interest in an exploration.
Many of the smaller British independent oil companies have recognised this fact, generally by taking a small partnership in an exploration acreage. They are trying to get the kind of spread which they hope will produce for them the same success ratio as that enjoyed by the international oil industry in general. If there is a ring fence around the North Sea it becomes extremely difficult for a small British oil company to spend exploration moneys overseas if those moneys cannot be offset against income which is produced in this country.
One can see the case for the multinationals having to comply, but the multinationals by and large are vertically integrated companies. They have other operations in this country such as refining, petro-chemicals and marketing against which they can offset losses. By and large they have the same opportunities in other countries. But the small British oil companies, which are largely involved in exploration, do not have these opportunities.
I am not trying to suggest to my right hon. Friend ways and means of dealing with this problem, although I have some ideas. However, he said that he had offered to meet all sections of the industry. There is now an association representing the smaller British oil companies. To my knowledge, my right hon. Friend has not met them, and I should be grateful to him if he would do so, because a ring fence operating in this way would severely affect the development of the independent British oil industry.
During his speech on the Budget debate my right hon. Friend said that he would be prepared to let us know what the amount of tax would be prior to the date of the Budget in April 1975. If companies are to proceed with development and get loan capital it is vitally important at the earliest possible stage for them to know the amount of the tax. They need to know it to enable them to work 498 out cash flow requirements, borrowing requirements and interest rates. I appreciate my right hon. Friend's difficulty and I would not have urged him to announce the rate prior to today's debate, but I ask him to do so as soon as possible after it. The amount of the tax is more important than the principle of the tax. The amount of tax is the factor which will determine the willingness of the international oil companies to remain operating in Great Britain.
In looking at different tax situations in different countries one tends to look at the amount of tax levied rather than at the final risk/reward ratio and the final return on capital to the companies. That is made difficult by the system of posted prices and other complexities. Fundamentally, a company decides in which country it will or will not make its exploration investment on the basis of the marginal return after tax, expressed generally in dollars per barrel, that it will receive. The basis on which most companies decide is the amount expressed in dollars per barrel that will accrue to them after they have done their development, and the amount of tax payable in this country will determine that. That is why most companies are now going back to the United States.
§ Mr. Dell
My hon. Friend has considerable experience of these matters and I intervene merely to ask a question. He said that what will determine whether oil companies remain in this country is the return in dollars per barrel. Presumably, companies will not ignore the cost of producing the barrel, which is a very variable factor between the North Sea and the Middle East. What weight would companies give to dollars per barrel compared with return on capital?
§ Dr. Phipps
The cost of producing the oil would be included in any calculation. I was speaking in terms of the net post-tax total cost figures. I do not suggest that that simple yardstick will always be used, but we have to accept that, for most international oil companies, finding oil is a bind. Their principal business is refining it, turning it into petro-chemical products and selling it. That is the principal distinction between the independent British companies I have been discussing and the international majors.
499 International majors are more concerned to get a source of oil. If they have that source of oil, it is the marginal profit at the top which will determine where they go to explore. I am well aware that it is cheaper to do so in the Middle East, but Middle East tax rates and other aspects are such that it is the margin of profit at the top that will determine where they go.
Perhaps I should not have spoken in simple terms of dollars per barrel. Let us put it as a percentage return on the capital invested. That is what determines where they go. That is why in the United States there is an oil exploration boom. There is no PRT in the United States, but I should not like to guess how long it will be before there is. I do not believe that the United States Government will allow the kind of profits that are currently being earned to continue.
I conclude by reiterating the importance to the British economy and the Government of a healthy independent British oil industry. I believe that that can be achieved alongside a British national oil company. For many years I have been a proponent of a British national oil company. I want to see both a Government and an independent participation industry developed here. I suggest to my right hon. Friend that at an early opportunity he should meet the companies which are attempting to build such an industry so that those aspects of the Bill which currently mitigate against its development can be ironed out.
§ 5.52 p.m.
§ Mr. John Hannam (Exeter)
The hon. Member for Dudley, West (Dr. Phipps), in an excellent speech, displayed his knowledge and understanding of the oil industry. He was the second speaker to express confusion at the complexity of the Bill. Perhaps that is why the benches around him are empty.
The debate is proving to be a searching examination of a potentially damaging piece of legislation, not in the sense of the principle of extending oil revenue taxation, but in the method chosen and the complexities of the proposed petroleum revenue tax and the field by field basis. However, I welcome the conciliatory approach of the Paymaster- 500 General. He says that he has kept an open mind on the tax and I hope that in Committee he will accept the need for substantial changes in it.
We are all extremely concerned at the economic crisis facing the country and the whole of the Western world. There is grave danger of a world-wide recession in trade which would mean a difficult period ahead for our exports. Our home industry has been clobbered so hard by the Government that confidence and profits have dropped to an all-time low. Even the Chancellor of the Exchequer recognised that and made the biggest "U" turn ever. He has not done enough to save us from slumpflation over the coming year and possibly for a longer period. Therefore, we look to the productive capacity of our economy to produce as competitively as possible those products and goods which can be sold here and abroad to reduce our balance of payments deficit. Gas, coal and oil are obviously three such products.
Coal is in world-wide demand, yet despite massive pay increases since 1972, production is not reaching basic targets and we face grave shortages at home, let alone having coal available to export. Even the Central Electricity Generating Board is having to generate electricity uneconomically by oil-fired stations because of the shortage of coal.
However, we have oil—at least, we hope to have oil and should have it—in increasing quantities. It is represented as our nation's lifebelt, although whether by the time the lifebelt is thrown to the drowning Britannia it will prove to have been rotted away by over-taxation and State interference is part and parcel of what we are discussing today. The priority for Britain must be to attain maximum exploration now and to have controlled exploitation of the oil reserves in future.
Since 1964, when the first wells were drilled in the North Sea, a remarkable success story is evident. The physical conditions in the North Sea and the scale and cost of the equipment required make exploration and production operations very expensive. Nearly 700 appraisal and production wells have been drilled in the North Sea since 1964, each exploration well costing about £500,000 in the southern sector and over £1 million in the deeper water in the north. Winter 501 drilling in the northern North Sea can cost between £2 million and £3 million a well.
The next phase will take the search into exposed waters of still greater depth and turbulence, for which a new generation of equipment is taking shape. Exploration expenditures will be dwarfed by the huge investment that will be required for fields found in these northern waters. These fields must be large enough to justify investment in pipelines at nearly £1 million a mile and costly offshore production facilities to bring the oil ashore. This kind of work has never previously been carried out at such depths anywhere in the world. The cost of developing under-sea fields in the North Sea will thus be measured in hundreds of millions of pounds for each field.
One of the many significant factors influencing the prospective return on such huge investments, is the very considerable "lead-in" time. The large production platforms may take up to three years from the decision to build to actual completion, and the development of a reasonable-size field could take between four and six years from drilling the first discovery well to bringing the oil ashore. For these reasons, the investment in productive capacity could be 10 times as much as would be required to produce the same amount in the Middle East. Operating costs will also be proportionately higher.
The financial implications are formidable. Even for the successful companies it will take several years to generate a cash flow sufficient to recover the very substantial initial high risk investments on exploration and production. To find the necessary capital, not only for the North Sea but for many other similar ventures around the world, the oil industry must maintain its profitability and will look for taxation policies by Governments that provide real incentives for the search to be pressed forward and investment levels to be maintained.
Of course, British involvement in these high-risk, deep-water technologies has been that of gradual progress in learning the skills of underwater drilling and assembly, oil-rig manufacture and servicing. We are now getting somewhere, although there are still many problems to overcome—rig construction sites, shortages of materials, labour difficulties and 502 shortages of labour. Nevertheless, a massive investment by the international oil industry has resulted in this lifeline being thrown to the hard-pressed British economy. We can now look forward to self-sufficiency by 1980, or even surplus and substantial benefits to our balance of payments, but only if the full potential of the North Sea and other areas of our shelf can be developed.
The oil crisis last October has meant a major reappraisal of taxation policies, licensing and conservation measures. As far as conservation of energy goes, I regret very much the total inactivity of the present Government during the crucial summer period when many steps could have been taken to conserve fuel in this country.
However, the election is over, the pregnancy is nearly at an end and the Government's conservation baby is about to be born. I hope it is a more prepossessing child than the one we have before us today. We all wanted to see some kind of oil taxation change, but the PRT looks less attractive the closer we get to it.
No one really disputes the need for extra oil taxation. The oil companies themselves acknowledged that a year ago when the Conservative Government were drawing up plans to place ring fence around the North Sea and to tax excess profits which would accrue when the oil begins to flow next year. It was considered essential to raise taxation only to a level which would still leave a reasonable discounted cash flow for the oil companies of around, say, 25 per cent.
So I do not oppose the principle of extra oil taxation. Yet what a complicated nonsense the Government made of it. Instead of a graduated-rate excess corporation tax on the windfall profits fitting neatly on to our existing corporation tax structure, we have this complicated tax, with no rate established yet, strict and penal restrictions on secondary field "sideways" costs, and limitations on deductibility of interest.
The effect upon our smaller marginal companies, which are those with just the oil wells we shall want to see developed if we are to attain the production levels we need, will be to drive them out of business. The effect on the larger companies will be to make them reconsider their future plans for secondary explora- 503 tion and development. American operators have already begun to reverse original exploration plans. They believe that there has been fundamental dishonesty on the part of the British Government in changing the rules so drastically halfway through the contract. They have had 12 months waiting for details of the Government's intention to be made clear. Now, very great concern is being expressed, not at increased taxation, but at participation threats, uncertainty over the rate of tax and the disallowance in the Bill of the real costs and interest incurred in genuine oil developments in our North Sea.
The Govenment's only reply to these charges is that other countries in the Middle East and Norway are doing it. Norway, with its 4½ million inhabitants and its need for conservation rather than exploitation, is a special case. The Middle East is an area of ridiculously low-cost established oil production. In any event, it is not the answer to beat your own child just because the bully down the road has been beating his. I suggest that the answer is to go and stop the other chap from beating the lad.
I should like to turn to some of the detailed provisions of the Bill which I hope the Government will revise before making it law. First of all, we have the concept of the petroleum revenue tax—a new tax on proceeds rather than profits requiring our oil companies to pay a rate of tax, as yet not defined, on their income after certain expenses have been allowed and the initial capital investment paid off.
It seems to me that the Government have opted for this complicated new tax system because they fear delays in payment of Government income if a simpler form of extended corporation tax were to be used. I think this is a fundamental error on their part, although I accept that it would be difficult initially to agree the levels of excess profits at which a sliding scale corporation tax would apply. But the flexibility inherent in the corporation tax system would allow early adjustment to the rates applicable to the smaller more marginal fields.
The more productive fields would be adjusted to a higher scale to cover the windfall profits of a prolific field. The problem of early payments of tax income to the Revenue could be overcome by use 504 of an advance excess profits tax payment—a kind of oil PAYE system. In any case, under PRT the Revenue will not get its return until after the capital costs have been recovered.
The complications and restrictions on allowable costs in the Bill are unnecessary and will certainly have a serious detrimental effect on the North Sea oil developments. Surely the first priority must be to get the oil flowing as quickly as possible and then to increase and sustain further exploration. But this involves vast capital costs and, in this inflationary era, rapidly rising servicing and development costs.
It must be becoming obvious to the Government that the so-called profits bonanza which the much-maligned oil industry was about to experience at the nation's expense is fast disappearing out of the window. In the last year, development costs of winning the oil from the unfriendly depths of the North Sea have just about doubled. On top of that there is always the fear of a sudden drop in world trade followed by a sharp fall in oil prices. I fear a future OPEC weapon when we are all hooked on expensive oil production.
For months, the Opposition have tried to warn Ministers of the danger of a mass walk-out from what is becoming a high-risk financial gamble. Now, at last, it seems that warning signals are being received by the Energy Ministers as the major oil companies cut back on future exploration plans and the smaller companies withdraw altogether from their North Sea ventures. If that is so—and it seems borne out by the article in last night's Evening Standard headedNorth Sea oil—a change of heart in Whitehall—we welcome the realism creeping into the attitude of Ministers.
We have had the Chancellor of the Exchequer, the Employment Secretary and now the aggressive Energy Ministers, especially the noble Lord, Lord Balogh, changing tack and becoming more subdued in their accusations against the wicked oil companies. If that is the new situation the Bill should and ought to be radically redrafted to include a graduated excess profits extension of corporation tax and the fundamental inclusion of real costs in recoverable allowances.
505 It is wrong to tax the revenue from the oil flow from one field without regard to the fall in profit margins due to rising costs and to the losses incurred and the costs of company operations in other secondary areas and wells. The aggregation of results from marginal and successful fields should be allowed, or without doubt the doubtful fields will not be continued and the smaller man will be driven out. But, perhaps in line with their other industrial policies, that is what the Government want to see.
The 50 per cent. uplift on capital expenditure set out in Clauses 2 and 3 represents an arbitrary formula which will not help the small company which has financed its oil exploration by outside financing and therefore has substantial servicing and interest costs to bear. Surely these smaller operators must be allowed to deduct such interest payments. I believe that they should be given the chance—I hope that the Bill will be so amended—to give up the uplift allowance and instead to deduct interest paid for outside financing.
Under Clause 3 the disallowable expenditure items will crucify those companies which have negotiated arm's-length financing. Even good fields will be threatened.
A company borrowing on a non-recourse basis has to offer a reasonable interest rate plus a return on profits to cover the risk element. The banks providing this non-recourse finance do not gain super profits from the transactions, because the oil companies ensure that such a sacrifice is not made. Therefore, arm's-length financing at normal returns of interest and royalty should be allowable either as uplift allowance or as interest at commercial rate. I hope that the clause will be altered to allow these fundamentally reasonable development costs.
I turn to the field-by-field requirements of the Bill. The Government have stated that these field limitations are non-negotiable. I hope that the flexibility that has begun to creep into the Paymaster-General's attitude will allow this rule to be relaxed. My objection to the inflexibility of the rule is that, at a time when investment programmes are at risk anyway, this field-by-field basis of assess- 506 ment will discourage investment by preventing profits from one field funding investment in another.
A company with four definable oilfields could have success with field A but suffer nine years abortive drilling on field B. The colossal interest costs over those nine years will not be allowable against field A revenue, so the result may be that the company will have to cancel the high-risk exploration programmes for fields C and D. In any case, the limit of 1,000 long tons laid down for the definition of a taxable field needs to be adjusted to take account of the abortive field which is lost after six months' operations due to one reason or another. By that time over 1,000 long tons of oil will have been extracted anyway, and I understand that the costs of that abortive field will not be allowable against the company's other fields. These losses will then be locked into that abortive field because it had run long enough to exceed the limit of 1,000 long tons of production.
As we look closer at the Bill it seems that we need to carry out substantial revisions. The nation and the oil companies want oil from the North Sea. We want a profitable oil industry with ever-growing British involvement. We want a businesslike method of taxing the windfall profits accruing to the oil industry. However, we do not want to create an unnecessarily complicated and unfair tax system which puts our exploration plans at risk.
I hope that the points that have been made in the debate will be taken into account, that by the time the Bill reaches Committee more drastic changes will have taken place and that other changes will be allowed by the Government in Committee.
§ 6.10 p.m.
§ Mr. Iain Sproat (Aberdeen, South)
I give a cautious and highly qualified welcome to the Bill. I give it a welcome because I appreciate the more open-minded manner in which the Paymaster-General presented it but more particularly because there is no disagreement on either side of the House that it is right that the potentially vast revenues from offshore oil should, in substantial part, accrue to the nation and not to the oil companies.
507 I give the Bill a cautious and highly qualified welcome, first, because I think that, while the Government's end is right, their means are wrong. I shall say why in a moment. Secondly, I qualify any welcome that I give to the main principle of the Bill because it cannot be wholly divorced from the allied legislation that is to be brought before the House later to set up a nationalised body, the British National Oil Corporation. That body's existence will be made largely redundant, and certainly could be made wholly redundant before it is even born, by the provisions of the Bill allied to some straightforward and relatively simple further legislation, since it and such allied provisions could give the British Government all the control they need over revenue, depletion and so on.
There is nothing by way of control that the BNOC is likely to have that could not be had by such a Bill as we are now considering together with allied legislation of a relatively simple kind to cover depletion and so on. The Bill, if properly amended, will give the Government a rightful element of financial benefit and control. A British National Oil Corporation will merely add interference without added control and, what is more, hugely expensive interference, which is likely in the nature of things to be slow and inefficient in itself and the cause of slowness and inefficiency in others.
It is wretchedly ironic to think that the huge sums in taxation that are proposed to be raised by means of the Bill and which could be put to such vital use for the country will be wasted in substantial and continuing part in propping up the white elephant of a BNOC the existence of which this very Bill makes largely needless.
It seems to me, speaking not as a tax expert and without going into the detail that my right hon. and hon. Friends have already well covered, that through the present provisions of the Bill we will get the worst of all worlds by levying taxation at a fixed rate and assessing each field separately.
By levying a flat rate equally on all fields, whether they are highly profitable or merely marginal, we are in effect turning what could be a marginal field into a totally uneconomic field since the reasonably high rate of tax that would 508 assure a fair return for the community and the oil company on a highly profitable field could be totally crippling on a marginal field. Therefore, the oil company would no longer consider it worth its while to exploit the marginal field, and the gross oil potential for the country, for whatever purpose, including that of taxation for the Treasury, would be diminished. That seems crazy in terms both of tax revenue for the Treasury and of the balance of payments.
Surely it would be sensible to do the exact opposite of what the Government are currently proposing. They should cither vary the tax rate with regard to the size, profitability, exploration and exploitation problems of any individual field or they should lump together all North Sea profits for any one company so that the consequences of the differences in character of the various fields within any one company's control can be spread in that company's tax reckoning on profits from British resources. That is emphasising what many of my right hon. and hon. Friends have said, so I shall not go into it in any greater detail.
There is another aspect of the effect of an inflexible tax rate on the currently marginal fields which I wish to mention now. One reason—not the only one—why a field may be economically marginal at present is that its exploration and/or exploitation requires a technological mastery of adverse physical conditions that is not yet developed and is highly expensive to develop.
An inflexible tax rate may now make it not worth the while of an oil company to develop such a field by turning it from one that is merely marginal for physical reasons into one that is utterly uneconomic for tax reasons. The technological advance which could have resulted from mastering the physical conditions will not now result since it will not be called for.
This is a particularly important point for Scotland since one of our hopes for the future is that Scotland will benefit from oil not only in the immediate and medium future in terms of increased benefit to the United Kingdom Treasury from the revenue accruing from oil and of jobs, which we are already seeing, but, more importantly, in the long term as the home of advanced oil technology which can then be put to use anywhere in the world where oil is found during 509 and long after the exploration and exploitation of our British resources have run dry.
§ 6.15 p.m.
§ Mr. Geoffrey Dodsworth (Hertfordshire, South-West)
The purpose of the Bill, as I understand it, is to ensure that there is no unfair or unjust profit transferred to the multi-national companies. I can understand that that is a proper and laudable desire in the national interest. But we must bear in mind very carefully that this is a project of an international and not a parochial nature. In these circumstances, it seems to me that perhaps the Treasury has been guilty of the sin of reading too closely the work of the Middle East in declaring that interest should be illegal. Under the terms of the Bill, as I understand it, interest is not allowable and does not exist.
I understood the Minister to say that the purpose of the Bill was that it was specially tailored to this particular situation, to allow freedom of movement in corporation tax and to ensure that the proper share of profits from the North Sea was directed in the national interest. If it is specially tailored—the Minister said that he wanted to keep it simple—I say that it is tailored but that it does not fit very well.
In the case of the PRT there is an attempted substitution for the payment of interest of the 50 per cent. uplift. A Labour Member drew an analogy with the 12. per cent. interest rate to try to equate the 50 per cent. uplift. If it were as simple as that, it would be very simple. But I suggest to the Minister that there is an attractive alternative if he wishes to control the profits so that they are not siphoned off for the multinational companies. There is no reason why we should not control the level of interest rates charged.
Suppose that I were to suggest that we take a percentage over the London inter-bank rate as a perfectly viable, attractive alternative allowing for proper freedom of flexibility of financing but at the same time ensuring that there was not any undue siphoning of profits outside the interests of this country. We are all concerned to see that this country benefits in its exchange and energy situations in particular.
510 The Bill fails to recognise that most of the financing must be carried out in foreign currencies. This is unfortunate. I should make clear at this stage that I have a particular and personal interest in that I am a director of a London merchant bank and chairman of the Equipment Leasing Association. There must be some form of mental blockage in the fear that too many funds will be extracted. I understand that there is a desire to eliminate hiring, for example, as being an allowable cost for uplift purposes to prevent there being an undue charge, thereby siphoning away profits unnecessarily and unfairly.
But we must recognise that in international oil and natural gas financing leasing is a world-wide technique and is already considerably in use in the North Sea. If that is the case, we wish to consider what the position is likely to be in connection with the contracts which have already been incurred, extending over many years in the past and into the future. In these circumstances I would like to be clear in my mind—it may be because of my failure to comprehend the terms of the Bill that I am not yet clear in my mind—what terms will be incurred in respect of contracts already entered into.
Leasing is a modern technique of financing what has been developed and is likely to continue to develop. It should not be confused with the short-term rental, hiring or contracting of equipment when comparing it with the full financing leasing of major international projects. Many rigs and substantial items of that nature such as gas pipes can be appropriately and properly provided through financial and other institutions, making sure that the funds which are desperately needed are available for a project which we all agree is of paramount national importance.
In these circumstances I hope that the Minister will receive any representations made to him on this subject. One recognises the difficulty which may be faced in ensuring that there is fairness in treatment so far as the national interest is concerned, but it would be unwise and ill informed if we did not allow modern financing to be operated in one of the most modern developments of our time.
§ 6.21 p.m.
§ Mr. Peter Hordern (Horsham and Crawley)
I declare my interest as a director of a subsidiary of an international oil company. The Bill should be considered as one part of the Government's proposals to deal with our offshore oil. We cannot consider it on its own. We must think of its total impact combined with the system of royalties, of corporation tax and of nationalisation.
We must first recognise that there is no prospect of our being able to exploit our North Sea reserves as we should like unless we realise that the North Sea must be made at least as attractive to the oil companies to develop as anywhere else in the world.
It is, of course, our right to tax the profits of oil production. We must, however, recognise that it is not for us alone to judge what is a fair return to the oil companies from such production but it is for the oil companies themselves, because it is they who can develop oilfields in other parts of the world—or decide not to develop them. Happily for us the cost of oil production in the Middle East is quite unpredictable. Until 1st October it seems that the companies' average cost of a barrel of oil from Saudi Arabia was $9.277, of which the actual cost of production was 16 cents. I understand that from 1st November, although the cost of production remained the same at 16 cents, the average cost to the companies has risen to $10.358 a barrel. Since, however, the price at which the State buys back the oil from the companies has been reduced, it also follows that the oil companies' margins have been severely squeezed.
It seems to me that two consequences flow from this. The first is that, as there is little or no prospect of the oil companies ever again achieving their former profit margin in the Middle East, they will be anxious to develop oilfields in the North Sea and in the rest of the world as rapidly as possible.
The second consequence is that the value of North Sea oil will receive an uncovenanted bonus simply by the Middle East producers increasing their price by such a large margin. It is this uncovenanted bonus that, it seems to me, it is right to tax. Yet we have all the time to recognise that the cost of production 512 of Middle East crude oil will always remain lower than North Sea crude oil and that the very existence of a bonus depends upon the producer countries' willingness to continue their high tax policy. The bonus depends also upon the actual cost of production in the North Sea, which is increasing at an alarming rate through inflation. I see no end to these inflationary pressures on the cost of building and construction for the North Sea. Therefore, the basic cost of getting oil out of the North Sea is likely to continue to rise rapidly.
A further problem about North Sea development concerns its financing. I understand that it is likely to cost about £10,000 million to develop the oilfields in the north of the British sector of the North Sea alone. It is not, of course, beyond the ingenuity of the banks to find money for this purpose, but there is considerable competition from the Government and local authorities for the sort of medium-term money that this kind of development requires. There is only one source for these funds—the surplus revenues of the OPEC countries themselves.
At present those countries show no inclination to deposit their funds on anything but a short-term basis. If they continue to do this, there will be no prospect of the banks being able, with prudence, because of their capital base, to lend these funds for medium-term investment, either directly themselves or through the Eurodollar market.
There is thus a growing demand for medium-term funds from all sources but a reluctance by the OPEC countries to supply them. If they are to supply these funds, they will do so only if the oil companies are confident of the long-term return that they will get from North Sea development. And that is the trouble with this tax. How can anyone be confident about the long-term return when they do not even know what rate will be charged? For the time being, therefore, borrowing for North Sea development must be difficult, and every day that passes makes the problem more acute as inflation continues to roar ahead.
This is not the time to make Committee points about the Bill, but there are certain things to which I should like to refer. First, the tax needs to be very flexible. I was interested in what 513 the Paymaster-General said about this. When one considers that only two years ago the landed cost of a barrel of oil was $3.20 from the Middle East and that it is now over $10 a barrel, one sees that the oil companies could find themselves losing their profits before the rate was changed.
Second, the flat-rate tax is bound to affect the fields owned by small companies which need to fund their development by loan and which have not yet got profitable mainland activities against which losses and allowances can be offset. It does not seem to me that the Government are aware of the vital part that loan interest plays with these small companies, and it is important too that loan interest should be deductible for the purpose of this tax. I hope, therefore, that this can be put right.
What matters is the impact that this tax will have on developing our oilfields quickly and getting the money that we need to do so. Until we know what the rate is likely to be, there is bound to be uncertainty. There are already signs that for one reason or another some oil companies are about to pull out of the North Sea.
But it is not only the fact that they have no idea what the rate will be that disturbs them; it is the threat of nationalisation. Why should oil companies pursue hazardous and expensive exploration if their profits will be severely limited by tax and more than half their equity removed from them at a price they cannot forecast? All that can be said about nationalisation is that it is a highly expensive, offensive and unnecessary operation which will be carried out for reasons of Socialist dogma and nothing else.
It is reasonable to ask where the Government think that they will get the money. They already have to raise over £6,000 million on the capital market simply to fill their borrowing requirement for this year. They will probably need at least that sum next year and the year after that. Let us suppose, although there is no reason to do so at present, that the non-oil balance of payments moves into surplus in three years' time. We could easily find ourselves with a total debt over the next five years of some £20,000 million—that is to say, a debt in the next 514 five years equal to our present debt which it has taken the whole of our recorded history to amass.
On top of that the Government are proposing that we should add £4,000 million or £5,000 million—I do not know what it will cost—of debts simply to nationalise North Sea operations. It would be impossible to conceive of a more damaging or wasteful operation.
§ Mr. Dell
I intervene merely in the hope that, as the right hon. Member for Wanstead and Woodford (Mr. Jenkin) did not do so, the hon. Gentleman, with his greater information about Conservative Party policy, might explain why, if participation is so costly, unnecessary and absurd, the Government that he supported had not ruled it out by the time that they left office.
§ Mr. Hordern
I do not know whether my right hon. Friend ruled it out, but I rule it out. The purpose of my speech is to explain why.
The Government do not understand the gravity of the situation. The additional interest charge that we shall have to pay in five years could be about £2,500 million a year, and that payment will have to be made abroad. Unlike interest charges paid to lenders in this country, therefore, that interest will amount to a straight annual tax on our own people.
Quite apart from this impost, it is certain that countries everywhere will take careful note of these proposals. The United States, for example, will do so in the light of BP's operations in Alaska. The OPEC countries, which will be asked to lend money to the Government for nationalisation, may well decide to take an equity interest in the North Sea for themselves in exchange for a direct loan to the oil companies.
The Government are not aware of the urgency of the situation. Why are we not now taking measures as the French have done, for example, to conserve energy? Why do we not limit the heating of offices, apply strict speed limits or make grants for the insulating of houses? What are the Government doing in this respect?
There is now, more than at any time since the war, a paramount need for the Western countries to get together and form a common policy. The international 515 energy programme is a beginning, and Secretary Simon's suggestion that a target should be set for a lower growth of oil imports is both constructive and helpful. Have we the will to heed it, or will we once again find the Government anxious to disguise from our people the full nature of the change which has occurred, as they did in the Budget? This is a time for high statesmanship and common action for a common purpose among all the oil-consuming countries. It is no time to spend millions in nationalising our most precious resources. So let the Government drop it.
§ 6.32 p.m.
§ Mr T. H. H. Skeet (Bedford)
The Paymaster-General asked just now whether we on this side should accept participation. He is aware that the United States and Canada have ruled it out, as they have ruled out PRT. Consequently, the tendency is for money to flow back to the States for exploration there. If the right hon. Gentleman wishes to continue to use the model not of PRT but of the subsequent legislation which will be introduced in 1975, using the Norwegian method, he might also adopt their practice of not interfering with existing contracts. Statoil will not have the right to abrogate contracts at all; its policy applies only to future licences.
My hon. Friend the Member for Horsham (Mr. Hordern) made a crucial point about company profit margins. It is assumed by many Labour Members that the profits of the oil companies are enormous. This is not so. The weighted average cost of Saudi Arabian crude oil in November was $10.358 a barrel and the transferred sale price was $10.57, which gives a company margin of only 22 cents. So how can it be said that in dealing with the Middle East the companies are making an extraordinary profit?
Another pertinent example when we are dealing with a taxation Bill is that the average realisation from a typical refinery yield in the United Kingdom, even accepting Sheikh Yahmani's figures, would be 19.9p per gallon made up of operating costs of 2.7p per gallon, total taxes, including producing countries' taxes and UK duties and taxes of 16.1p per gallon and company profits at only 1.1p.
516 Expressed as a percentage, the picture is even more interesting, with operating costs of 13.8 per cent. and taxation from all sources of 806 per cent., giving company profits of only 5.6 per cent. So it cannot be argued that the oil companies are making a bonanza worldwide. If Labour Members want to visit the appropriate opprobrium on the organisations making the big profits, they should do so on Her Majesty's Government in the United Kingdom and the OPEC Governments in the Middle East and elsewhere.
What I fear is this: the petroleum industry may be quite prepared to concede the lion's share of the profits it is likely to make from the North Sea. It may well be in the vicinity of 80 per cent. I do not know what flat rate of PRT is to be introduced, but if it is a very substantial share most of it will go to the Exchequer. What I am in doubt about is whether the Minister is prepared to concede fairness to the oil companies. They, after all, initiated the proceedings in the North Sea, and but for their success in the early stages the Government's present rapacity to take over what is proving to be a productive asset could not have existed.
I fear that the petroleum industry will become a veritable Gulliver, tied down by the Lilliputians of Whitehall; in the end they may be unable to operate successfully and instead of extracting the oil from the North Sea it will be left there because of constant slippages in the programme. I therefore suggest that the industry and, I hope, the Government, should examine all the proposals most carefully and consider the various elements involved in profitability.
One is that the companies must know the rate of tax. I hope that the right hon. Gentleman will be able to disclose this well before Christmas. Secondly, he must recognise that the price of oil oscillates. The price may go extravagantly high, or it may in future years fall very considerably, taking a great deal of the profitability out of the North Sea operations. I hope that he will also bear in mind that industrial costs are escalating. Whereas in Norway the rate of inflation is 9.5 per cent., in the United Kingdom it is well over 20 per cent., so that the two situations are not comparable.
517 He may also care to consider, for example, the cost of production platforms. In 1970, for a production platform operating in 100 feet to 120 feet of water—that is, in the southern North Sea—the cost was about £1 million or slightly over. In 1974, to operate in 275 feet of water, it was about £10 million. The figure for concrete platforms now being ordered for operation in depths of 465 to 500 feet is £60 million. There has been a rapid escalation in costs. Is he taking all this into account in his negotiations with the oil companies?
Perhaps I could make certain recommendations to him, in order to abbreviate what I have to say. I think that a flat rate of PRT must be ruled out. He indicated today—and I was satisfied to hear this—that he intends to avoid frequent changes but that there will be periodic reviews. He must recognise that certain elements must be borne in mind both by the Government and by the companies—the ravages of inflation on the cost of equipment, the impact of interest rates, the risks involved, the problems of working in very deep water, the demands of technology, and, finally, the mercurial nature of oil prices. He must have noted that between October of last year and this year there has been such a movement in oil prices that—and it seems a rather extraordinary thing to say—he cannot now talk about the extraordinary profitability of the oil companies.
I therefore hope that he will introduce a very flexible PRT. It will be incumbent upon the Government to interpret the prevailing prices intelligently at all times. Moreover, I hope that in dealing with Clause 2—and I apologise for the fact that I shall be in Africa when he comes to discuss it upstairs—he will not consider taking prices at mid-periods in the assessable term but will consider them almost from week to week in order to give the companies the opportunity of actual prices or fair assessments. I also suggest, for reasons which I shall give later, that natural gas should be excluded because there there are no uncovenanted profits. I suggest, too, that the flate rate of PRT could suitably be broken down into multiple rates, somewhat analogous to VAT and the multiple rates which exist on the Continent. I would put 518 it into three categories: the highest rates for the prolific fields; a lesser rate for marginal fields; and possibly—I hope that he will earnestly consider this—a lower rate to aid the smaller operators.
§ Mr. Dell
The hon. Gentleman does not seem to realise that if we adopt the proposals of his right hon. Friends, which evidently he supports, there would be, say, a 52 per cent. rate of corporation tax. Does he not appreciate that a marginal field could be highly marginal at a 52 per cent. rate of corporation tax, completely leaving aside petroleum revenue tax?
§ Mr. Skeet
I appreciate that, but I am afraid that the right hon. Gentleman is so concerned with his tax figures that he is overlooking the necessity to get the oil. The prime concern of the United Kingdom today is to get the oil to secure our balance of payments. He is so concerned with the facts and figures from the tax angle that he will deter North Sea development which is what I am trying to persuade him not to do.
The right hon. Gentleman has indicated, too, that one of the fundamental factors is the field-to-field basis of assessment. I should like to see the allowances spread right across the North Sea. But, rather than a tax of this nature, covering areas delineated by commercial fields, could not the areas conform to the size of geological basins—that is, the southern North Sea basin, the northern North Sea basin, the Faroes basin, the Celtic Sea basin, the Rockall basin and the Porcupine Sea Bight basin? That would seem to make much more sense than breaking up the North Sea into fragments which simply complicate the whole position with no benefit to the companies involved.
The right hon. Gentleman has talked about easing the cash flow of the companies in the early years. I admit that by conceding 150 per cent.—that is, 100 per cent. write-off and a 50 per cent. uplift—the cash flow will be eased in the early years. It will be the front-loading of allowances. But what will happen ultimately when all the allowances have been worked off and interest rates continue? Interest is disallowed for the purpose of PRT. Companies will find that they will be extremely heavily taxed indeed and therefore it might be a better 519 idea to allow the companies to spread their allowances over the established life of the field in the form of free depreciation at the companies' option. Surely that would be much more reasonable than the one that has been suggested.
Under Clause 3 I find that the allowable expenditure is totally inadequate. Has he considered that no allowance has been made for essential research and ancillary office services or for seismic surveys conducted beyond the 1,000 metre limit? He has no built-in inflation element and no provision for gas separation plants which are essential to put the oil on the market. He has no provision for the construction of storage facilities to accommodate the off-take of companies engaged in consortium. On those points there is scope for several amendments at the Committee stage.
May I approach another point which I am certain the Paymaster-General will take into account when he is dealing with the oil companies? I am going to challenge him outright. His whole policy is to drive the small firm out of the North Sea, and let them be taken up by the new organism which he is building up next year in his petroleum Bill—the BNOC. It will be standing in the wings to take up all these small companies. He wants to eliminate the small company and favour the big one.
Of course, I do not think that the big companies will object to that. How will the small companies state a proposition to the banks to obtain money? How will they raise cash? In the United States they can mortgage the oil in the ground. This they cannot do because Section 1 of the Continental Shelf Act 1964 says that the oil vests in the Crown and thus is no longer available to them. If they were in Norway they could assign their licence to the bankers. Why can they do that in Norway but not in the United Kingdom? Because the right hon. Gentleman and the Secretary of State for Energy have the right to revoke the licence. Anyway, it is not allowable here and it is asset that they cannot convey.
They are not capable of identifying a commercial proposition. The banks will ask, "Why should we lend money to you? You do not know the rate of tax and have no idea of the actual costs involved." 520 What proposition will they put up to their bankers? The right hon. Gentleman has made the situation even more difficult. Under Clause 3(3)(a) he has disallowed interest. Grants of overriding royalty or profit participation with third parties are disallowed under Clause 3(3)(d). Thus, the Thompson's 5 per cent. overriding royalty to a consortium of banks in respect of its interest in the Piper field has been negated. Although it received the prior approval of his Department, it is negated by this Bill. How will the right hon. Gentleman deal with that? Incidentally, further exploration may be discouraged in the Thistle and around the Thistle field due to overriding royalies granted to the Signal Oil and Gas Company or Signal Industries should oil and gas be discovered in adjoining blocks. Therefore, the provision in the Bill could lead a discouragement of exploration in that area.
The small firm is again impeded because all forms of farms-in and farms-outs have been disallowed under Clause 3(3)(e), although this is the normal practice of the industry. Thus, the Hamilton Bros, sale of 24 per cent. interest to Texaco in respect of the Argyll field to help finance the participant's costs becomes vulnerable.
I dare say the right hon. Gentleman is bearing many of these points in mind and he may care to consider them. They come under Clause 3(3), paragraphs (a) to (e), on page 7 of the Bill. If the Minister is prepared to give an undertaking tonight that he will modify paragraphs (a), (d) and (e), we shall get somewhere. If he is not prepared to do that, he is signing the death warrant of most of the small companies involved.
Will the Minister bear in mind one or two other aspects? I am quite prepared to say that interest is an element of cost and to recognise that, from the Treasury's angle, there are difficulties. There will be difficulties, however, if the right hon. Gentleman leaves the provisions unaltered, because malpractices will develop, interest will be added to the price and on the price there will be a 50 per cent. uplift. That is how it will develop. The best analogy I could find was when levy was added to the price under Land Commission legislation and the purchaser paid the lot. I am certain that the Minister wishes to avoid that and 521 the best way would be to follow the recommendations I have suggested.
Neither is it fair on the smaller enterprises to be forced, with little or no security to offer, to pay a premium rate of 5 per cent. over the market price in order to obtain the necessary finance to do what they want in essential exploration and development.
The other point I raised when I intervened was this: the right hon. Gentleman is prepared to put in the Bill a 50 per cent. uplift, which we could regard as a sweetener, but that would not prevent him at any time in the future from lowering it to 25 per cent., and probably to 10 per cent. The Americans had vast experience of this when the depletion allowance was reduced from 27 per cent. to about 22 per cent.—and it now threatens to go down even further. Is he prepared to give a guarantee tonight that the uplift will be maintained for 10 years at the current rate to give the companies support?
May I make one or two suggestions on the marginal fields, which I think are important. I agree with the Minister that they should be developed. The trend is towards the discovery of the smaller field. In a number of basins, similar to the North Sea, 10 per cent. are large but 60 per cent. are small, that is, roughly about 50,000 barrels a day or less. Therefore, the long-term development of those fields is essential and the Minister is in a position to encourage their development—not through the BNOC but through the use of the private companies. All Governments have made that initial mistake in the southern North Sea. Gas fields were discovered many years ago which have not been developed because of the uneconomic pricing engaged in during 1966 and afterwards.
If I may, I recommend that an exemption limit be granted to marginal fields or that they be granted a tax holiday for five years, or that multiple rates of PRT be granted for fields with a barrelage reserve of under 250 million barrels. These would include the Argyll, Auk, the Brent extension, Josephine and Montrose, and probably many others. I know that the Minister has in mind a grant analogous to the REP, which was for a fixed term—I am merely using a general analogy—but that would amount to a subsidy which is one thing I would not recommend.
522 Natural gas is included with oil. I fail to understand why, if there are no uncovenanted profits, it should be included in the Bill and be subjected, even with modifications, to PRT.
The right hon. Gentleman will recollect the history. In the Hewett field the price paid to the oil companies is 1.1958p. That price was negotiated in 1968. In the Viking field it is 1.5p. These are very low figures. There is a big difference between the price paid for the raw material, the natural gas, and what the domestic consumer has to pay in England and Wales, namely, 10.96p, and in Scotland 13.78p. Thus, it is the British Gas Corporation that is making the profit.
But if the right hon. Gentleman is to take this into account, will he not consider adopting the procedure in Norway? The Viking field price in the United Kingdom is 1.5p, equivalent to 36 United States cents per thousand cubic feet. In Norway the Ekofisk field price is 2.3p, or 52 United States cents per thousand cubic feet. If the Norwegians are prepared to pay a higher price for the gas, why are we not prepared to do so? Or are the Government prepared to continue to cut the companies to the bone and hope that they will produce the gas and still tell them that they will be liable to pay PRT and corporation tax?
The Paymaster-General will be aware of the Continental Shelf Act, which in Section 9 places an obligation on the Government, in the guise of the British Gas Corporation, to secure a reasonable price, and they are the lone arbiters of their case. I enjoin the Paymaster-General to knock out natural gas altogether from this Bill. If he must keep it in, he should ensure that the tax is kept low. The United Kingdom should have a low price for gas, and it is absolutely essential that there should be a lower price for natural gas for chemical processing, although the legislation he has in mind for next year will put it on a par with others forms of gas.
Finally, the right hon. Gentleman has heard about what happens in the United States, in offshore Louisiana and Texas. The oil companies' revenue percentage of gross profits is between 25 per cent. and 30 per cent. Is he working it out on that basis?
523 In the Netherlands the Government have an option of a 40 per cent. participation rate, and with taxes, they aim at a total Government take of 80 per cent. of profits, after costs. In the UK, if he does not allow realistic costs, he will deprive the companies and he will not have a reasonable result.
While I am prepared to concede what my right hon. Friend the Member for Wanstead and Woodford said, it is absolutely essential that the companies should be called upon to pay their fair share of taxes. But it is encumbent upon the Government to ensure that they are reasonable to the companies so that there may be a continual flow to the United Kingdom of oil when it is required so that we can improve the balance of payments situation.
§ 6.54 p.m.
§ Mr. John Moore (Croydon, Central)
I shall endeavour to be brief, Mr. Deputy Speaker. This is, I think, one half of two stages of Government legislation. It is the half that I believe to be most crucial. This is the legislation that will bring a return to the British people. It is somewhat distressing that 90 per cent. of the speeches in this debate, pleasant though it may be to listen to my hon. Friends, have had to come from this side of the House, with the more than notable exception of the speech from the hon. Member for Dudley, West (Dr. Phipps), who I believe in this instance should be sitting with us.
My comments will be on the general theme of the Bill, but I draw the attention of the Paymaster-General with as much emphasis as I can to the comments of the hon. Member for Dudley, West, with few of whose views I found any difficulty in agreeing, much to my pleasure.
I give a grudging but definite welcome to the Bill. I stress that from the beginning. I find that the measure proposed is in many ways attractive. I stress that because the Paymaster-General made it clear that the variations that could take place and the degree to which he would listen to comments would allow him to make those variations and would still 524 not destroy the principle. I do not find difficulty about the principle of the Bill.
There are two main factors that should be looked at in regard to an Oil Taxation Bill at this stage of our history. I deprecate the need by so many in the House constantly to refer to the past. Looking to the future, our two prime objectives are the need to produce our oil and the need to make sure that the nation benefits.
First, as to the need to get out the oil, my criticisms are of the margin and not of the centre. In that context I strongly urge the arguments that have been pressed from both sides for variable rates. I say this to illustrate a point that has not so far been made in this debate. I argue for almost positive discrimination in terms of certain fields. I see this as a long-term pattern of price decline in world oil costing. Over the next three to 10 years as we begin to produce our oil we will constantly, as mentioned by my hon. Friends, have low-cost Middle East crude oil available to affect the basic price structure.
With that on one side, the obvious political factors involved and the price risks involved to us, it would appear sensible, if we are endeavouring to utilise Government policy to encourage certain forms of exploitation, to go for the most expensive produced oil first. We would thus be in a position three to five years from now where our oil which cost less to produce would still be available. In other words, I think it would be possible for the Government to examine those possibilities along with variable rates of positive incentives for the more marginal fields and companies.
I am unhappy at the absence of any provision for the offsetting of interest payments, and I endorse the comments that have been made in that respect. I cannot stress strongly enough the importance of that aspect. I recognise the Treasury's difficulties, but I believe that this is a controllable factor and it would be depressing if any Government today were not able to introduce this key factor by the use of intelligent mechanisms.
I emphasise this as one who has observed rather than been in the oil industry. There seems always to be a fundamental difference between the 525 exploitation of oil and its discovery. The initial discoverers are a particular kind of breed and company. Those companies are not the same as the vast, multinational company. We must be a little more sophisticated in our handling of the situation, especially with regard to the treatment of interest payments.
I turn now to consider whether the nation profits. We have had much extraordinary political discussion about the degree to which the oil companies or the nation are likely to gain from the oil exploitation. I should like to submit a few simple figures which I believe to be germane to the argument, because if we are to consider the possibilities not only of variable rates, to which I have referred, but, more important, the actual rate of the petroleum tax, the House and the nation should be made aware of the realities.
I am aware that it is a difficult assumption to make, but let us take, say, crude oil at $10 a barrel. I submit that in all my assumptions that would be a pattern of price expectation that would decline. Let us take costs of about $4 a barrel. Those are low relative to North Sea production and to inflation in the future. On an 80 per cent. petrol revenue tax, taking an approximation of corporation tax at 50 per cent., we have a return of 15 per cent. to the company. That is not excessive. It is not enough to encourage people to put money into a high-risk operation.
What is vital in that equation, however, is to draw the nation's attention, even on those figures, to the fact that out of a barrel of oil $5.40 in tax would go to the Government compared with 60 cents to the company. Those are the comparisons we should be talking about in terms of the Bill, and they are valid comparisons. I am not decrying the prime thesis. Taxation should be able to be levied, provided that there is sufficient return to attract capital investment to develop the oil.
I could give many examples. At $8 a barrel, with PRT at 80 per cent. we are talking about a 10 per cent. return. That is far less than using one's money in a much less risky enterprise. Therefore I submit that the Bill's provisions, taken in isolation, given the variations proposed and the right level of PRT to 526 entice capital into oil development, would be adequate. My true worry is that the proposals will not be in isolation but that the participation agreement will come in on top of it. That participation agreement coming on top of it will be enough politically to worry companies and, more important, not give to the nation any particular advantages.
The question has been asked, why should not the British nation gain the same as the OPEC nations? But we are doing that, as I have illustrated by the figures in the Government's own proposals. If on a barrel of oil, on my assumptions about present prices, we were to gain $540 against a company profit of 60 cents—at no risk and no cost to the nation, with all the risk and costs being incurred by the company—we should not be endeavouring to tie up the nation's capital, which could then surely be used for the development of hospitals, schools and other activities.
That is the crucial issue. The Bill has enormous merit, given variation, but I ask that we ensure that the support we may give to the Bill will be seen in isolation from the detrimental possibilities associated with participation.
§ 7.3 p.m.
§ Mr. George Thompson (Galloway)
In speaking on the Bill tonight I am aware that I speak as a sort of Daniel in the lions' den of the oil and taxation experts, because I am neither a lawyer nor a taxation expert. But I felt that if there were no Scottish National Party voice tonight the fact might be commented upon by hon. Members.
§ Mr. Thompson
I thank the hon. Gentleman for his remark, but I shall continue to say a few more words, because in addition to promising to speak I promise to be brief.
I have noticed that the Prime Minister is very fond of quoting scripture to us when he comes to Scotland to talk about oil. I fear that his attention has never really left the book of Genesis. I should like to commend to him for meditation a verse from the forty-fifth Psalm:You have loved justice and hated iniquity: therefore God, your God, has anointed you with the oil of gladness beyond your companions".527 I feel that there are certain depths to be meditated on here, and I commend the verse, using, I admit, the old-fashioned symbolic exegesis.
The great thing that oil has done for us in Scotland is to promote a new self-confidence. For many years we have heard the prophets of doom going on about how we were too poor to run our own affairs—sometimes that we were too stupid to run our own affairs—and in general we in Scotland indulged in a process of self-denigration. The oil in the North Sea has restored self-confidence to such a degree that I noticed during the election campaign this year that arguments that I put forward in 1970 on behalf of our candidate in Galloway and that were then not accepted were accepted in 1974.
Many people said to me during the recent election campaign that they agreed with what I had to say about North Sea oil but that Scotland could run her own affairs perfectly well without it. So there is a psychological benefit already from the oil in the North Sea.
I agree with the hon. Member for Roxburgh, Selkirk and Peebles (Mr. Steel) that oil is not the great salvation. That is perfectly clear and we must not delude ourselves into thinking that all our problems, either in Scotland or elsewhere in the United Kingdom, will disappear with a wave of the oil magician's wand. Certainly, too, we must not indulge in the folly of mortgaging our oil, or borrowing on it and then having to use it to repay such loans.
There is also the need for conservation, the need to draw out the oil at a rate that will allow us in Scotland to benefit from the technological knowledge that will be developed there and allow us to use the revenue in such a way that our industry is developed for the day when there will be no more oil. We must not delude ourselves into thinking that the oil will last for ever, or that oil wells somehow fill up like water wells.
My colleagues and I support the Bill because it seeks to plug the gaps in our taxation legislation, gaps that were allowing the oil companies to benefit excessively from Scotland's gas and oil. I cannot let pass the opportunity to warn the House that we on these benches do 528 not accept that the increased oil revenue, which I am informed will amount to £3,000 million by the early 1980s, should go to the British Treasury.
We should like the House to remember in passing this legislation that the possibility must be envisaged that it will have to be adapted so that the revenues will be able to go in due course to a Scottish Treasury. The problem of the division of revenue from oil in federal systems has already arisen. I understand that in Canada there is dispute between Alberta and the Federal Government on this subject. We hope that the arrangements that the Inland Revenue makes will be such that the revenue from Scotland's oil and gas can readily be transferred to a Scottish assembly when such an assembly becomes a matter of fact.
I am not a taxation expert, but I regret the absence of a mechanism for utilising a tax reference price system, because that would make for stability and control, whereas the Bill relies on the fluctuating yardstick of arm's length sales receipts. The Scottish National Party has always believed in participation and we hope that the Government will not envisage taxation merely as an alternative to participation. We hope that they will press companies to participate by having a two-tier tax rate, with lower burdens imposed on companies which accept participation.
I shall not condescend upon particulars, as I am only a layman in these matters. I therefore leave for another occasion the detail to my colleagues who are learned in the law.
§ 7.10 p.m.
§ Mr. Peter Rees (Dover and Deal)
I had not intended to intervene in the debate until I had applied my mind more closely to the details of the Bill. However, having looked at the Bill, even though briefly, various points have occurred to me, as they have no doubt occurred to other hon. Members, and I hope that the Minister will be able to deal with these points.
I welcome the moderate contributions of the hon. Member for Galloway (Mr. Thompson). I was a little surprised to hear him say that North Sea oil or, as he may choose to call it, Scottish oil, was needed to boost the self-confidence of the Scottish people. In view of their 529 massive contributions to our Imperial past, our shared history and, I hope, our shared future, I would not have thought that the discovery of North Sea oil was needed to regenerate confidence in that important part of the United Kingdom.
I agree with the hon. Member that we should be rather moderate in our expectations from North Sea oil. The Hudson Institute—not that I have a great regard for either its analysis or its conclusions—has pointed out that there is at least a possibility that we shall find ourselves tied to a source of high-cost oil when prices are declining in the Middle East. We must consider this carefully before launching into any grandiose projects.
The hon. Member said that he thought that it would be wrong for the revenues from North Sea oil to go to the British Treasury. In all candour, I think that the real danger is, not that the proceeds will go to the British Treasury, but that they will go to service the inordinate borrowing to which we shall be committed in the intervening years.
I believe—this has been the tenor of all the speeches—that we are all agreed on the objective, which is to ensure for the British people a fair measure, a fair cut of the profits, such as they may turn out to be, from our native resources.
I do not propose to debate whether it should be some kind of excess profits tax or a special tax, as has been devised. I do not see any great difference in principle, providing that both taxes are drawn in a sensible and fair way. Unless we achieve a measure of fairness, as I am sure the Paymaster-General and his hon. Friend recognise, we shall find a marked reluctance among the oil companies to exploit these resources.
To judge the fairness of the tax it is necessary to look at the fine print. I hope that I shall not be thought to be raising points which should more properly be canvassed in Committee. But I would like to ask the Minister if he could deal with the following points.
What criteria are the Government going to apply in the determination of what constitutes a field? This is a question of supreme importance, because the oil companies should know what expenditure they can match, and what revenues. In that regard, I am concerned that I see no par- 530 ticular provisions for appeals against a determination of the appropriate authority. Will the Minister give us an assurance that somewhere deeply embedded in the schedules, in a part that has possibly escaped my attention, there is at least an appeal procedure?
§ Mr. Rees
I am grateful for my hon. Friend's intervention. I do not particularly mind where the onus should be put, whether, in the first instance, the determination should be left to the oil companies, subject to objection by the Minister, or whether there should be determination by the Minister, subject to appeal by the oil companies. I am perhaps predisposed in favour of the outside experts rather than in favour of the Government and would prefer, perhaps, the determination to be left to the oil companies in the first instance.
The point I am stressing—and one which I hope the Minister will be able to deal with tonight—is that there should at least be a fair appeal procedure, as this is of crucial importance. I am sure that the House will appreciate that there should be a fair determination of fields, particularly as, apparently, there is to be no offset between losses in one field and profits in another. I would prefer to see such an offset because it seems that the rather narrow, niggardly approach the Government seem wedded to at the moment will discourage the exploitation of the more risky marginal fields. I hope that the Minister will be able to deal with that.
The second point which I hope that the Minister will deal with is the calculation of profit. There is a great amount of detail which will have to be explored on a later occasion. But there has crept in an entirely novel principle which we have not so far encountered in British tax law—that is, that tax should be exacted before there has been a disposal of the stock-in-trade or the product. The oil companies are bound to bring inthe market value, three months before the end of the period"—I may be obtuse, but I do not see why the market value should be determined 531 three months before the end of the period—of so much of any oil so won as was appropriated by him in the period to refining".presumably by the oil company itself, otherwise it would have been disposed of.
That seems an unattractive breach of a principle that has long been established in British tax law, that one taxes only when a profit has been realised. There are many details in the computation of profits that will have to be explored at a later stage, but this seems a point of fundamental importance with which I hope the Minister will deal.
I come next to the question of the deductions that will be allowed under Clause 3. Many of my hon. Friends have dealt with the first disallowance, namely, the disallowance of interest. It is quite wrong that the Government should attempt to dictate the way in which these operations should be financed. It seems contrary to much of their philosophy, as expressed in opposition, as this will tell in favour of the large multinational companies against the small domestic operators, which may have to finance their operations with bank loans, or in other ways. Is that the intention of the Government, or is it something they have overlooked? It is a curious approach to the problem.
As one of my hon. Friends suggested, if one wishes to control the deduction of interest, a limitation should be placed upon it. It should be, say, interest at a commercial rate. I know the pathological worry of Governments that dividends or distributions will be dressed up as some form of sophisticated interest, but that can be got round. It has been got round in our ordinary tax legislation, so why cannot it be got round in regard to this tax. The fundamental objection is that one is dictating the way operations can be financed and one may limit the operations to certain large multi-national companies. I have no criticism of or objection to multi-national companies, but it is a matter of curiosity on which I am entitled to comment. It is not in harmony with the views we have heard from the Labour Party in opposition and even, to a degree, in government.
532 There is another deduction which I find curious and which may bear harshly. It is the deduction under Clause 3(3)(e):any payment made for the purpose of obtaining a direct or indirect interest in oil won or to be won from the field".As I read that with a perhaps untutored eye, it will prevent companies taking over the unsuccessful, or partially-completed operations of another company and obtaining any deduction for the cost of acquisition.
That strikes me as a little harsh. There may be operators, crushed with the burdens the Government are putting on them, who will wish to abstract themselves from the North Sea and sell their operations to one of the multi-national companies. Why should not a deduction be allowed for that kind of expenditure?
Then there is the disallowance under Clause 3(3)(c) ofthe cost of acquiring or erecting any building or structure on land …It occurs to me that the pipe which is inserted at the field and attached to some installation on shore may be in part a "structure on land". The whole tenor of the legislation—and I am sorry to burden the House and the Minister with the details, but I think that they are important details—shows a rather niggardly approach. Perhaps the Government are drawing on precedents established in the Persian Gulf. I detect the hand of Lord Balogh, and that augurs ill both for the oil industry and for the country.
I have thrown at the Minister points of detail, but in the aggregate I believe that they are important. Unless the Bill establishes a fair balance between the Government and those who are going to risk their capital and expertise in the North Sea, we shall find that there will be a marked lack of enthusiasm to exploit something which in the long run may prove to be an extremely expensive asset.
There is common ground, I hope, between all parties on this side that we wish controlled but enthusiastic exploitation of this asset. Therefore, I hope that the Minister will consider the various points made tonight and will give us a generous and clear reply to our anxieties.
§ 7.21 p.m.
§ Mr. David Howell (Guildford)
This debate has been remarkable in three ways. The first has been the almost total absence of Labour Members from the debate from start to finish. We all know where they are, of course. They have gone to a comradely little gathering across the road. But the Paymaster-General told us himself that this debate involved possibly the most important tax decision taken by any Government since the war. It is rather eloquent that 99 per cent. of Labour Members should place more priority upon a little friendly back-stabbing across the road than on joining in this crucial debate.
The second remarkable feature was the Paymaster-General's speech. Gone were the bloodcurdling noises we heard before the February General Election and even as recently as last week. Instead, the keynote of the Paymaster-General's speech—and how right he is—is now caution and open-mindedness. He intends to proceed step by step. It is almost as though his favourite hymn has now become,Abide with me,I do not ask to see the distant scene;One step enough for me.This is where the Paymaster-General has got to now, and I certainly think it a more prudent posture than the one which he and his right hon. Friends have been adopting in recent months.
The third remarkable event in this debate was the speech by the hon. Member for Dudley, West (Dr. Phipps), I hope that my hon. Friends will forgive me if I pick out that speech. It was remarkable in being the only one from the Government back benches, but it was remarkable also because it showed a great deal of common sense and a great deal of expertise. Indeed, the hon. Gentleman is an expert in this sphere. More than that, it showed a feel for the problems of the whole offshore oil industry, which frankly is completely lacking on his Front Bench, as I shall show in a moment.
The hon. Gentleman's speech showed a sensitivity to the problems and structure of the industry which is not demonstrated when the Paymaster-General and other Ministers recite in a somewhat dreary sequence all the consultations they have 534 had with the various oil companies. I shall return to this aspect, because I believe it to be one of the most important and dangerous in terms of the damage that these provisions could do, if we get them wrong, to the whole offshore oil effort of the nation.
All the speeches pointed also to another aspect which is equally worrying. What concerns us is not so much what the Paymaster-General has said and what the Bill says as what has not been said and what the Bill does not say. The hon. Member for Dudley, West made the point that we do not have the rate. The rate is the nub of the whole programme. The rate is the thing upon which decisions, motivations and investment decisions depend day by day in the North Sea. We are not to have the rate until the spring—we hope, the early spring—and I agree with those who say that it cannot come too soon. The rate is the missing element, and without it the offshore oil programme of this country is inevitably on a crutch.
Next, I refer to the artificial losses accumulated before 31st December 1972, for which, the Paymaster-General told us, provision would be made in the spring Finance Bill. I see the virtue of proceeding on those lines, although for the oil companies it leaves yet another gap in their calculations. But I add a slight warning. I know that the strategy and the intention is to make sure that the oil companies do not somehow, by upstream operations, escape their full tax liability downstream. We must remember, however, that upstream other Governments are saying the same thing in reverse. The net effect, as my hon. Friend the Member for Bedford (Mr. Skeet) reminded us, is that the squeeze is on the oil companies in a big way.
In its latest brief, Shell has published a note—confirming what my hon. Friend said in a very authoritative speech—making clear that its margin on a barrel of marker crude is now down to 22 cents. We know—this again is a Shell figure—that the company needs a minimum of about 50 cents to finance the heavy investment programme in oil development. Thus, it is running at below half its need to sustain an adequate investment programme of the kind that we in this 535 country expect and hope the oil companies to maintain in the North Sea. We must, therefore, beware lest we fail to adjust our minds to the facts of the present situation in putting on the squeeze through the additional provisions that are to come in the Finance Bill in the spring. They are, of course, another prong in the enveloping strategy in dealing with the oil companies.
The third gap is the one to which many of my hon. Friends have referred—the British National Oil Corporation. The Paymaster-General rather bravely asserted—as though if it were so asserted it would lie down or go away—that it was a self-contained matter, and that because he said it was self-contained it would remain so. It is not self-contained. It spills over into every aspect of the Bill that we are discussing, into every aspect of the oil programme and into every aspect of the decisions taken by North Sea oil operators. The question mark which it provides and which looms over the whole programme is crucial to the whole future of the North Sea oil industry.
Will it be just another oil company? That is the sort of safe Fabian view, if I may put it like that. I hope I am not being rude to the hon. Member for Dudley, West. I am sure that from the Front Bench he could have put it in a plausible, relaxed way, as just another oil company such as Total, or something like that. Or will it be a sleeping partner or a busybody agency going round with a cudgel marked "51 per cent." and regarding itself as the instrument of Government policy? That, apparently, is the view of the Secretary of State for Energy. If that is the view, what becomes of the officials in the Department of Energy? Do they stand aside? Do they provide back-up for the BNOC or do they, as I suspect will be the outcome if ever this ghastly contraption sees the light of day, get in each other's hair in one glorious bundle of incompetence, bottlenecks and delay?
As the Paymaster-General is the first to know—indeed, he has written an excellent book proving it all too clearly—it is all a lot of nonsense. Not a penny piece more will accrue to the people of this country as a result of the creation of BNOC. My hon. Friends have put devastatingly the logical and rational case against it. It will be of no use whatso- 536 ever. It is a device entirely to deal with sensibilities within the Parliamentary Labour Party.
You would be right, Mr. Deputy Speaker, to say that it is not in the Bill and not in order, yet clearly it is highly relevant to the outcome of the Bill. One is driven to the point which my hon. Friend the Member for Bedford made, in an outspoken and forthright way, when he asked "Is this the instrument—the body—that will sweep up the smaller holdings, the smaller operators? Is this the device—the dustpan—into which is to be swept the smaller companies after they have been mutilated under the Bill?" That is the question which is being asked in the oil industry today, and it provides a rotten background against which to create the impetus and drive needed in the North Sea oil programme.
That impetus was there, and in some areas it still is there. Certainly when I was involved with this programme at the beginning of the year there was a tremendous atmosphere of drive and bustle amongst the business community, the financial community, the oil industry and the smaller oil operators. But I think very few would disagree that at this moment this impetus appears to be fading.
One has to ask why that is so. To understand why, one has to appreciate, as the hon. Member for Dudley, West, who has just walked out, appreciated—but I still question whether the Government Front Bench appreciate it—that there are two North Sea oil worlds, not one. One is dealing with two distinct worlds. The first is the world of the big oil companies, the big operators and the big contractors. They are the ones who tend to form the deputations, provide the views and consult with the great Departments of State in Whitehall and with Ministers, and by the very nature of their size they are better equipped—they may not like it—to absorb the shocks of the ups and downs, the switches and turns, in the policies of the Government. That is their position.
Then there is the other world, and it is the voice of the other world which has been heard in this debate but which is totally absent from the thinking behind the Bill. The other world is the world of the new men whose energies have been 537 mobilised by the prospects and by the sheer size and magnificence of the North Sea oil adventure. This world includes financial groups, component manufacturers, fabricators of equipment, subcontractors, service firms, consultants and entrepreneurs in the literal sense of the word—go-between operators in the very best sense. These are the people who have provided the vitality in the North Sea oil drive hitherto. It is here that one now finds far less enthusiasm and far more readiness to shrug the shoulders at the appalling uncertainty.
I do not think that any of these people or any of the oil companies ever expected that there would be an unchanged tax environment. Of course they did not. They never expected that the pattern of regulations and taxation or the economics of oil recovery would remain unchanged. There was no expectation of that kind. But where they may have been misled is in failing to foresee the almost self-destructive disarray which is now being caused by political statements and by actions taken largely by Ministers in the present Government. These have created a background of uncertainty which did not exist six months ago. I do not think that visits of Ministers around the world help. I am referring to the visit of the Minister of State, Department of Energy, to America, which I understand did not do anything to reassure anybody.
The truth is that there is a feeling of nervousness. The hon. Member for Dudley, West referred to this. That is the first and foremost consideration. Everywhere now there is uncertainty. In a sense, the petroleum revenue tax rate is just the final element in a long and growing string of doubts in this increasingly unpredictable situation.
That is the first issue—the gross uncertainty. Secondly—and this is the item to which my hon. Friends have referred again and again this afternoon—there is the question of rising costs and the continuing lack of appreciation amongst Ministers in the Department of Energy—I do not know so much about the Treasury—about the rapidly rising costs and the risks in the North Sea.
First there was the famous, incredible remark by Lord Balogh, the Minister of State, Department of Energy—admittedly 538 just before he took office—that the North Sea wasone of the least risky areas in the world.The more one thinks about that remark, the more it is calculated to send a shudder of nerves through those who are operating in conditions of appalling and rising risks in the North Sea, and who will be operating, we hope, in the other areas as well as they are opened up. Therefore there is apprehension, of which we heard strains in the debate today, that the smaller fields and the smaller operators will be in difficulties.
The Paymaster-General in his new guise of open-mindedness, of action step by step and all the rest, appeared to suggest that in the smaller fields perhaps the principles that were immutable before, things that could not be changed, had turned out to be mutable and changeable after all. But I am not sure that he had any comforting words for the smaller operators. The difficulty is that the attack on the smaller operators which is evident in the Bill wil not hit only them. It could also hold up the big fields in which they are minor partners. If they cannot get their financing, the whole field can be delayed even though the bigger companies are able to get their finance.
"Attack" is the right word. We cannot mince our words here. The attack is in Clause 3(3) in the form of the disallowance of interest for PRT. Later in the Bill there is also the disallowance, except for specific North Sea oil money, for corporation tax. This is a tightening up of the corporation tax rules. These represent a frontal attack on the smaller operators and the smaller men in the North Sea oil business. Unless it is changed, Clause 3(3) puts many of the smaller participants in the North Sea oil programme in the tumbril and ready to be rolled off to the tricoteuse of the Labour Left wing who are tonight elsewhere with their knitting.
The fourth thing which has created apprehension is finance. There is evidence of a reluctantce to lend. Apart from the fact that some banks are short of finance for new projects for obvious reasons, and apart from the general economic climate which creates additional difficulties, there is a general feeling that finance is difficult to come by for North Sea operations both for the main operators and even more so down 539 the line for the component manufacturers. One would think that in a levelheaded and rational world the North Sea oil programme would be getting every priority for bank finance and that the Government would be doing all they could to back it up. The Government might say that there will be the FFI, but when will that start? It might be January, February or March, but we do not know. Every day that passes increases the biter and heavy cost to this country of the delays before the oil begins to flow.
That is the not very happy scene which has now emerged in which the Bill takes its place and in which other measures which lie ahead will take their unhappy place as well. I do not think that the loss of impetus—and it is there—will be shown up in an immediate slow-down in the rate at which the oil begins to flow in the next year or so. It will be further down the line. It will show up in exploration and evaluation of the enormous potential which lies outside the North Sea altogether. In talking about North Sea oil, we sometimes forget that it is believed that there is commercial oil and mineral potential west of the Shetlands, in the Western Approaches, in the English Channel and in the Celtic Sea. Heaven knows, we should be getting on and finding out what exists there at deeper levels down to 1,000 feet and more.
To get the oil out will require technologies which have not yet been invented, but the challenge is there. With a huge push in this direction we could raise our sights above the aim of the limited ambition of self-sufficiency by 1980. That would be admirable, but we could look far beyond. This country, if we maintained momentum, could be one of the world's greatest exporters of oil, oil products and minerals as well as a leader in the technology of offshore equipment. The question that is left hanging in the air by the Bill is whether the incentive is there to move on to this bigger scene, to provide the impetus to those people who were and still are trying to take part in the North Sea oil programme to move on to the still bigger recovery of minerals and hydrocarbon wealth that lies beyond.
We all recognise that the Paymaster-General is on a tight-rope. Every leader 540 writer who is concerned with these matters has written about his dilemma. I warn him, however, that on one side of his tight-rope is political unpopularity if he fails to screw the oil companies for enough. He was the first to recognise that. On the other side is the danger that he could undermine confidence and that if he gets it badly wrong he could snuff out the prospects which are there and on which our whole national recovery depends.
Practically everyone in the debate has agreed that oil is not a free ride and is not an easy venture. It has to be worked for and won in the hellish conditions of the North Sea by an enormous input of brainpower and manpower and of every other kind of effort in order to break through the physical and technological barriers and the barriers of organisation and management.
We in this country are right to make that effort, and I think that my right hon. Friend the Member for Wanstead and Woodford (Mr. Jenkin) brought home devastatingly clearly that so far there has been a great deal of success. Some of the best brains and talents in finance, commerce and industry have come together in the United Kingdom to carry forward the British offshore programme. Now, however, if a clumsy Government put a dead hand on this great surge of activity, as I believe is the danger and as has been chillingly emphasised in the debate they may already be doing, if that is the course of action we get dragged into we as a nation will have deserved to fail.
§ 7.42 p.m.
§ The Minister of State, Treasury (Mr. Robert Sheldon)
This has obviously been a valuable debate in so far as it has helped along the discussion which my right hon. Friend the Paymaster-General and I and many of our colleagues have been having and will continue to have with the oil companies. Consultation has been the very keynote in the preparation of the Bill, and with a new tax of a radically different kind from those to which we are accustomed there must be this element of consultation.
It may be that had we had the time, one of the options might have been for a Select Committee to study the tax. As we know, however a Select Committee 541 is already being set up to examine the wealth tax, and it is very important, because of the coming on stream of North Sea production next year, that the oil tax is ready in good time.
The right hon. Member for Wanstead and Woodford (Mr. Jenkin) referred to the calculations sent to him by an oil company. Those calculations were available only to the oil company and whether by a direct method or an indirect one they found their way to him. These figures were given in confidence, although I shall not elaborate that point. But the important aspect was that the Government provided calculations in a way that is rare. Instead of saying, as has so often happened in the past, that Government know best, we put the calculations forward openly and frankly in an endeavour to see whether the oil companies agreed with the method, to see whether they could devise any better method and to hear any other comments they might make. The element of consultation has been central in the preparation of the Bill.
§ Mr. Patrick Jenkin
I accept the value of consultation, although consultation on the tax has not been going on for long, but will the Minister of State release the figures for wider consultation and consideration? They are bound to have gone to the companies' financial advisers and the banks, and I see no reason why they should continue to circulate with "Confidential" stamped on them.
§ Mr. Sheldon
The right hon. Gentleman, whose knowledge seems to be fairly considerable, may know that there were two types of consultative document. One type is strictly commercially confidential because it depends on information about the activities of individual companies which could be identified, although we tried to make sure that they were not easily identifiable. The same argument to a more limited extent might be put about the hypothetical case. That aspect gave us some anxiety. I will with pleasure look into what the right hon. Gentleman says. Unless there is an overwhelming case for keeping documents of this type confidential, I believe that they should be made available to the Opposition.
§ Mr. Jenkin
I am grateful to the Minister of State who, as so often, approaches these problems with an open mind. Will he consider applying the same procedure to what has become known in the industry as the Dalton letter, which was circulated before the Bill was published and of which the Paymaster-General's office was kind enough to send me a copy in strict confidence? I shall of course preserve that confidence.
§ Mr. Sheldon
I shall, with great pleasure, consider that matter, too.
The hon. Member for Guildford (Mr. Howell) spoke of the need to maintain incentive. He posed the question fairly by asking, "Is the incentive there?" The Government's intention is to maintain an adequate and generous incentive to the oil industry to deal with the problems that it will have to face. We want to make sure that there is an incentive. It will at least in part depend on the rate of the petroleum revenue tax, which is still a matter for final decision based upon consultation and upon other factors that we have discussed.
The Bill has been called the first part of the Government's strategy for dealing with our offshore oil. The second part will be concerned with participation, and that is outside the scope of this Bill. Participation is one of the most valuable methods of ensuring that the Government understand the problems of the industry——
§ Mr. Sheldon
I listened to the speech of the hon. Member for Bedford (Mr. Skeet) with interest and some courtesy. Perhaps he will allow me to continue.
Participation will give the Government the opportunity to discover the precise calculations of profitability and to learn how to regulate and administer the oil industry.
§ Mr. Sheldon
I wish that were so. If that had been so the need for consultation would have been less. It was precisely because the Government did not have the information which the hon. Member for Bedford assumes they have that they had to undertake extensive consultations to secure the information on which the Bill will be based.
§ Mr. Sheldon
The hon. Gentleman should know that the Government in their dealings with British Petroleum do not have the information which they will acquire through the consultations. The information available to the Government from oil companies, even from those with which the Government are closely associated, is an inadequate basis for financial legislation which is crucial to the development of these resources.
§ Mr. Jenkin
Of all the arguments advanced for the British National Oil Corporation that is the weirdest. The Government will take powers to get information in the Bill to be presented in the new year. It is all set out in the famous Clarence Tuck letter of September. Why do they need to invest £4 million, £5 million or £6 million of the taxpayers' money to achieve the same objective?
§ Mr. Sheldon
The right hon. Gentleman must know that, apart from the problems of dealing with a company in which the Government have an interest but which is not owned by the Government, the details of management and the work on the ground are not known. If those details were known they would be about one company and not about the whole industry. If the right hon. Gentleman's argument is that there is no need for consultation because as the result of the Government's having a connection with British Petroleum all the information is available, he is seriously mistaken. The argument for consultation is that we do not possess the kind of information that the right hon. Gentleman for some peculiar reason assumes that we do possess.
§ Mr. Sheldon
I find this to be an incredible situation. Opposition Members are saying that legislation can be framed on the basis of one or two examples and that the Government can decide how to get vast sums of money on the basis of grossly inadequate information. I am talking about consultation over the whole of the oil industry, and about participation which will give us further knowledge. The third part of the Government's strategy is the setting up of the British National Oil Corporation as an oil company possessing the power to develop the resources and hold the shares which will arise from participation.
I am sorry that we have spent time on this subject which will be dealt with in the Bill to be presented by my right hon. Friend the Secretary of State for Energy. Much of what has been said is a curtain raiser to the Second Reading debate of that Bill. I suggest that hon. and right hon. Gentlemen come back to the House after a month or two and make their speeches on a more suitable occasion.
§ Mr. David Howell
The Minister made some important statements and lifted the curtain on the BNOC. In doing so he has revealed a scene of some confusion. Is he saying that it is not to be a corporation in the recognised sense of the word—even a nationalised industry is a corporation—but is to be an agency, an instrument for consultation and information gathering. Is that what he said?
§ Mr. Sheldon
No. I did not say anything of the kind. If the hon. Gentleman reads what I said, he will see that this is a matter which will be brought in by my right hon. Friend the Secretary of State for Energy. The hon. Gentleman would do better to wait and see the proposals announced in the kind of detail which will be adequate for the purposes that he has in mind.
Even before the rise in oil prices last year, it was clear to everyone that the revenue arising from the North Sea was quite inadequate. The impetus for this Bill rightly came from the work of my right hon. Friend the Paymaster-General and the publication of the Report of the 545 Public Accounts Committee for the Session 1972–73. There are many outside this House who decry the rôle of Parliament in the work of our country. Those who do that should note that here is a case where a Select Committee of Members of Parliament provided vital information to the effect that our people were not getting a fair return from the oil policies of the then Conservative Government. Condemnation of those policies was voiced by the Public Accounts Committee, of which the right hon. Member for Wanstead and Woodford made light——
§ Mr. Sheldon
The right hon. Gentleman spoke of "the myths" of the Public Accounts Committee. I thought that that was making very light of its report, which was the foundation for our oil taxation policy. The myths of which the right hon. Gentleman spoke were the product of an all-party committee whose members included a large number of Conservative Members. They made their condemnation about the granting of licences, and most of us were deeply impressed by the way in which their report formed the background to this present legislation.
It is important that the three main planks of this legislation should be made clear. My right hon. Friend the Paymaster-General pointed out that the Government had adopted a field-by-field approach, that it was essential to have this prior charge, and that it was essential to have the ring fence in operation. There are other matters which we shall be discussing, and consultations will take place. However, it is important that the resources of our country, newly enriched by these finds, should be used in the interests of the country as a whole. I hope that they will be used for the industrial regeneration of the development regions, especially those in Scotland.
Our concept of the proper exploitation of this new source of energy includes proper care of this new resource in the provisions which will be brought forward by my right hon. Friend the Secretary of State for Energy——
§ Mr. Hordern
The hon. Gentleman said that one of the points not open to discussion was the question of interest relief 546 against petroleum revenue tax. Will he address himself to the reasons for this exclusion? This is an important matter, and we should be told the reasoning behind it. At the moment there does not appear to be any.
§ Mr. Sheldon
I shall be coming to that later in my remarks.
I want now to deal with one or two of the detailed points which have been raised. First, the hon. Member for Hertfordshire, South-West (Mr. Dodsworth) pointed out, quite rightly, that Clause 6 allows for abortive development expenditure only if a field is abandoned before 1,000 long tons have been brought up from the North Sea. This is a point worth considering, and I am prepared to consider it.
Another matter which I found somewhat complex arose when the right hon. Member for Wanstead and Woodford said that this Bill had the wrong structure. There is nothing more fundamental about a Bill than the structure upon which it is built. Having decided that this is the wrong structure, the right hon. Gentleman has come to the conclusion that he does not intend to vote against it. I shall be interested to discover how he intends to reshape the Bill if his opposition to it is so muted.
§ Mr. Patrick Jenkin
I thought that I had made the position abundantly clear. The Opposition agree in principle with the idea of additional taxation. I spelled out at length the points of common ground between us. But we have said that the first part of the Bill has instituted the wrong structure of tax and that we shall move amendments in Committee to put that right. It is a little odd to invite the Opposition to vote against a Bill when so much of it is agreed.
§ Mr. Sheldon
I have been a little uneasy about the right hon. Gentleman's reasoning on these matters over the years. If he intends the structure to be radically different and he succeeds in changing it, it will not be the same Bill.
My hon. Friend the Member for Dudley, West (Dr. Phipps) pointed to the problems and needs of the small operators. I accept that they are rather different, and I have personally invited my hon. Friend to make representations to me on these important matters.
547 A number of hon. Members referred to the problems arising out of Clause 2, which lays down the rules for computing participators' assessable profits or losses from oil fields in any chargeable period. I regret that this is a complex clause. When dealing with a new tax it is essential to ensure that it is sufficiently clear for the purposes of those who have to decide its interpretation, even at the expense of the clarity which we ourselves might prefer. The tax is designed specifically for a narrow and homogenous sector of industry. As a result, it is only fair to set out in full the appropriate method of computing profits.
Clause 3 concerns the allowance of expenditure other than expenditure on long-term assets. A number of hon. Members referred to this, and I shall try to deal with some of their points. I shall take up in correspondence those with which I am unable to deal tonight.
In defining what is to be allowable as an expenditure in broad categories, the clause departs from the normal rules for income tax and corporation tax. Under those rules, tax is charged on the balance of profits and gains supplemented first by a general disallowance of any expenditure not laid out wholly and exclusively for the purpose of the trade, and second by a number of specific disallowances—and also some provisions for specific items to be deductible. The starting point of all corporation tax and income tax trading computation is the commercial profit shown by the accounts. In discussions on the petroleum revenue tax structure the industry has urged that the same rule be followed.
Unfortunately, there are good reasons why that cannot be done. Income and corporation tax apply to a wide variety of trades and the computation rules are naturally drawn in wide terms. It would be impracticable to draw up a specific list of allowable expenditure covering all trades from, say, a toffee shop to a steelworks. Inevitably, broadly drawn rules have led to frequent litigation over the years.
By contrast, the petroleum revenue tax applies to a narrow and homogeneous sector of industrial activity. Therefore, it is sensible to draft the expenditure rules in terms appropriate to that activity. 548 The categories set out in Clause 3 subsection (1) are quite broadly drafted.
§ Mr. Patrick Jenkin
I wonder whether the Minister is slightly misunderstanding the point that has been made. The novel principle is that of setting out matters which are allowed, whereas the practice in the past has always been to allow more normal business expenses computed on ordinary accountancy principles and to disallow certain specified matters. Is it not possible to adopt that procedure here if the Government feel that it is essential to disallow a number of matters rather than to specify that one must bring the expenditure within a number of categorised headings which may not cover desperately important points?
§ Mr. Sheldon
It was felt desirable to draw up this matter rather more tightly than the right hon. Gentleman suggests. During the further discussions some widening may be possible. I look forward with interest to hearing what these representations might eventually produce.
Several hon. Members have referred to interest. Uplift is in lieu of interest. It is not possible to make a precise connection with the value of the uplift in terms of interest rates in the way suggested by my hon. Friend the Member for Dudley, West without making a number of assumptions. These include the length of the loan repayment period, over how many years the interest would be repayable, the timing, the flow of receipts, and other matters. The Bill provides for the uplift—the additional deduction equal to 50 per cent. of cost—to be given for certain items of expenditure as compensation for the disallowance of interest paid on borrowings.
The decision to disallow interest when computing profits for PRT was a precaution against possible loss of tax. Interest charges could be arranged to erode the tax base of PRT. The production company could borrow from another company in the same group at inflated rates. There could also be the problem of allocating interest where a company carries on activities additional to North Sea oil production. The uplift has been fixed at 50 per cent., but that figure could be reconsidered, in the light of comments that have been made tonight, if the industry could prove that it was inadequate as compensation for 549 interest paid on borrowings. If interest rates were to rise dramatically, that factor could be brought into the discussion.
I turn to the problem of the ring fence to which reference has been made. Under the present rules for corporation tax there are a number of ways in which the profits on United Kingdom oil activities could be eroded. The most important is the set off of losses and capital allowances from extraneous activities carried on by either the same company or an associated company in the same group.
The purpose of the ring fence is to prevent the corporation tax yield on United Kingdom oil production profits being reduced by these or by other means. The effect is to isolate North Sea income for all corporation tax purposes from losses and allowances arising from any other sources. The ring fence will operate in one direction only. It will not prevent any losses and capital allowances attributable to United Kingdom oil and gas production from being set off against non-North Sea profits of the same group under the normal corporation tax rules. Other matters connected with this problem were fully discussed by my right hon. Friend the Paymaster-General in his opening speech.
Severe criticisms have been made about the level of optimism, expectation and enthusiasm by a number of the oil compaines.
§ Mr. Peter Rees
I put a specific question which I think echoed points made by others of my hon. Friends. What criteria are to be adopted by the appropriate authority in determining what constitutes the area, as the Minister chooses to put it, within the ring fence? How will the area for taxation purposes be defined?
§ Mr. Sheldon
These are matters for, further consultation as required. I explained to the House that there are only three bases on which we firmly stand. We believe that we have a workable outline of the tax—a tax which I think will be of enormous value—but we are prepared to discuss these other matters on the basis of figures and representations made to us by the oil companies. The fact that we had a cordial and valuable meeting as recently as a week ago—it was the largest meeting of a number that we 550 have had—is evidence that this relationship exists. Indeed, I hope that it will develop.
I should now like to deal with the gloomy prognostications made by the hon. Member for Guildford. My right hon. Friend the Paymaster-General said that it is no part of the Government's intention to allow these tax proposals to deter any development. The Offshore Supplies Office of the Department of Energy was set up to ensure that there was no slippage in the development programme. I am sure that the oil companies and the financial institutions accept the Government's assurances that they intend to see this programme carried through at its present pace.
It is a fact that, for example, Texaco recently acquired a major share in the Argyll field and that the International Energy Bank—a consortium of major banks—recently agreed to arrange a credit of about $250 million for two of the licences for the Piper field. That, at any rate, may go some way to offset the gloomy picture painted by the hon. Member for Guildford.
§ Mr. Patrick Jenkin
Will the hon. Gentleman answer the question about the Thomson Scottish and Occidental loans, to which he referred, by telling us the nature of the assurance that the Government had to give to the companies in order that the deal could be signed up?
§ Mr. Sheldon
I shall be pleased to write to the right hon. Gentleman about that matter. I have no knowledge of those negotiations. The right hon. Gentleman has these problems in mind because he is more concerned with the next Bill on this subject and is using this debate as a curtain raiser. I appreciate and understand his interest, but I suggest that he should leave those matters for the next Bill which is his prime consideration.
§ Mr. Jenkin
The Minister chose to refer to that loan by the consortium of banks, under the leadership of the International Energy Bank, for the financing of the Piper oilfield by Occidental and Thomson Scottish as an example of confidence. What undertakings or assurances have the Government had to give to those companies to enable them to sign up that deal?
§ Mr. Sheldon
The right hon. Gentleman will understand that a number of these matters are the subject of confidential negotiations. Naturally all these things always are. But I shall be happy to go into the matter if the right hon. Gentleman writes to me.
The Government have in a short space of time, but acting with determination—which is important in this respect—created a new tax, in an entirely new situation. The new sources of fuel that arise from the North Sea are now being exploited at a time of international concern about the security of energy supplies. What we as a country do with these sources and how we obtain for our country the benefits from the sources are bound to be matters of debate and continuing concern.
As I have said repeatedly, we shall continually consult with all those interested, and we believe that with the sort of co-operation we have had so far this wealth will be brought from the North Sea, so that we can produce a fair deal both for those who work to produce the oil and for the people of our country.
§ Question put and agreed to.
§ Bill accordingly read a Second time.
§ Bill committed to a Standing Committee pursuant to Standing Order No. 40 (Committal of Bills).