§ 4.9 p.m.
§ Mr. T. H. H. Skeet (Bedford)
I beg to move amendment No. 60, in page 7 line 33, leave out ' 60 ' and insert 56
It would appear a little extraordinary that I should raise a topic such as this at the beginning of the day because it will not attract the attention of many people, due to its complexity. The amendment proposes to reduce the new rate of 60 per cent. for petroleum revenue tax to 56 per cent. When the Oil Taxation Act 1975 was going through the House the then Paymaster General, Mr. Edmund Dell, who has since left us, indicated that he had been at some pains to assure the industry that this tax was intended to be stable and not a short-term regulator. It was fairly important that this should have been indicated at the time, and this is binding on the Opposition. My right hon. Friend the Member for Wanstead and Woodford (Mr. Jenkin), who was the Opposition spokesman at the time, said:I hope that …the industry will take the joint assurance of the right hon. Gentleman and myself that there is no intention here that this should be anything other than a stable tax, which will not be used for demand management purposes nor as a short-term regulator."—[Official Report, Standing Committee D, 6 February 1975; c. 729.]I come to the crux of the matter. This tax was levied for the first time in March 1975, and I must point out that we are now in 1979 facing sweeping changes provided in the Finance Bill. The Paymaster General said in February 1975:a change in the price of oil relative to price levels generally could have a profound effect on profitability. I therefore made it clear on Second Reading, and I take this opportunity to reaffirm, that the Government will stand ready to review and adjust the incidence of PRT in the event of a sustained and significant change in the price of oil in real terms."—[Official Report, 25 February 1975; Vol. 887. c. 291.]That is a limiting factor. When Labour proffered the suggestion that PRT 279 should rise to 60 per cent, they broke the assurance given to the House. Between January 1978 and March 1979 there was no increase in the price of oil in real terms. Indeed, the trend went entirely the other way. I emphasise that there was an 18 per cent. drop in the real price of oil between the time when PRT was introduced in February 1975 and the time when the new rate of PRT was announced in August 1978. Her Majesty's Government at the time broke the pledge which they gave to the House and to the Committee that this tax would not be altered unless there was a change in the real price of oil.
I am not arguing that this tax should not rise. I bear in mind the fact that OPEC has secured a considerable increase in oil prices. But we have to examine the matter statistically. If we take the time when PRT was introduced in February 1975, we must take into account three factors: first, the changes in OPEC prices—and the top price that would be acceptable in respect of North Sea crudes would be $23.50 in line with North African crudes—secondly, the dollar-pound exchange rate, and, thirdly, the price index.
If we take February 1975 as the base and July 1979 as the current figure, we see that the price has risen from £4.94 per barrel to £5.91. The change in the base is 19.7 per cent. This would justify a PRT rate of 54 per cent., not 60 per cent. I believe that, for the reasons I have stated, two points higher might be the relevant figure to pay.
§ Mr. Dick Douglas (Dunfermline)
Will the hon. Gentleman concede that there are other factors to consider, such as the amount of oil going on to the spot market and the spot market price?
§ Mr. Skeet
The oil markets in Rotterdam, Genoa and elsewhere trade in margins and deal with only small quantities. The price is anything between $30 and $35 per barrel, but that does not apply to term contracts. We know that OPEC has agreed that the top price will be no higher than $23.50 per barrel. Therefore, surely the spot market should not be regarded as the appropriate indicator.
The Government should not have adopted the figure of 60 per cent. laid 280 down by the Labour Government. They are entitled to take account of other factors, but they should have worked out arithmetically by what margin the real oil price had altered over that period. This is not a concluding factor because the position varies considerably. There was a long period, between January 1978 and March 1979, in which the real crude oil price fell.
There is an interesting passage on this subject in The Economist of 7 July this year which reads:they need to learn "—referring to the participants in the Tokyo summit—how to take advantage of the modest drop in the real price of oil which stagflationary recession might bring: say, only a 5 per cent. rise in crude oil prices next year but a 10 to 15 per cent. general price inflation in most other things.Although the Government may argue that a rise is justified because of a real rise in the price of crude oil, it must be said that next year the price may fall drastically. If that happens, the proposed tax will be extremely onerous.
I wish now to move to the supply argument. I approach the matter in logical sequence. Historically, exploration success in the North Sea peaked between 1973 and 1975 and thereafter declined. The total productive capacity of 25 fields is 2.5 million barrels per day, but this is likely to decline to 400,000 barrels a day by 1995.
The lead time required for exploration to mid-peak production is assessed at between seven and a half to nine and a half years, which gives the time frame within which replacement oil must be brought forward. New oil required is assessed at about 2 million barrels a day and, measured back from the mid-1990s, this requires to be discovered between 1979 and 1987. As there is a major shift towards the discovery of smaller fields as opposed to the prolific fields, such as the Forties field—the probability of finding a field with recoverable reserves of 300 million barrels is about one in a hundred—it is essential to have a fiscal regime to provide an incentive to ensure their discovery and development.
I am uninfluenced by the fact that recently Phillips Petroleum is stated to have made an important discovery in 281 block 16/17 in the Tiffany field. It is thought that this field, together with Thelma and Tony, will produce recoverable reserves in aggregate of no more than 500 million barrels. But what concerns me at this stage is the fact that exploration drilling has been dropping away seriously. This is noted in the report of Wood Mackenzie as late as 22 June 1979:With six rigs in the UK sector still employed on development work, the number of UK exploration and appraisal wells drilling has remained at a depressed level.The report indicates that the result of what occurred last year, when the announcement was made by the Labour Government that PRT would be increased and that other rights would be taken away, will not help the petroleum industry.
I congratulate the Department of Energy on bringing on the development of oil and gas resources in 1979. There were 37 exploration wells and 25 appraisal wells drilled in 1978. That compares with 67 exploration wells and 38 appraisal wells drilled in 1977. How is the decline to be remedied? Exploration is essential to avoid a significant shortfall in production in the late 1980s and the early 1990s so that the United Kingdom will remain self-sufficient in oil. The fiscal system which drains the funds which would otherwise be available for future drilling is short-sighted. Further, future discoveries have to be funded out of past successes and not out of abortive drilling. It is notorious that future costs will continue to rise because of three factors—increased water depth, lower productivity per well, and the increased technology which will be required. All three will demand greatly increased funds in the future.
It may be necessary to drill deeper in order to locate oil beneath existing finds. It should be noted that smaller fields are more likely to be developed in the future and, whoever conducts the search for oil, the contribution of independent enterprise should not be overlooked. According to the American Association of Petroleum Geologists, independent producers account for the majority of wild-cats that are drilled in the United States and they have discovered about 54 per cent. of the current United States oil and natural gas reserves.
282 The proposed taxation at 60 per cent. will affect the marginal fields much more seriously than any others. The new rate will prove relatively onerous to the marginal fields because of the broadening of the tapering tranche, together with other proposals which will accelerate the time when PRT will be paid. Compared with the current rate of 45 per cent., the increase will be 20 per cent. for Brent, Forties, Ninian and Piper, but it will be much greater for the smaller fields. It will be 142 per cent. for Murchison and about the same for the United Kingdom sector of Stratfjord. That means a rate of return in real terms on the major fields referred to of 23.7 per cent. compared with 13.3 per cent. for Murchison and Stratfjord (UK). That was the view of Wood Mackenzie in December 1978.
It is intolerable that under the tax regime which we have in the United Kingdom the more prolific and profitable fields get away more lightly and the smaller marginal fields get clobbered hard by petroleum revenue tax and all the other taxes which are associated with it. The reason for the difficulties of the marginal fields is that when a field's adjusted profit is more than 30 per cent. of investment —above the safeguard—the PRT within the tapering tranche is 80 per cent. of the excess. At a 45 per cent. PRT rate that is a considerable band, but at the higher rate of 60 per cent., together with the halving of the oil allowance, the tapering tranche is widened threefold to include all the marginal fields. Surely that cannot be allowed to continue.
The top rate on a big field falling outside the tapering tranche would be 60 per cent. under the present proposals. The Government will take in royalties 84 per cent. of each price increase from the high-profit fields and 92 per cent. from the low-profit fields. That is ridiculous, and I hope that the Financial Secretary will look into the matter at the earliest opportunity.
One recommendation is to modify the tapering tranche to produce a more progressive system of tax that is analogous to income tax. Thus, by adjusting the tapering provisions so that the rate that applies to annual taxable income in the range of 30 per cent. to 60 per cent. of investment is 45 per cent. the 80 per cent. rate applies to all incomes above 60 per cent. of investment until the income exceeds that 283 in the tapering tranche. That would make sense. For example, with a prolific field, under ordinary income tax it would pay at the higher rate and therefore the yield would be higher, but with a marginal field with lower profitability tax would be paid not at the higher rate but at the proportionately lower rate.
The reduction of uplift from 75 per cent. to 35 per cent. discriminates against the fields that are now being developed —Beatrice, Buchan, Fulmar, Murchison (UK), Strafford (UK) and Tartan. Those fields that are already operating, Brent and Forties, have had the benefit of uplift at current rates. The only benefit in the Finance Bill is that the date for contracts has been advanced from 2 August 1978 to 1 January 1979.
The oil allowance was intended to benefit the development of the marginal fields, but, like other phenomena in politics, it has turned out to be the other way around—it is to their debit. The large fields have been able to take advantage of the allowance because of their longer life of between 15 to 20 years. The smaller fields could only utilise the allowance for two to three years of their life, although the facility is available for a 10-year term. The only consolation in the provisions is that the safeguard mechanism has been retained. However, that could be modified.
It is essential to get people back to the North Sea, working and drilling for new oil for the 1990s. It will be appreciated that if Wood Mackenzie is prepared to say that there has been a fall-off in drilling the country is in a serious position. The Government should confine themselves to lifting the rate of PRT and they should leave untouched the provisions that relate to uplift in the oil allowance. There will be ample time to consider those provisions in the Finance Bill of 1980 because few companies are paying petroleum revenue tax now.
The PRT should be adapted to become a progressive tax analogous to income tax by altering the application of the tapering tranche. The capital base upon which safeguard provisions under section 9 are calculated should be indexed. That would help to overcome the effects of fiscal drag which may become severe later in the fields' lives. The faster oil prices rise in money terms, the less valuable is 284 the safeguard mechanism under the 1975 Act for protecting marginal developments against high taxation.
§ 4.30 p.m.
§ I have two further recommendations to make. I hope that I have not wearied the Committee in expressing some of the important provisions. The Treasury could with advantage provide a formula under which no royalties would be payable on fields yielding between 35,000 and 70,000 barrels a day—that is, 100 million barrels of recoverable reserves—from the marginal fields compared with 125,000 to 150,000 barrels a day from the larger areas. That would require a simple modification of section 41(3) of the 1975 Act.
§ My final recommendation is that the Minister should consider the application of the ring fence. It is working satisfactorily under corporation tax. It is possible for one oil company to use the profits from one field for the development of another marginal field—for example, the Magnus field. If the ring fence were not extended to cover the entire North Sea, it could be widened a little to incorporate some of the marginal fields which could be developed in conjunction with some of the more profitable fields.
§ It is all very well to accept a rate of 60 per cent., which may be tolerable now. Next year, after a severe recession, the real price of oil may decline. The tax would then be wrong.
§ The Financial Secretary and the Secretary of State for Energy must consider whether they will be able to produce in the [...] 1980s and early 1990s the barrel-age per day to make this country self-sufficient in oil. Alternatively, will production have declined so much because of the absence of exploration that we shall have to import more and more? It is no good saying that we can rely upon coal. It will not fill the gap. We must have oil.
§ The long-term problems have been caused by five or six years of disastrous Labour Government. They did not face the problems.
§ Mr. Denzil Davies (Llanelli)
We have just heard a typical pro-oil industry lobby speech. The hon. Member for Bedford (Mr. Skeet) was well briefed, and he knows his subject well. It was the usual 285 type of speech from a Tory. Government supporters seem to be more keen to espouse the oil companies' case than to consider the matter objectively in the interests of the British taxpayer and the country.
§ Mr. Davies
The hon. Gentleman may weep tears for the oil companies, but they do not seem to have done too badly in the last 25 years. It looks as if they will do even better in the next 25 years. I am not too worried about the oil companies.
I do not support the amendment, but this is an opportunity to debate the subject and to express ideas that we might express on the debate on the clause as a whole.
The clause puts into effect the principle which my right hon. Friend the Member for Heywood and Royton (Mr. Barnett) announced to the House last August. We accept and welcome the clause.
A long time has elapsed since August. At that time Tory spokesmen niggled about, if they did not oppose the ideas in the statement. They did not think that it would assist the revenue of the United Kingdom. The same attempts were then made to put forward the oil industry case as were made during the passage of the Oil Taxation Bill. The Opposition's speeches then were made on behalf of the oil companies.
At that time nobody in government had any experience of introducing oil taxation legislation. It was a difficult period. Little help came from the Conservative Opposition. They were more concerned to espouse the interests of the oil lobby.
The decision that was taken by the last Government in August was against a background of a price for North Sea oil of about $14 a barrel. There had been a period of stability. We came to the conclusion that a 60 per cent. rate was correct at that time.
The price of North Sea oil could increase even further. By the autumn it 286 could reach $23 a barrel. Events have overtaken the Government. The principle in the clause was right last August, but it is not right now. It is not right against the background of the OPEC price increases and the knowledge that there will be an increase in North Sea oil prices.
There may be a period of recession and the price may stabilise, but in the next 25 years there will be an escalation in the price of oil, with short periods of stability. In those circumstances, 60 per cent. is not adequate.
§ Mr. Skeet
The right hon. Gentleman did not appreciate what I was saying. I said that the PRT rate should be 54 per cent. I was working on North Sea oil at $23.50 a barrel, a dollar exchange rate of $2.20, a North Sea crude oil price of £10.68 a barrel, the wholesale price index having moved from 94.4 to 170.5, which brings the real crude oil price to £5.91 per barrel. That is an increase of 19.7 per cent., which justifies the rate that I suggest.
Is the right hon. Gentleman suggesting that we should levy a 60 per cent. rate and even more on an expectation that may never materialise? The right hon. Gentleman should consider the matter again.
§ Mr. Davies
I accept that with a decline in the value of the dollar the oil companies may have to adjust the price. I do not accept the hon. Gentleman's figures. I prefer to take my information from the Sunday Telegraph rather than from the oil companies. The Sunday Telegraph may be a little more objective. An interesting article by W. I. Carr was headed: " Oil companies OPEC bonanza ". This article appeared in a sensible financial column and was written by a respected journalist. His figures are likely to be more objective than the figures quoted by the hon. Member for Bedford using a brief from the oil companies.
A table gives an indication of the profits of the largest oil companies. The article claims that Shell is to benefit by £700 million merely from the latest OPEC price rise. BP is to benefit by £440 million. The Government apparently want to sell the majority control in BP when its profits are likely to rise 287 remarkably over the next year as a result of the increased price of oil. That seems extremely foolish and dangerous.
§ Mr. Douglas Jay (Battersea, North)
Is it not also the case that when there are OPEC price rises, the oil companies immediately raise the selling price of stocks that they bought at the lower price? Huge stock profits are made, as has been admitted by the chairmen of some of the major oil companies—I do not think that the hon. Member for Bedford (Mr. Skeet) will contradict me—which run to enormous figures. If it is necessary to make immediate price increases and reap huge stock profits, is that not a case for some form of additional taxation rather than for a reduction?
§ Mr. Davies
My right hon. Friend makes a good point. Being rather simple minded on these matters, I have never understood how profits can rise when costs increase. One sees that happening not only in the oil industry, but in other cases. Costs rise, but why should profits rise so dramatically as a result? The profits should surely not rise any more than enough to absorb the rise in costs. BP and Shell will be making enormous profits over the next 18 months to two years as a result of the OPEC " bonanza ". Both those companies, especially BP, are heavily involved in the North Sea. I do not see how they can argue for a cut from 60 per cent. I argue that the rate is too low in present circumstances, because it takes no account of the latest oil price rise.
The Conservatives opposed PRT when it was introduced. They were not enamoured of the idea, they did not like it, and they have constantly niggled away at it ever since. We understand that the Government are looking at oil taxation again. I hope that they will look at the clause and at the rate of tax in the light of what has happened and what is likely to happen over the next few years.
If nothing is done and enormous profits are made, cries and clamour will come for some sort of excess profits tax on the oil companies to take away the profits that they are making, not through any hard work, initiative or industry, but because a cartel in the Middle East 288 decides to raise oil prices and the oil companies reap the benefit.
§ Mr. Nick Budgen (Wolverhampton. South-West)
Does the right hon. Gentleman agree that the consequence of high profits will be, if anything, excessive investment in marginal fields? That would lead to a great increase in production, and that could lead to a break in the cartel with more and more energy coming on to the market.
§ 4.45 p.m.
§ Mr. Davies
I do not know about that. It depends on world demand over the next 25 years. I do not see demand falling much unless somebody invents a new sort of engine that uses something other than oil. Demand will probably outstrip supplies for a long time. One cannot answer that sort of question when one just does not know. I guess that it would be the other way around.
§ Mr. Anthony Nelson (Chichester)
The right hon. Gentleman seems to be indicating that the Labour Party feels that the 60 per cent. rate in the Bill is too low in present circumstances. Will he say what rate he thinks it should be, and why no amendment has been tabled providing for a higher rate?
§ Mr. Davies
The hon. Gentleman has been long enough in the House, and has served on one or two Finance Bill Committees, to know that the Opposition cannot table amendments to increase taxation. An amendment was tabled by the Scottish National Party, but it was not selected.
We will consider that complicated and difficult matter—[Interruption.] It is all very well for the hon. Member for Bedford to laugh when he has the oil companies resources behind him. They provide him with a brief, and that brief is always for a reduction in the rate of tax. We will submit our proposals in due course. The Government should look at the matter again—not between now and Report—because we shall see massive profits from the oil companies over the next two years.
It may be that the PRT system, which worked well initially, is not the right instrument to deal with the problem over the next 25 years. It was the first shot that we in Britain had had at oil taxation, and the Labour Government had no help 289 from anyone to put it through. The oil companies tried their best to create as many loopholes as they could, with the help of many Conservative Members, against a difficult background and in a difficult situation. Therefore, we may have to look at the problems again.
I quote from the splendid article in the Sunday Telegraph:But much will depend on what happens in the Middle East and on the dollar-sterling exchange rate. The only sure thing is that the oil companies are in for more flak, as each quarter churns out more record figures.When the record figures are published I hope that the Government will think about the tax and the rate again, because it is our opinion that 60 per cent. is too low.
§ Mr. Geoffrey Dodsworth (Hertfordshire, South-West)
We should regard the debate as an extension of the debate that took place on Friday last week on the motion entitled " The Challenge of North Sea oil ", introduced by my hon. Friend the Member for Gosport (Mr. Viggers), seeking on a wider basis to examine the needs of the situation. We are all grateful to my hon. Friend the Member for Bedford (Mr. Skeet) for submitting his reasons for a reduction in the tax.
We are still in very early days and treading new ground on the effect on the economy and the effect on Britain of the development of North Sea oil. The PRT is only part of that development and only part of the issue.
The yields from the tax are only just beginning. These are early days and we are looking to substantial yields from that sort of taxation in the future. The yield from PRT in 1978–79 was £180 million, and we are looking for the year 1983–84 to a yield of more than £3 billion. We are at the very beginning of the effect of the tax.
It is perhaps helpful to look at some of the comments made in the debate today and in the debate on Friday to see how we should proceed. There was an interesting comment from the right hon. Member for Down, South (Mr. Powell) that the effect of additional taxes on oil supply was not the traditional or desired effect of suppressing demand. It did not mean that extra oil would be produced because the price was raised. There would not be additional production be- 290 cause there is a limitation on supply. The right hon. Member for Llanelli (Mr. Davies) takes the view that we shall have an ever increasing demand, but it seems that we are seeing a restriction in supplies. We are seeing a restriction by physical means by those who control the resources throughout the world, if nothing more than that. We are certainly seeing a diverting of those resources for political purposes. That has for us a substantial economic effect.
We add to that the taxation procedures that I understand were felt desirable at the time. Here was a resource which many felt would meet the needs of the nation, and there were those, who are still represented in the House, who felt that it represented the needs of a particular part of the nation and it was their resource. I do not share that view, but it is true that we all have an inbuilt interest in seeing how this resource is developed.
In Friday's debate many hon. Members expressed the concern that the resource might be developed purely as an adjunct to the Treasury. It may be an attractive source of revenue and of funding for developments, and there may be long discussions about the sort of social advantages that may be obtained from it. However I believe that we must think of it in terms of being an energy bank.
Many of my hon. Friends expressed the view on Friday that the oil should be husbanded purely in energy terms, and that the marginal fields should be developed as effectively as possible as a positive act of Government policy. The observations of my hon. Friends about the marginal fields were highly relevant. The more one takes in tax from a company, the more one depletes the finance available to carry out the development of marginal fields. It is not good enough to say that because the Government can tap this source of revenue they are better able to make judgments about development than the oil companies.
I do not hold a brief for oil companies, but I certainly have a view about the development of the nation's resources. The track record of the oil companies is remarkably good. We should have been in a pretty sorry state if they had not been prepared to invest substantial resources in the North Sea. That investment 291 has provided a positive benefit for the nation. The argument that we should simply mulct taxes so as to benefit socially desirable causes is simply not viable. The companies engaged in the development of the resources should be able to retain profits to use in their development activities. That is in the interests both of the nation and of the companies. It might be said that the interests of those companies is their perpetuation, and that the route of their perpetuation is via their profitability. If that is done on the basis of self-motivation, that will lead to far more efficient and effective development.
If the Government are to benefit from the substantial sums that will accrue over the next few years—and here, like many other hon. Members, I draw on Mr. Brittan's article—we should consider how the money can best be used. Mr. Brittan tells us that the figures are likely to rise from £1.6 billion in 1979–80 to £6 billion in 1983–84.
I offer two slightly divergent ideas on how that finance should be employed. During the general election campaign I conducted a survey of all my constituents. I commend that as an activity. It was a unique opportunity to address specific questions to my 76,000 constituents. One of the matters I questioned them on was North Sea oil. I asked how they wished the oil to be utilised and how they wanted the proceeds from it to be used. About 375 people replied, and of those 70 sent very detailed letters explaining how the resources should be developed. The vast majority of the electors who replied wished the resources of the North Sea to be used to develop further energy resources. That was the sum of their views—there were, of course, many diverging views among them. That is a useful expression of public opinion. It can be related back to the activities of the oil companies as being a way of ensuring that the resources are used in that way.
Other people went further, saying that they wanted the money used to develop our industry. They felt that if the resources were finite the money should be invested in industry but they did not wish to see the money used to " prop up lame ducks ". I quote those words from some of the people who wrote to me.
292 These resources give the nation a great opportunity, and that leads me to my second, slightly divergent view on this matter. We have an opportunity here to relate the activities of the OPEC countries to our own trading activities. The OPEC countries want the resources that arise from their oil used to assist developing nations. If that is a praiseworthy aim, and I believe that it serves a number of purposes and causes, we, too, might take such a view.
If we want our industrial activity to be developed and our trading activities promoted, we should consider whether some of these resurces should be directed to overseas aid. This country has had excellent experience of providing tied aid. We have been able to offer aid in ways that promoted the commercial and industrial activity of our own people, providing jobs, opportunities, profits and prosperity for the nation. We have a good record of doing that in a benevolent way that is advantageous for some developing countries.
We have an opportunity to do that here. We can in one move serve a moral and social purpose in the world while serving our own national interests. The catalyst for that is the private enterprise system. I want the Treasury to take a firm grip on the revenues, the Department of Energy to pay attention to the proper use of the resources, and those concerned with our trade to seize this opportunity of generating new business around the world with countries which need our help and which can help us. I hope we shall not fail to grasp that opportunity.
§ Mr. Tam Dalyell (West Lothian)
The hon. Gentleman has told us of the admirable survey of his 76,000 constituents. I am a bit curious as to how it was financed during the general election. Who paid for it?
§ 5 p.m.
§ Mr. Dodsworth
I will answer that question precisely since it was a matter to which I addressed myself most carefully after advice and consultation at the time. The survey was quite properly part of my election literature. I referred to it, and to the issues I thought were important to the nation, in my election address. I told my electors that they had the chance during the campaign to send their views to me as, I hoped, a future 293 Member. I invited them to say how they thought the affairs of the nation should be conducted. I did not supply my constituents with pre-paid envelopes for their replies. They dug deep into their pockets and bought ninepenny stamps rather than sevenpenny samps, so eager were they to send their views to me. I am grateful to them. I have today sent a reply to all of those 375 constituents thanking them for providing me with information and telling them that I hope to have meetings at the House of Commons to discuss the issues they raised. There is a need for the House to be involved in the everyday ideas and thoughts of our constituents, from whatever walk of life, and whatever point of view they may hold. Not all those who took part in the survey agreed with me.
I should like to see us applying our resources in a way beneficial not only to ourselves but to our fellow human beings throughout the world. That is an idea which appeals to many of our countrymen. They look to the House of Commons to initiate such activity. I like to think that debates such as this provide us with the opportunity to advocate such causes, and I am grateful for the chance to raise the issue today.
§ Mr. Gordon Wilson (Dundee, East)
I thank the hon. Member for Hertfordshire, South-West (Mr. Dodsworth) for his reference to tied aid. I shall be foremost in advocating the cause of Dundee, East and Scotland as a whole as an area for overseas aid. We are an oil-producing country, and we seem to be getting very little value out of it.
I was interested in the remarks of the right hon. Member for Llanelli (Mr. Davies) about the rate of taxation which he thought appropriate to the current position, and I hope to return to that later. The whole Committee is grateful to the hon. Member for Bedford (Mr. Skeet) for allowing this matter to be raised, though I believe that a good number of hon. Members, especially on the Opposition Benches, would be keen to oppose his amendment should he press it to a vote.
The gist of my message is that the tax take-off from the petroleum revenue tax is inadequate. We heard from the hon. Member for Bedford about price increases which had taken place over the 294 last few years, but it was my contention in 1975, when the Oil Taxation Act was going through, that the rate of taxation then adopted was insufficient. The perspective of history will show that North Sea oil was an asset to be exploited with the utmost discretion. It is, after all, a non-renewable asset, a capital asset, and whichever party we belong to our object must surely be to ensure that the maximum benefit from that asset comes to the people of the country, however much we dispute which country that is.
My view is that the oil revenues ought to be increased by taxation so that the funds can be used to encourage investment for the future rather than domestic consumption such as has taken place over the past year to 18 months.
I think it fair, since most of my remarks will be addressed to the present Government, that I should say that the previous Government deserve a great deal of criticism in relation to oil taxation. I found during the proceedings on the 1975 Act that the then Government did a U-turn half-way through and abandoned a large part of their objectives, though admittedly—we had a hint of this from the right hon. Member for Llanelli—under pressure from the international oil lobby.
§ Mr. Douglas
Is the hon. Gentleman not being a bit unfair? The whole strategy in 1975 was to deal with the first 10 clauses of the Bill later on after consultation with the oil companies. There was no abandonment of strategy. There was an indication of a willingness to understand the problems confronting them at that time.
§ Mr. Wilson
I note the hon. Gentleman's remarks. I served on the Committee and I know that at the outset the order of proceeding was changed. Having been on that Committee and having been a party to certain understandings and information about what might be happening, I knew—it was quite clear from the international press—that the Government of the day were under considerable pressure from the international oil companies regarding what might happen if they exacted a higher rate of taxation than the oil companies considered the market could bear in relation to oil 295 production, and the consequences for the balance of payments.
If the hon. Gentleman casts his mind back three or four years he will remember that the balance of payments problem was considerable and that the Government were in some financial difficulty in relation to credit. Those difficulties eventually led to the IMF loan being made available. The Government were aware of their weakness in financial terms, though I think that they should be criticised for what happened at that stage.
The history of oil taxation is interesting. One recalls the Public Accounts Committee report and what was said by Mr. Edmund Dell and others criticising the lack of any taxation structure, because the Conservative Government had failed to produce one in time to deal with North Sea oil. Although they protested that such a plan was in their locker ready to be brought out and dusted off, it is perfectly clear that they were devoid of any real proposals which could have been adopted, judging by the time they had taken.
When we moved on to the Oil Taxation Bill certain things happened, which I referred to in my exchange with the hon. Member for Dunfermline (Mr. Douglas). It was very significant that an article in the " Highlights " column of the Petroleum Times for 7 March 1975 had this comment to make under the heading " UK Government's ' give-away ' tax ":The battle of the United Kingdom rate of petroleum revenue tax is now over, and the oil companies operating in the North Sea can chalk up another victory over a European government. Their success in this sector contrasts strangely with their failure to cope with the governments of the OPEC nations.That was the comment from one respected journal at that time.
§ Mr. Wilson
There is no author given, but if the hon. Gentleman cares to look up the article it is on page 3 in the " Highlights " column of Petroleum Times for 7 March 1975. I shall make a copy available to him if he so wishes.
That was the comment at that stage—that the rate of taxation and the 45 per cent. PRT with the combined oil allowances referred to earlier was too low.
296 On 24 July 1978 there was an article in the Financial Times presaging a change in the rate of taxation which the then Government had in mind. That article, after narrating some of the differences in price which had occurred said:The Treasury and Energy Department have been concerned about the high profit levels being earned by companies in such fields as Forties, Piper, Beryl, Claymore, Auk and Argyll. However, they are also trying to arrive at a formula which will continue to benefit the small or marginally profitable discoveries.I suppose that the comments of the hon. Member for Bedford should be listened to here in the sense that perhaps the changes made may not in fact have the beneficial effect on the smaller field which was intended. Indeed, I accept the view of the right hon. Member for Llanelli that this is a highly complex area of study, and perhaps the time has come for a review of the whole oil taxation structure itself.
At the time of the passing of the 1975 Act, I canvassed the possibilities of a 75 per cent. rate of petroleum revenue tax and was shot down—not in flames, I think, but certainly shot down by Mr. Edmund Dell, then Paymaster General, who took the view that if the rate of taxation were fixed at 75 per cent. there would be an inhibiting effect on development in the North Sea, and, although he did not spell it out, his main worry was not, as far as I could see it, the rate of taxation but the impact that there might be on our balance of payments as a result of any falling off in oil production or, rather, any slowing down in the future rate of production.
In my view, the central issue is this. All is relative to two major factors. The first is sale price. The second is development cost. I admit that there has been an increase in costs through inflation over the past few years, although these increases themselves are dwarfed by the price additions which have taken place particularly within the past six months.
When the rate of tax was fixed at 45 per cent., the Paymaster General said in a statement at the time:I am, of course, fully seized of the fact that a change in the price of oil relative to price levels generally could have a profound effect on profitability … the Government will stand ready to review and adjust the incidence of PRT in the event of a sustained and significant change in the price of oil in real 297 terms."—[Official Report, 25 February 1975; Vol. 887, c. 291.]I think that what the Paymaster General was intending at the time was to give an assurance to the oil companies that if there were a drop in price the rate of petroleum revenue tax might well be revised downwards to maintain their levels of profitability. But one can read that statement of his both ways.
§ Mr. Wilson
That is an argument which the hon. Gentleman might have with the former Paymaster General, though outside this place since he is no longer with us. All I am saying is that what Mr. Dell said in the phrases which I have quoted could be interpreted two ways.
Since I have always held the view that the rate of taxation on oil at the start was too low, I am arguing that if the price of oil rises substantially it is fair and appropriate that the rate of PRT should likewise be increased in order to cream off some of the windfall profits—unexpected windfall profits, at that—which may be obtained by the oil companies.
The question now is whether the 60 per cent. rate of petroleum revenue tax proposed in the Bill, with or without the amendment proposed by the hon. Member for Bedford, would give rise to an appropriate state of affairs. What must be made clear is that the price of oil has risen substantially in the past six months. I quote now an extract from page 266 of the Petroleum Economist of July 1979 under the heading " North Sea revenue options ". The article is directed mainly to the use of the revenues rather than the rate of taxation, but this is what is said:After the latest price increases, last month's contract price for BP's Forties crude was $20.70 a barrel, compared with the official selling price of $14.546 for OPEC's marker crude, $16.40 for Kuwait's main export stream, and $18.47 for Iranian light.The article then went on to make allowance for one dollar a barrel.
298 We know that the OPEC standard price is now $23.50. and to that may be added the premium which North Sea oil normally enjoys, though I understand from the comment of the hon. Member for Dunfermline that the rate currently charged is $23 and not the figure which the right hon. Member for Llanelli thought might be applicable in the autumn.
§ 5.15 p.m.
§ All this suggests that we ought to have a close look at the rate of profits which the international oil companies will enjoy. Thanks—if I may use that word—to the liquidation of the Price Commission, no real check can now be made on superheated profits which might be made on stock and on inventory oil which is already on tanker bought at the lower price from the OPEC countries and now heading to the United Kingdom.
But we have some control over windfall profits which might be made from the North Sea. The history, as has been made clear, is that in July and August the then Government decided that a 60 per cent. rate of petroleum revenue tax was appropriate, with reductions under the relevant oil and other allowances and including, in particular, the 175 per cent. mark-up on capital costs. This was homologated—I am not sure at exactly what time—by the new Government round about May or June before the main oil prices had come through, although, admittedly, the trend of increased prices was then clear.
With the recent OPEC increase and equivalent increases in the price of oil from the North Sea, it seems to me reasonable that the rate of tax now suggested is inadequate, and I strongly urge the Government to look at the matter once again to see whether they can increase the rate of tax to a more appropriate figure.
There is a lot of money at stake here. The bon. Member for Hertfordshire, South-West spoke of the ways in which the oil revenues could be used. They could be deployed towards alternative energy resources. I certainly would not disagree with that. They could be used for the improvement of our industry or economy, and certainly in my country of Scotland that is badly needed, especially since the present Government are 299 dismantling a number of the regional aids which have existed hitherto.
If they are not lost in the bottomless purse of the Treasury and if they are not deployed towards consumption which merely sucks in imports, the funds which can come from oil taxation can be deployed in strengthening the economy, thus serving a genuine purpose and giving a useful boost. This is where an adequate rate of petroleum revenue tax which brought as much to the country as possible for spending on behalf of its individual citizens would certainly be a step forward.
I can only ask the Government carefully to consider not stopping at the 60 per cent. rate. It is not possible for me to suggest another figure which I may have had in mind, because that was ruled out of order, but what I can certainly do is request the Government to look again at what is happening in the light of the increased figures of cost and price which they had not anticipated when they themselves homologated the decision of the previous Government, and to make sure that, whatever else happens, the international oil companies do not go off laughing to the bank at our expense.
§ Mr. Nelson
I am greatly indebted to my hon. Friend the Member for Bedford (Mr. Skeet) for moving the amendment and enabling the Committee to have an opportunity to discuss whether the rate of petroleum revenue tax in the Bill is appropriate. When the matter has been discussed in the past, the prevailing conditions in the economy, the international market and the North Sea have been radically different. At a time when there has been a certain amount of concern about the effect of rising capital costs, spiralling prices for oil and a number of other factors, it is right that we should once more consider whether the rate proposed in the Bill is appropriate. The amendment is modest and I hope that the Treasury Front Bench will respond to it and justify fully the higher rate proposed in the Bill.
Whenever this issue is discussed, there are numerous figures bandied around. We have to deal with such vast telephone number figures and projections based on so many variables that we often find that the best laid expectations and the best 300 prophecies on profits, prices and returns come unstuck.
In 1975, when PRT was originally mooted, it was hoped that the return by 1980 would be about £500 million and that the value of total production would be about £3 billion. However, the total return from all the major taxes that bite into the profits from the North Sea—namely, 12½ per cent. royalties, 52 per cent. corporation tax and PRT—has not even matched the prospective take from PRT. That is partly a reflection of the delay in developing certain wells in the North Sea and the capital costs and difficulties that many companies have encountered. That indicates that the return in the next five years or six years will be substantially higher.
When considering the rate of PRT, it is appropriate to spend time considering what we earn from the other taxes that fall on North Sea oil production. I suggest that the Government's reply includes some clear impression of the official estimates of the total take from the three taxes. That is the relevant figure for the public to know in deciding whether they have a fair return from their own resources and whether the oil companies are left with sufficient net disposable resources to reinvest in further development.
My hon. Friend the Member for Bedford spoke about the importance of stimulating smaller companies to explore and develop their finds and to encourage larger companies to develop small fields and small lots that they may own. The problem in the past has been that the lack of progression of PRT, the tax being unique to the United Kingdom, has impinged highly on the prospective development of small fields. We have a continuing responsibility to set a tax regime for North Sea oil that will encourage the development of small fields.
About 18 months ago, I remember, the Treasury projected the effect of raising the rate of PRT from 40 per cent. to 60 per cent. on variable sized fields. The Treasury projected that the annual return to the company after paying tax from a field that has a production rate of about 60 million tonnes would be about £810 million. That amounted to a return of about 19 per cent. It projected that if PRT were increased to 60 per cent. the return would fall to about £730 million 301 and the rate of return on the capital employed would fall to about 17 per cent. It is important to note that the Treasury was projecting that the rate of return to the company from a field of about 60 million tonnes, which is a large field, with 40 per cent. PRT moving up to 60 per cent., would fall by about 2 per cent.
The second example is the small field with a production of about 30 million tonnes overall. The rate of return 18 months ago with 40 per cent. PRT was about 38 per cent. However, if PRT were increased to 60 per cent. the rate of return would fall to 31 per cent.
These are wide estimates, but they make it clear that PRT, with the hike-in of 20 per cent., will have a substantial effect on reducing the rate of return that may be expected, especially from the smaller fields. That works regressively against the large company with the small field and the small company which will probably be exploring and developing a small field.
In the sixth round of licences, I believe, about 46 areas are involved. In the light of the figures that I have given and the prospect of further developments in the Celtic Sea, and perhaps in other areas around our coastline, it is important to ensure that we create a regime that is not repressive to further exploraion and development.
In seeking to set the right rate of tax it is important to consider the capital structure of oil companies. We must consider whether the capital structure of the companies has changed. Are the companies now using a far greater proportion of debt to fund their capital investment? Bearing in mind that interest is not allowable in assessing the PRT liability, that will bite even harder on oil companies. The question whether the oil companies are using a larger proportion of debt in total on their balance sheets or in application to certain North Sea oilfields is one that may be answered by the Minister who replies. I hope that the Committee will be enlightened.
My impression is that the companies are using a much greater proportion of debt partly because they have not been able to generate, retain and reinvest their net resources, and partly because the supply of Eurodollars, which I believe 302 has been the principal source of major balance sheet funding for the oil companies, has in recent years been substantial, to an extent—perhaps ironically—as a result of the circulation of petrodollars back into the Eurodollar market.
Although that has made good sense historically for the oil companies as they have been able to borrow in a depreciating market and have been able to invest in the production of a commodity the real value of which has increased substantially, there is no certainty that that situation will continue. For oil companies that are starting to fund new oil developments in the North Sea, it may be that their experience will not be the same over the next five or 10 years.
The capital structure of oil companies and the way in which they fund future developments is an important factor for us to take into account in deciding whether PRT is the important item to jack up rather than varying other rates of tax or altering the various capital uplifts and other means of obtaining a reasonable take for the public from what is a precious and scarce national resource. I hope that the Minister will be able to respond to that.
§ Mr. Dalyell
The hon. Gentleman has said that the Government should take into account the capital structure of the oil companies. It is ironical that at the very moment he makes that suggestion the Government are considering taking away, and possibly dismantling, some of the powers of the only instrument to do that, namely, the BNOC.
§ 5.30 p.m.
§ Mr. Nelson
At first sight, I do not follow why the BNOC is relevant to the argument. Perhaps the hon. Gentleman would say. To encourage small companies' field developments it is necessary to look at how they will fund them and, in setting our tax regime, ensure that it is fair and not repressive. The question of BNOC's activities in the North Sea, its holdings in those companies, and the degree to which it finances developments is relevant to the equation. However, I do not see it as the prime factor, as BNOC has a statutory right to a share in the North Sea developments. Most of the money that has gone into the development of those fields has been raised outside and not by BNOC. It has 303 been put into independent companies or wells through equity or interest holdings. However, perhaps I misunderstood the hon. Gentleman.
§ Mr. Dalyell
There is some dubiety whether the Department of Energy has the resources to do what the hon. Gentleman says.
§ Mr. Nelson
I did not suggest that the Department of Energy should become involved in this matter. It is important for it to make an assessment by looking at oil companies' balance sheets. I could do that for an appropriate fee. It is a simple exercise. Therefore, it is reasonable to ask for reassurance on the matter.
§ Mr. R. B. Cant (Stoke-on-Trent, Central)
Did the hon. Gentleman suggest that the tax structure under the heads that he mentioned should be tailored to the oil enterprises as they adopted a certain amount of gearing in that capital structure and got into difficulties because they borrowed too much? Did he say that they derived advantages because they went into the Eurodollar market to borrow a depreciating currency with which to build up an escalating capital asset?
§ Mr. Nelson
Broadly speaking, that is what I suggest. That is what already happens. The petroleum revenue tax is unique. It was created for a unique sector of industry and a unique product. It already impinges and imposes liabilities on companies involved. Interest is not taken into account in assessing PRT liability. When PRT was established, interest was excluded partly as a recognition of the high interest costs of the capital borrowings of companies involved. That is my understanding of why interest was excluded. When PRT was set up a judgment was made about the capital structure of companies and the way in which the matter would be handled in the future. Now there will be less net disposable resources to reinvest, as circumstances change, to justify a tax regime of 60 per cent. PRT, or the reduced unlift rate that my hon. Friend proposes.
There are two other matters on which I should welcome the Minister's comments. One is the question of offsetting profits from one field against losses on another for the purposes of estimating 304 companies' PRT liability. I understand that companies are not allowed to do that at present. There may be good reasons for that which the Minister may be able to give.
If we are questioning whether this is a fair tax on companies and a reasonable tax on a scarce national resource, we should bear in mind the total liability, which may be nil for one company but considerable for another. However, companies' total performance in financial terms may not be substantially different, although they are not able to offset losses in one field against profits in another.
Unilateral tax relief is an important marginal factor. It must be considered in relation to the appropriate rate of PRT. Previously there were loopholes in the unilateral tax relief that were closed as a result of the Oil Taxation Act 1975. In 1977 the former Chancellor of the Exchequer, the right hon. Member for Leeds, East (Mr. Healey), threatened to restrict unilateral relief on some taxes paid by oil companies to other countries. I should welcome a brief comment from the Minister on the present situation. I have not been able to follow the changes and developments since then.
Broadly speaking, the Government proposal for a 60 per cent. rate of PRT, based on the total public take from all three taxes, is reasonable. On the face of it, I should be willing to support it.
It is fair that my hon. Friend the Member for Bedford allowed us to question whether the contribution from all three taxes was appropriate in terms of encouraging small field development and conserving and making the best possible use of a scarce resource. Striking the correct rate of tax is an arbitrary judgment, owing to the number of variables that will come into play. However, if the Minister can give an assurance on the overall take from North Sea oil over the next five to 10 years, his proposal is not unreasonable.
It is not surprising that the Opposition should seek a larger share of the profits from North Sea oil. I recall that at the time of the PRT debate the Labour Party wanted an 80 per cent. take from North Sea production between the three taxes. That percentage was lowered to between 70 per cent. and 75 per cent. On that basis a rate of 60 per cent. PRT was 305 originally mooted, but it was subsequently brought forward at 40 per cent. When it was announced by the previous Government that the rate would go up many Members of Parliament were approached by oil companies who said that the rate was unfair in the circumstances and would substantially inhibit future development.
I agree with my hon. Friends who expressed the view that we were in a new ball game. The substantial rise from about $14 last year to over $23 for light Arabian market crude this year means that even with these percentage rates of tax the net real return and the amount of money left in the coffers of the oil companies will be considerable. Therefore, many of the representations made at the end of last year and early this year about the proposed new rate of tax were greatly out of date.
On that basis—and with the assurances that I requested—I broadly support the figure mentioned in the clause. However, this has been a helpful opportunity to explore the lower rate put forward in the amendment. I hope that the Minister will comment on the important—I trust that he will not consider them esoteric—points raised in the debate.
§ Mr. Dalyell
I listened with care to the speech of the hon. Member for Chichester (Mr. Nelson). If I got the wrong end of the stick, he will doubtless interrupt me—in which case I shall give way. I thought that he touched on an important point when he said that the tax might have to be in some way tailored—a word that I borrow from my hon. Friend the Member for Stoke-on-Trent, Central (Mr. Cant)—to the capital structure of the oil companies. I do not know whether the Chief Secretary thinks it is the business of Government to intervene in the internal workings of the oil companies to the extent necessary to give a meaningful answer to the questions asked. Although additional people may have been taken on, it would involve a mammoth task beyond the resources of the Department of Energy and give considerable problems to the BNOC
If I have misunderstood the hon. Gentleman, I shall give way to him. I think that what he says is very unrealistic and would lead to all sorts of arbitrary judgments. I note that the hon.
306 Member for Bedford (Mr. Skeet) is nodding. It would lead to enormous trouble and to endless recrimination between Governments and various oil companies. If I have not misunderstood the hon. Member for Chichester, he might like to reflect on what he was saying, because I think that in the middle of his speech he put forward some very unreasonable propositions.
I should like, Mr. Weatherill, at the beginning of my speech to refer to clause 19. It might be courteous to give time to the Treasury Ministers to find an answer to the matter I intend to raise. I shall not blame them if they cannot give it off the top of their heads. I think that clause 19 is of some relevance in relation to the amendment that we are discussing. At the moment I am somewhat mystified by clause 19. I represent, incidentally, Hound Point, which is possibly one of the major terminals of South Queensferry. I should like to know what is meant by the words of subsection (1):In section 3(1)(f) of the Oil Taxation Act 1975 (which allows expenditure of transporting oil from the field to the place where it is first landed in the United Kingdom), for the words ' the place where it is first landed in the United Kingdom ' there shall be substituted the words ' the place in the United Kingdom at which the seller in a sale at arm's length could reasonably be expected to deliver it or, if there is more than one such place, the one nearest to the place of extraction '.I do not believe that those words have been put into the Bill without some reason, and I am curious to know the reason for them.
§ The Chairman
I must interrupt the hon. Gentleman and point out that we are discussing an amendment to clause 17, not to clause 19. The hon. Gentleman has asked his question, and I have no doubt that it will be helpful to the Minister, but may we now get back to the amendment?
§ Mr. Dalyell
I hope that when we get to clause 19 an answer will be forthcoming. I wanted simply to give notice of a matter to which I should like to have an answer.
A year ago my right hon. Friend the Member for Heywood and Royton (Mr. Barnett), who was then Chief Secretary to the Treasury, made a statement on North Sea oil taxation, and I asked him:Will not this package in general and the deductability of PRT from corporation tax in 307 particular help to solve the problem of exploiting small fields of marginal value in a rational long-term sequence? Will my right hon. Friend confirm that these financial measures help to solve that problem?The answer from my right hon. Friend was:As I pointed out to the hon. Member for Cornwall, North (Mr. Pardoe), there are more than adequate safeguards available to the Government, and I indicated in my statement that we are more than willing to use them to ensure that the national interest is taken into account in the development of small fields.My constituency is one of those bordering the North Sea, and I can only report that there is a general feeling that a good deal of oil is being wasted, both in the small fields and in the difficult fields. Incidentally, the two may not be the same.
I refer again to the speech of the hon. Member for Chichester. As I understand the position, the volume of oil in any particular field, in terms of tax take, can be very misleading, because it depends, self-evidently, on how difficult it is to get it. It is a matter of where it is geologically. However, I do not make too much of a point of that. " Small " and " difficult " are not necessarily interchangeable terms in speaking of oilfields. but this is an important matter.
§ 5.45 p.m.
The Chief Secretary, on the occasion to which I have referred, was asked by the then hon. Member for Dudley, West, Dr. Phipps, to
confirm that the uplift provisions and the return on capital provisions already extant have not been changed, that they fully protect the smaller discoveries in the North Sea and that it is only the very large discoveries that will, in fact, be affected by this current change ".
My right hon. Friend replied:
On the question of the uplift, as my hon. Friend appreciates, both in respect of small fields and large fields a lot of the capital expenditure will already have taken place, so they will still have obtained the benefit of the uplift at 75 per cent. But they will also have the benefit of the transitional arrangements, where public expenditure has been committed. When my hon. Friend considers the details of what I have said, I think he will see that most of the fields in the North Sea will be able to obtain what I have described as a reasonable return."—[Official Report, 2 August 1978; Vol. 955, cc. 757–9.]
There is a very wide feeling that the whole strategy is not as successful as it might be, in that there are several fields where exploitation has been too hurried. All the available materials—which possibly at $8, $10 or S12 a barrel were uneconomic but which nevertheless at $23 a barrel are economic—have not been exploited, and this is the problem. I ask the Ministers who are present whether they think they have available, as my right hon. Friend the Member for Heywood and Royton said last year, all the necessary mechanisms, or whether there are other methods which should be used in coping with a problem which is all too evident.
Are there any available figures—possibly they have been published and I have missed them—of how much income from petroleum revenue tax has been received to date? I understand that very little income has been received, and that this is partly due to the offsetting arrangements in the Oil Taxation Act 1975. Are there any hard figures showing how much has been received, and can any calculation be made about the offsetting arrangements? As time presses, I should like, Mr. Weatherill, to reserve the right to come back to this point.
Before sitting down, I should like to refer to an interview that my right hon. Friend the then Chief Secretary to the Treasury gave to journalists on 2 August 1978, the day on which he made his statement in the House. He was asked:
Is it the Government judgment that the oil companies were making excess profits and this is the reason for this increase in the revenue tax? Could you give us some indication of the rate of excess profits you think were being made?
My right hon. Friend replied:
I can't give you figures about individual fields or individual companies, because I am not personally allowed to know about any individual taxpayer, whether it be a company or an individual.
As we know, that is very proper and correct. My right hon. Friend continued:
But what I can tell you, and I was very pleased to note that the Opposition spokesman in the House today agreed, is that there were a number of oil companies and particular fields who were doing very well on the previous rates of petroleum revenue tax. This will reduce it somewhat, but will still leave it a very reasonable rate of return for large numbers of the fields being run at the present time.
Later on that occasion, in answer to a further question, my right hon. Friend said:
The important thing, and I think it is reasonable, is that the companies should not be able to obtain a higher tax relief than the actual value of the asset, and that would apply, as wou will appreciate from the sums, if the uplift was a lot more than 35 per cent. with a 60 per cent. rating.
We want to know today what is the uplift position in relation to the problem which concerns many people on the east coast of Scotland and elsewhere in Britain, namely, what is to be done to make full use of such resources as we have available, given that once a field which is less than profitable is deserted at one stage in our history it is very difficult, and certainly much more expensive, to return to that field.
In the light of the various statements made by my own Government—which, without question, were made in good faith—now that the position and the price relativities have changed, what is the attitude of the present Government?
§ Mr. Iain Sproat (Aberdeen, South)
I apologise to my hon. Friend the Member for Bedford (Mr. Skeet), and indeed to the Committee, for being absent when he moved the amendment. As so often happens, I was trying to serve on two or three Committees at the same time.
I congratulate my hon. Friend on giving us the opportunity to discuss the structure of PRT. It is a subject which, although we have discussed it in the last couple of days, is not discussed often enough. I urge my hon. and learned Friend the Minister of State to look at the proposals put forward by my hon. Friend the Member for Bedford, with particular regard to the marginal fields.
One matter which must concern anyone—not only an hon. Member who represents a constituency involved with North Sea activity but anyone who is worried, as indeed we all are, about the economy—is the very dramatic downturn in activity in the North Sea which we have witnessed over the past two or three years. This downturn is currently threatening our ability to keep up the self-sufficiency level of 2 million barrels a day production that we expect to reach next year.
310 As my hon. and learned Friend will know, the United Kingdom Offshore Operators Association, in its last report to the Energy Commission, said that it would not be an unreasonable prospect for this kind of production rate to be kept up well into the 1990s. Of course, with the current threat to our energy supplies, and the need to maintain the benefit of North Sea oil for our economy, there is more reason today why the Government should do everything they can to achieve this target. Indeed, the understandable euphoria that greeted the very high production rates achieved so far in the North Sea tended to obscure—perhaps not to hon. Members but certainly to many outside—the very dramatic falloff in exploration effort during the last few years.
The figures show that prior to 1975 seven major oilfields were discovered, only one of which was discovered during the last four years. Before 1975 one well in nine discovered a commercial field, but the success rate since then has been only one in 74. Up to 1975 about 3,175 million barrels of theoretically recoverable oil were discovered, following five years' intensive exploration. That figure has since declined very rapidly with only 725 million barrels of oil being discovered in 1977, and 50 million barrels during the first five months of last year. Additionally, wildcat drilling declined in 1975 from 75 wells to only 37 last year. In the first half of this year the rate was even lower.
It is to reverse this unhappy trend that I hope that the Government, and in particular my hon. and learned Friend with his responsibility for the tax rate, will do everything possible to encourage a rate of, say, 20 explorations continuously in operation during the next decade, drilling between 60 and 95 wildcat wells a year. In other words, I hope that we shall return to the peak effort that we saw in the North Sea during 1975.
If that is not done, and if every encouragement is not given—not just through tax structures as my hon. Friend's amendment suggests—we all know that there is liable to be a very severe problem in the late 1980s as production begins to decline in existing fields which cannot be replaced by production from as yet undiscovered new fields. In other words, my hon. and learned Friend must look 311 at this problem in the long term and not allow short-term Treasury needs to deflect overall North Sea effort, as occurred under the Labour Government.
I was pleased to hear that talks began last week with major oil companies to discover exactly how they believed—we do not need to take their advice—it would be possible to stimulate development in the marginal fields. Perhaps my hon. and learned Friend will confirm this.
My hon. Friend the Member for Bedford suggests the interesting reduction of 4 per cent. in the PRT rate. In general terms, I would not quarrel with the Government's present proposal to raise PRT to 60 per cent. and to reduce the allowances against tax which companies were previously permitted. Although these are justified in general, I hope that my hon. and learned Friend will again consider these rates—the uplift and the allowances —as applicable to marginal fields. Increasing our exploration rate in the North Sea, in marginal fields, is one of the most urgent tasks now facing us. Consideration of these tax rates could, I believe, be a vital factor in encouraging such exploration.
§ Mr. Douglas
I shall not follow the remarks of the hon. Member for Aberdeen, South (Mr. Sproat), as we engaged in pleasantries along the same lines last Friday. However, I welcome the opportunity to consider in greater detail the tax regime which the Government propose.
It is worth going back to 1973 and the report of the Public Accounts Committee. That report recommended that we should look at what the oil companies would pay in tax on profits made in the United Kingdom. The examination of the Public Accounts Committee on that occasion found that major oil companies registered here would pay very little tax. Had we persisted with the tax regime then in existence, the benefits in terms of tax revenue from North Sea oil enterprises accruing to Her Majesty's Exchequer would have been few.
The Public Accounts Committee, in its wisdom, made certain recommendations, the major one being that we should consider a quantity tax. That would have meant a barrelage tax, which frightened the life out of the oil com- 312 panies. They nearly died with their feet up when they heard that suggestion.
The Conservative Government at that time made certain noises about what they would do in future in terms of North Sea profits. When we came to power in 1974 we carried out an undertaking not only from the point of view of tax but also regarding the total strategy of what the Government would take. I urge the Minister seriously to consider a similar strategy now.
Although we are discussing a major item concerning the Department of Energy, there is no Minister from that Department on the Front Bench. That point needs to be made, because if there is to be arm's length dealing between the Department of Energy and the Treasury we shall not have a total strategy. In 1974 the Government had a total strategy, embracing royalties, petroleum revenue tax, corporation tax and participation through the creation of the British National Oil Corporation. That was a total package.
What we are seeing, albeit in relation to our discussion on this narrow amendment, is the paring away of the total strategy. The PRT was originally introduced at 45 per cent. In my opinion, that was too low. It was a figure that was almost plucked out of the air. I believe that at that time we could have had at least a 50 per cent. PRT which the oil companies would have accepted.
If hon. Members want a cure for insomnia, they might be interested in reading the further memoirs of the right hon. Members who were on the Government Front Bench at that time, in order to discover why the figure of 45 per cent. was decided upon.
§ 6 p.m.
§ This was a new ball game, and I think that negotiations were perfectly acceptable. I do not think that anyone can quarrel with that, because one must achieve a balance between the tax revenue that is desirable and the actuality of field operations. As it was first devised, the PRT, with uplift and so on, was wonderful in terms of tax revenue, but it did not take cognisance of the actual operations in the North Sea. I base my argument on the belief that the original rate was too low.
313 I come to the assurances given by the then right hon. Member for Birkenhead, Mr. Edmund Dell. I submit that those assurances were made against the keeping of the total regime. Since the oil companies catch up with tax loopholes, one is perfectly entitled, in terms of safeguarding the revenue—which is the responsibility of both sides of the Committee—to make adjustments.
Can the hon. and learned Gentleman disclose the latest Treasury thinking on the total tax regime? What are the motivations in reducing the uplift from 75 per cent.? Is it because the oil companies, instead of taking arm's length deals from the producers of capital equipment in the North Sea, are submitting against uplift full financing packages which include interest? That point deserves an answer.
The hon. Member for Chichester (Mr. Nelson), who has now left the Chamber, talked about adjusting a tax system against the balance sheets of the companies. I took that to mean something rather different from what my right hon. Friend the Member for West Lothian (Mr. Dalyell) took it to mean. I took it to mean that one had an uplift and an oil allowance to suit not only the marginal fields but also the companies that could not finance capital development off their own balance sheets. The big boys who could finance capital developments off their own balance sheets were all right; they got a bit of a bonus. My understanding is that these adjustments were designed to suit those companies that found it necessary to borrow from the banks and so on.
If the bigger companies have been making use of this loophole, and have been doing full financing including borrowings, this Committee is entitled to know. Perhaps we should press the Treasury to make a full statement on why it is adopting this regime at this point in time.
I come to the marginal fields. I have a great deal of sympathy with the argument of the hon. Member for Bedford (Mr. Skeet). It would be acceptable to devise a regime that had graduations in PRT, but if we cannot devise such a regime we ought certainly to look at graduations in royalties, as the Norwegians have done. Royalties ought to be related to field sizes. There ought to 314 be a statement this evening as to the willingness of the Treasury to forgo royalties on the smaller fields. What is the Treasury's tactical approach to this? If one embarks on capital development for the 50-million barrel to 100-million barrel fields, if not in excess of that, one must have some understanding as to how it will be financed as well as the gains that are offered.
I therefore hope that the Minister will have something to say about the remission of royalties. The power exists. What are the Treasury's intentions, and what discussions is it having with the oil companies?
I turn to the role of BNOC. The Conservatives want to go back to their post-1974 policy, when all they wanted was a sort of Texas railroad commission, where one just had a regulatory authority. There may have been some acceptable arguments for that in the past, but in the present situation it is not admissible in terms of protecting the public interest. The public has a right to know the extent of North Sea reserves. It has a right to know the capital and current cost of developing these reserves. It has a right to know the profits that stem from those reserves, and where the oil and gas will go once they come ashore. The only way one can effectively exercise those rights is to have a seat at the table, in particular a seat in the operating committees.
That is what frightens the oil companies. The tax regime does not frighten the oil companies. The oil companies will live with the tax regime. They have done, and will continue to do so. However, they object quite strongly to licensing conditions that give the British taxpayer a seat in the operating committee, because that is a seat at the top table. I admit that there are difficulties in exercising this, because the skills available to evaluate what goes on in the North Sea, and in other offshore developments, are internationally scarce.
Having had the fortuitous situation where, because of the failure of Burmah, BNOC was able to acquire very quickly the staff and expertise of the Burmah Signal Company operating in the North Sea, it is absolutely vital in the national interest that that is not destroyed. Hon. Members on both sides of the Committee who have the national interest at heart ought to support that argument.
315 I am sorry that energy Ministers are not present. I hope that the Government will accept the argument. This is no time to embark upon a dismantling of BNOC. This is also no time to sell our shares in BP. The terms of the tax regime are very important, but I hope that the Minister will also ensure that the national interest is protected not only in 1979 but into the late 1980s and 1990s.
§ Mr. Nigel Forman (Carshalton)
I find myself in agreement with the hon. Member for Dunfermline (Mr. Douglas) in at least one of his arguments, namely, the importance to the whole Committee of getting from the Minister the fullest possible information on the Treasury's current expectations about the different volumes of yield not only from PRT but from all the other taxes that apply to the North Sea.
However, I feel slightly provoked by what the hon. Gentleman said about the impeccable position of BNOC and the need to leave it exactly as it stood before this present Parliament came into being. I am delighted that my right hon. Friend the Secretary of State for Energy has been undertaking a comprehensive review of its activities and operation. If he sees fit, it would be right at the end of that review to separate its twin roles of referee and player.
I should be interested to hear from the hon. Member for Dunfermline whether he knows of any companies around the world that are analogous to BNOC. I know of no instance where it is necessary for other Governments to have an agency such as BNOC with such an invidious dual position.
§ Mr. Douglas
I can immediately respond to the hon. Gentleman and tell him that in Norway there is STATOIL.
§ Mr. Forman
I am grateful for that, but having looked at STATOIL I am not convinced that the position is analogous. No doubt we can return to that point.
I intervene mainly to pay tribute to my hon. Friend the Member for Bedford (Mr. Skeet), who speaks with great knowledge and experience of these matters. I was glad to learn from the right hon. Member for Llanelli (Mr. Davies) that the Labour Party welcomes the proposed change from 45 per cent. to 60 per cent.
316 I believe, however, that he was wrong to argue for even higher rates of tax. The Government have struck the right balance with the increase in the PRT rate, not least because it is accompanied by an undertaking to set up a working party fully to investigate the tax position of the marginal fields and examine ways of making the award of royalty relief less discretionary and therefore less capricious from the point of view of the companies.
The Committee should be concerned with the fall-off in the drilling and exploration rate in the North Sea. We must balance a continuing drilling and exploration rate with our desire fairly to maximise the revenue available to the country. The Government have the balance about right, and the important area of controversy concerns what to do in relation to marginal fields. There are at least two ways of considering the problem.
We can Pursue the line of argument of the hon. Member for Dunfermline that there should be graduated treatment of the tax position according to the size of the field. That argument is fairly understanding of the oil companies' difficulties and it is interesting that it should come from the Labour Benches. It is, however, the same large companies in many cases that are involved in fields of different sizes. Although they may be drawing accountancy rings around their operations in different areas, the Treasury in looking at the overall picture has to consider the swings and roundabouts. In this area they are large companies. They will be offsetting the great risks and cost per unit in the marginal fields against the more favourable conditions in the large fields.
The Government are right to adopt a non-dogmatic approach and link the rise in the rate with these other concessions. With great respect to my hon. Friend the Member for Bedford, it would be a mistake to move the rate down the four percentage points. There is force in his argument, but it would be difficult to explain to our constituents in Bedford, Carshalton or elsewhere that as Conservatives we do not take the view that it is right to create the conditions for private enterprise to prosper in the North Sea. We should equally take the maximum feasible slice of revenue for the taxpayer 317 and the country in a perfectly open, above-board way. It is infinitely preferable to proceed with a tough rate of PRT which implies constant terms and conditions of levy together with an element of continuity and certainty for the companies rather than a regime of treatment that is uncertain from one year to the next. That was too often the case with the previous Government.
It is deplorable that many Labour Members do not grasp the achievement of private enterprise in the North Sea. The figures will be familiar to many of my hon. Friends. Ninety-two per cent. of the investment of over £14 billion in the North Sea comes from the private sector. That has helped create about 50,000 jobs in Scotland and a further 50,000 elsewhere. The total cumulative net savings on our current account balance of payments over the four years 1974 to 1978 was £9.6 billion.
We must strike the right balance for the operation of the oil companies in the North Sea so that they have the confidence necessary to pursue their difficult and costly operations. They need continuity of treatment and the Government must play fair by them. We must do that in the knowledge that the purpose of treating the oil companies in a decent and above-board way is to lengthen the time during which the Government can put greater stress on energy conservation policies and move towards the development of replacement sources of energy. Although I understand the arguments of my hon. Friend the Member for Bedford, I believe that this is the fair, right and transparent way for the Government to proceed. I urge the Minister to give the House the fullest possible information in his reply.
§ The Minister of State, Treasury (Mr. Peter Rees)
I congratulate my hon. Friend the Member for Bedford (Mr. Skeet) who moved the amendment with his customary skill and depth of knowledge of the oil industry and energy problems generally. He gave the Committee the opportunity for a far-ranging debate on petroleum revenue tax. The hon. Member for Dunfermline (Mr. Douglas) widened the debate into a general discussion of energy and I make no complaint about that.
318 There was a great deal of common ground between all hon. Members. Every right hon. and hon. Member who spoke recognised, if not explicitly at least by implication, that there is a delicate balance to be struck. We all wish to achieve the maximum benefit for the people of this country, as the hon. Member for Dundee, East (Mr. Wilson) said, although he may define the people of the country in a slightly different way from myself. I hope that he, too, wishes that the whole country, north and south of the border, west and east of Offa's Dyke, and Northern Ireland too, should benefit from North Sea energy. The method of achieving that benefit is a matter for legitimate debate.
We should proceed in a spirit of enlightened self-interest. We wish to achieve the maximum benefit for the country, but if we strike a wrong balance and press the oil companies too hard, the people of this country may ultimately suffer. Oil may be extracted at the wrong rate or not extracted at all. Marginal fields may be left unexploited.
Certainly I have approached this debate in the spirit which my hon. Friend the Member for Carshalton (Mr. Forman) urged upon me. Indeed, the whole Committee has debated this issue with a singularly undogmatic spirit. I believe that the package which the Government are commending to the Committee in these clauses is right, but I certainly would not dogmatise. I would not say that in no circumstances could it be reviewed. Neither would I say that it necessarily met every side of the problem. All I would say is that we have done our best and we hope that we have struck the balance fairly.
When the right hon. Member for Llanelli (Mr. Davies) spoke of the proposals that were produced in August 1978, he chose to think that events had overtaken this Government. Certainly, events have moved on since August 1978. The package may have been right then and it may have been wrong, but we had to look at the position again. Perhaps there has been retrospective justification for the package as it was then produced, but I suggest that orginally it struck the wrong balance.
I am fortified in the conclusion that the Government have taken on this matter 319 by the delicate balance between the arguments advanced from both sides of the Committee. My hon. Friend the Member for Bedford argued so persuasively that the regime was too severe. He called for a slightly less exacting regime of PRT at 56 per cent. instead of 60 per cent. I am sure that the Committee listened to his arguments. On the other hand, the right hon. Member for Llanelli thought it was a far too lenient regime. I congratulate the right hon. Member for not having adopted the well-known cliche that has featured all too often in our recent debates—that of a " rip off " for the oil companies. The right hon. Member put his case in a more moderate way, as one would expect.
The hon. Member for Dundee, East also suggested that a slightly tougher regime should be adopted. The fact that his amendment was not selected did not inhibit him from putting the case for a more exacting regime. Other of my hon. Friends have suggested, however, that perhaps we should have been a little more tender in the interests of the oil companies, not because they are advocates for the oil companies—it is slightly offensive to suggest that they are—but because they are concerned to get the balance right.
It should be recognised that the oil companies deploy capital and expertise all over the world and if the fiscal and royalty conditions that we set are not right, they could readily deploy that capital and expertise elsewhere.
§ Mr. Forman
Is my hon. and learned Friend aware that that occurred in Indonesia where a number of leading oil companies did withdraw and had to be inveigled back on terms that were a great deal less satisfactory to the people of that country?
§ Mr. Rees
I am glad that my hon. Friend reminded us of that example. No doubt those with longer experience of the oil industry could cite other instances. There are obvious potentials to be exploited in the Gulf of Mexico. I do not wish to parade through the mythology of the Labour Party because this has been a singularly good-natured debate, but the fact is that in Socialist mythology the multinationals feature as demons with sinister motives deploying their forces illegitimately all over the world. Luckily 320 that strain of thinking has not surfaced in this debate.
§ Mr. Douglas
Would the Minister care to name another province in the world that has been more profitable, not only to the oil companies but to the contractors operating?
§ Mr. Rees
I am flattered by the hon. Member's question. After all, companies, individuals and partnerships have been extracting oil for more than 70 years, and to suggest that I could answer that question off the cuff, without notice, is remarkable. If he cares to write to me I shall do my best to answer it. Is my hon. Friend the Member for Bedford coming to my assistance?
§ Mr. Rees
I do not believe that that information is directly relevant to the point on which this Committee must form a view tonight. The capital and expertise available to the oil companies can be deployed in any part of the world and therefore we must get the balance right. Even the hon. Member for Dunfermline should realise that whatever role he casts for BNOC, that body certainly is not capable of conducting the exploration and development of the North Sea single-handed. If we can start from that common ground we can look relatively dispassionately at the kind of fiscal regime we should devise in the light of the increasing oil prices over the past few months.
I remind the right hon. Member for Llanelli, who seemed over-ready to discard the package that his right hon. Friend put to the House in August last year, that when that package was put together there had been a decrease in the real price of oil since PRT had been introduced. On that basis we certainly had reservations about the package. We were prepared to look at it and support it, possibly with amendments. However, I do not think it is particularly relevant to return to the position in August 1978 because we have moved on from there.
There has now been an increase of 20 per cent. in real terms in the price of oil 321 since PRT was introduced. That contrasts with the position in August last year. Whereas we had considerable reservations about last year's package, we feel that it probably meets the circumstances against which we are debating the position today. To go on from that and to say that because there has been an increase over the past two months—and I recognise that the position has altered possibly even since the Second Reading of this Bill—prices must inevitably go up and up and up and therefore we should introduce harsher regimes, is to show an undue certainty in a situation in which no one can speak with complete assurance.
§ Mr. Denzil Davies
I did not deploy that argument. I said that the package in August last year was broadly right, and I would be expected to say that. I thought that it was right in view of the price of oil at that time. Now, because of the increase, that package is too lenient. That was my argument. I did not say that prices would go up and up over the next 25 years. I do not know that, but I suspect that they will.
§ Mr. Rees
I apologise to the right hon. Gentleman if I did not entirely appreciate the subtlety of his argument. Going back to August last year, I remind the right hon. Member that the real price of oil had declined since he and his right hon. Friends introduced PRT in 1975. On that basis and against the assurances that have been given I do not feel that that package was then justified. However, against the increase in real prices of about 20 per cent. since then—which no one could have reasonably foreseen in August 1978—I suggest that although the package was then wrong, it has been retrospectively validated. That is why this Government have been prepared to adopt it.
§ Mr. Gordon Wilson
Does the Minister accept that the OPEC countries have institutionalised the price of oil at $23.50 a barrel and therefore for the foreseeable future that will be the reigning price of oil? There may be some minor fluctuations downwards, but almost certainly the price of oil will rise in the future. If the previous package, under the Oil Taxation Act 1975, was far too low—as the Treasury agreed in respect of certain fields—does he not now think that the 322 rate of taxation should be increased to more than the 60 per cent. which is stated in the Bill?
§ Mr. Rees
I do not know whether I quite understand what the hon. Member means, but I do not wish him to challenge me again. If OPEC is an institution and it is capable of rationalising prices, I would have thought that it did so, by the same token, in 1973–74. But we observed a downward drift from 1974 until the spring of this year. It is not impossible, even with the present OPEC set-up, and in view of present world demand for the price of oil, that it will drift downwards again. I do not want to make any forecast this afternoon, but I wish to emphasise the volatility of the present situation and the uncertainties against which we have to reach a conclusion on the package which the Government are now presenting to the Committee.
§ 6.30 p.m.
§ Before I come to the assurances about stability given by the Labour Government and by spokesmen for my own party, I wish to deal with various questions that were put to me about the United Kingdom's share of North Sea oil. The hon. Member for West Lothian (Mr. Dalyell) asked what was the petroleum revenue " take " up to 1979. It is calculated by reference to calendar rather than to fiscal years. The figure is £450 million by contrast with royalties for that period of £650 million.
The hon. Member for Dunfermline and my hon. Friend the Member for Chichester (Mr. Nelson) asked what is the likely petroleum revenue take for 1979 on the new basis contrasted with the old basis. On the old basis it would have been £620 million on the best evidence available to the Government. On the new basis it will be £730 million—an increase of £110 million.
The hon. Member for Dunfermline and my hon. Friend the Member for Carshalton—establishing an identity of interest if not a complete identity of view—asked for the total Government revenue from the North Sea—that is to say, from petroleum revenue tax, corporation tax and royalties from the date on which North Sea oil came on stream until 1985. It should be about £18.3 billion on the new basis, and on the old basis it would 323 have been about £16½ billion. I emphasise that those figures are only speculative.
The effect of the package which I am commending to the Committee is to increase the total Government take as a percentage of total undiscounted profits for a field from just under 70 per cent. to just over 75 per cent. as a broad average. There are wide variations in fields and that may not be a particularly meaningful figure.
I wish to emphasise that the marginal take on a barrel of oil as a result of the new measures will be about 82 per cent. If the Committee wishes that figure to be broken down, I can tell hon. Members that it is 12½ per cent. royalties, 52½ per cent. PRT and 17 per cent. corporation tax. I hope that the Committee will accept that that is a considerable marginal take. It takes us up to what were the higher ranges of income tax. I do not want to reopen yesterday's debate, but at least the Committee's view then was that an 83 per cent. marginal rate on earned income was too high and that we should bring it down. Therefore, by the same token, I believe that this is a pretty high marginal take on a barrel of oil.
The hon. Member for Dunfermline, insatiable as ever for facts, wanted to know the best view of the quantity of recoverable oil. I commend the hon. Gentleman to a document entitled " The Development of Oil and Gas Resources of the United Kingdom 1979 " produced by the Department of Energy. On page 3 that document states:
The quantity of recoverable oil reserves originally in place on the United Kingdom continental shelf is estimated to he between 2,400 million and 4,400 million tonnes—that is between 18 billion and 33 billion barrels.
Against that indigestible factual background, I should like to consider some of the interesting suggestions for improving the PRT regime. It is important to consider the assurances that were given when PRT was introduced. I am compelled, therefore, to read the assurances given on both sides. I turn first to the comments which were made by Mr. Edmund Dell. It may embarrass the right hon. Member for Llanelli if I say that we regard Mr. Dell as a person of singular moderation and good sense.
§ Mr. Rees
I am delighted to have that unanimity of view about Mr. Dell's contribution to past debates. I am sure there is almost a unanimity of view about how greatly we regret his departure. Why he should have departed and into what fields perhaps it would be provocative of me to speculate about.
Mr. Edmund Dell said on 27 November 1974, when introducing the Oil Taxation 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."—[Official Report, 27 November 1974; Vol. 882, c. 473.]Certainly by August 1978 no significant shift in oil prices had occurred—or, if there had been a shift, it was downwards.
What Mr. Dell said on that occasion was very much in tune with what was said by my right hon. Friend the Member for Wanstead and Woodford (Mr. Jenkin) who led for the Opposition in the Standing Committee on the Oil Taxation Bill. He said in February 1975:We appreciate that there is need for considerable stability in the tax regime as it applies to a long-term industry such as offshore oil and gas exploration and development. Therefore, I hope that, having once got the structure of the tax roughly right, the Government will not seek to use the tax as a short-term regulator or anything of that sort.Nevertheless, it would be quite unrealistic to imagine that the tax will not require amendment …I, too, want to stress on behalf of the Opposition what the right hon. Gentleman said about the manifest undesirability of a tax of this sort, which is solely for revenue-raising purposes in a specific circumstance being used in any sense as a short-term regulator. He and I both know that what we say cannot bind our successors, whoever they may be."—[Official Report, Standing Committee D, 6 February 1975; c. 727–730.]There was obviously singular unanimity on that matter. Against that background, I hope that the right hon. Member for Llanelli will not, out of undue cupidity, press on the Committee rates which perhaps are not justified by the 325 real increases in the price of oil which have so far taken place.
I was a little surprised that the right hon. Gentleman suggested that we should review the whole structure of the system.
§ Mr. Denzil Davies
I think that it is reasonable as time goes on to review the structure of PRT. It was a tax that was introduced for the first time in this country. I believe that it was an excellent effort and it has worked very well, but surely circumstances change and I do not see why that tax, any more than any other tax, should not be reviewed. The Minister should not put too much weight on the need for constant stability if there are changed circumstances.
§ Mr. Rees
Considerable thought was given to the tax when it was introduced four years ago. Now the right hon. Member for Llanelli is saying that not only are the rates wrong but the structure needs a fundamental overhaul. He must curb his restless, tinkering mind. I know that there has been an overhaul of the whole battery of capital taxes and that subject will be returned to in the next Finance Bill. There have been considerable reforms in income tax. But the right hon. Gentleman should recognise that it is important that there should be a measure of stability so that people can plan their businesses and their lives. An assurance cannot be given that until the end of time there will be no amendment to income tax, capital gains tax, corporation tax and all the other taxes that afflict the nation.
If the right hon. Gentleman is suggesting that the tax was introduced in a frivolous and short-sighted manner and he is prepared to come candidly to the Dispatch Box and say that, let me say to him that there is more joy in heaven over one sinner that repenteth.… However, the Government wish to approach the tax more modestly. We acknowledge that the Labour Government 326 gave it considerable thought but the assurances that they gave did not extend to freezing the rates if there was a considerable shift in the price of oil.
§ Mr. Denzil Davies
The hon. and learned Gentleman and his colleagues will review capital transfer tax with great zeal. Why the difference with petroleum revenue tax?
§ Mr. Rees
The difference may be spelt out from our respective contributions to the debates when the taxes were introduced. We feel that capital transfer tax is wrong in many major particulars, particularly the rates. We shall review that tax thoroughly and the House will have ample opportunity to debate that next year.
The right hon. Gentleman described our attitude as niggly. I would prefer to say that it was constructive. We were not bound to accept uncritically the package that was produced in 1975 although there was not the same deep controversy over the structure, the rates and the approach which characterised the debates on capital transfer tax.
Various hon. Members have made fundamental proposals. My hon. Friend the Member for Bedford suggested that the tax should be progressive. I shall answer him in the same way that I answered the right hon. Member for Llanelli. My hon. Friend the Member for Bedford was not the midwife who presided at the birth of petroleum revenue tax and I do not believe that there should be a fundamental change of the sort that he proposes. In the sphere of corporate taxation there are no precedents for a progressive tax. There are remissions for small companies but the principle has been accepted generally that corporate taxation should be at one rate.
My hon. Friend the Member for Chichester suggested that the tax should be tailored to each field and each company. That would defy the ingenuity of the Administration. It is not always possible to anticipate in advance the relevant circumstances. If we were to devise a series of individual taxes retrospectively, my hon. Friend would still find fault with that. I am sure that the Committee would not expect that taxation should be done in retrospect. We recognise that we are fallible and there will 327 be a few wrong moves but we shall try to devise a framework to cover most circumstances.
§ Mr. Nelson
Has there been any reconsideration or partial reconsideration of the way in which interest is treated in the assessment of PRT liability? If people are funding their North Sea oil operations with a substantially larger proportion of debt rather than equity there might be a case, given the reduced uplift, for being rather more lenient and taking interest payments into account.
§ 6.45 p.m.
§ Mr. Rees
My hon. Friend is right and that is touched on in the uplift provisions. Most evidence confirms the fact that the rate of 25 per cent. provides for cover if there should be a dramatic change. We have approached the problem with an open mind on the best evidence available, but I take my hon. Friend's point. The hon. Member for Dunfermline made the same point as my hon. Friend the Member for Bedford, that petroleum revenue tax should be graduated.
§ Mr. Douglas
Before the hon. and learned Gentleman moves on, will he comment on the point I made about the way that certain companies are using the uplift against a full financing of a project, including interest charges?
§ Mr. Rees
Uplift was designed to compensate for the fact that interest relief is not available. Companies have financed their development in a variety of ways and it follows inevitably that the uplift provisions do not precisely affect the circumstances of every company that operates in the North Sea. However, we believe that there is a broad measure of justice.
My hon. Friend the Member for Chichester mentioned the question of unilateral double taxing. There is no question that that touches on petroleum revenue tax—it is a matter of corporation tax. We shall keep the situation under review but I do not believe that it is directly relevant to today's debate.
§ Mr. Nelson
I made an additional point about the offset arrangements for losses in one field being offset against another. Will my hon. and learned Friend comment upon that?
§ Mr. Rees
I am grateful to my hon. Friend for reminding me about the matter. The ring fence principle, as it is sometimes described, is now embedded deeply in petroleum revenue tax. I cannot offset losses to other fields outside the remit of petroleum revenue tax although that is sometimes done with corporation tax. Strong arguments can be applied for breaking down the ring fence concept but the consequences would be to defer the payment of tax on a number of North Sea fields for an indefinite period of time. The British are entitled to a more immediate return from the North Sea in terms of petroleum revenue tax at least. The North Sea has been developed for about four or five years and the figures I gave earlier demonstrate that the considerable element of front-loading has prevented large sums of PRT being paid so far. We look for considerable returns in the years to come.
The matter of the marginal fields is uppermost in the Committee's mind. We want to be reassured that the development of the marginal fields is not stultified and retarded by the tax regime that we are commending to the Committee. I do not believe that the existing provisions will have that effect. However, there is an extra dimension to the problem —the question of royalty remissions. It is not possible to devise a hard and fast formula by which to judge whether there should be a remission of royalties in a given case. I understand that there have been two or three applications for remission, none of which has been granted. That shows that there has not been a flood of applications so far.
This is not specifically a fiscal measure. A considerable measure of discretion should be left to the Secretary of State. I do not say that because he is a member of a Conservative Administration. The most substantial reassurance offered by the Government was my right hon. Friend's statement that he was setting up a committee to examine marginal fields and whether there were adequate safeguards. I am happy to say that that special committee has been set up and is now in operation. If there are any reservations or worries on this score they should more practically be addressed to that committee.
Amendment No. 60 was helpful because it enabled us to explore more 329 thoroughly than usual—because of time restrictions—the petroleum revenue tax regime. We also explored certain aspects of energy, on some of which I am not qualified. We owe my hon. Friend the Member for Bedford a debt of gratitude for providing us with the opportunity. I hope that he will feel that justice has been done to the view that he so ably argued. I hope that he will withdraw his amendment and feel that the interests which he champions so thoroughly will be safeguarded.
§ Mr. Cant
For the first time I am rather disappointed by the Minister of State, not because I disagreed with what he said but because he did not repond to some of the important arguments from the Opposition and from his hon. Friend the Member for Bedford (Mr. Skeet).
North Sea oil exploration is one of the great wonders of the world. Anbody who is prepared to exploit a hostile area such as the North Sea to obtain oil is worthy of zero tax rating. However, that is not practicable.
The Minister has not said what will happen to the money raised by the PRT. Nobody objects to certain rates of tax so long as the use that is to be made of the money can be seen more clearly. I had hoped that the Minister of State would throw some light on this. As the hon. Member for Bedford said, we are in a new ball game. The estimates are conjectural but there will be a substantial benefit, not only to the balance of payments but to the Budget. Whether this is a progression from £1.6 billion to £6.1 billion in 1983–84 or whether some other figures will be true only time will tell.
An article in the Investors Chronicle this week argues that we are dealing with an amount of money which is almost equal to the public sector borrowing requirement. We may reach the stage, in five years, when the public sector borrowing requirement is zero because of our oil revenues. Then there will be a crisis of another order because, if there is no public sector borrowing requirement at a time when money from pension funds and insurance companies amounts to £14 billion, there will be no gilt-edged market left. However, that is an aside.
Precisely what is to happen to this money? Shall we continue as we have, so that the relatively small revenues are 330 absorbed by the general public finances? Alternatively, shall we use these revenues for the regeneration of British industry? Who knows? If we cannot isolate these revenues and put them to a specific purpose, some of which have been mentioned in the debate, it will be useful to come to an agreement, not with OPEC or the less-developed countries but with the EEC. We might trade our oil in exchange for German investment in Britain, for the transfer of more advanced technology and other assistance, which would produce more practical results than we are experiencing today. All that we are doing with North Sea oil revenues is to import Japanese and European cars and other consumer goods.
§ Mr. Dalyell
I do not apologise for intervening as I wish to raise a matter of substance—the question of policy towards marginal fields. I do not complain about the Minister of State because I realise his difficulty. This is one of the problems which straddle Government Departments, not least the Scottish Office, the Department of Energy and the Treasury.
The problem causes considerable anxiety to many of my constituents who work in the North Sea. Perhaps I misunderstood, but I thought the Minister said that this problem was being examined by a committee. I do not know to which committee he refers. How is the exploitation of marginal and difficult fields and areas of the North Sea surrounding, for instance, the Forties, which hitherto have been regarded as submarginal, to be handled? Is this all to be done by a policy of royalty remission?
I see the hon. Member for Bedford (Mr. Skeet) shaking his head, but I understood that this problem would be overcome by way of royalty remissions because otherwise, to quote the Minister of State, development would be stultified. Then it was said that there was no hard and fast formula. What do we have to do in these circumstances? Do we make representations to the committee? What financial powers will the committee have, what money will it have, and what weight will it carry with the Treasury? In the final analysis, this is a Government financial responsibility and one that will 331 almost certainly be decided in Great George Street.
§ 7 p.m.
§ Mr. Peter Rees
I did not intend to convey that the remission of royalties was the sole instrument available to assist marginal fields. It is one instrument, and it may be a very important one.
As for the committee, I refer the hon. Member for West Lothian (Mr. Dalyell) to the question put down by my hon. Friend the Member for Bedford (Mr. Skeet). In his reply, my right hon. Friend the Secretary of State for Energy said that changes in the oil allowance were included in the Budget proposals, and that it was his intention to invite representatives of the offshore oil industry to join officials in reviewing, without commitment, the way in which marginal fields could best be defined and the impact on them of the Government's offshore oil policies as a whole. I am sure that my right hon. Friend will report in due course to the House if anything constructive emerges from the review. If it concerns budgetary matters, that will probably have to await a further Finance Bill.
§ Mr. Dalyell
Do I take it that the chairman of the committee is either not known or has not yet been chosen? Some of us would like to know to whom such questions should be addressed.
§ Mr. Skeet
We have had three hours to debate the subject, and I am deeply obliged to my hon. and learned Friend the Minister of State for the many arguments that he has advanced in favour of the Government's proposition to increase PRT to 60 per cent.
I think we saw a glimmer of light in the sense that we were told that the problems of the marginal fields would now be referred to the special departmental committee. It was important for us to be told that for the two reasons that I indicated. The first concerns the supply problems that we may encounter in securing the necessary resources later. The second fac- 332 tor is that marginal fields should be adequately and properly treated and considered. I hope that the whole structure of the tax will be framed from that point of view.
PRT comes in three tranches. The first tranche covers royalties and corporation tax. PRT in that tranche is nil and the Government take is 59 per cent., although it is a matter of discretion. We then come to the tapering tranche in which PRT is 80 per cent. and the Government take goes up to 92 per cent. As I explained to the Minister of State, the structure of PRT is making it very difficult for marginal fields to survive. It makes it difficult for the oil companies to invest in the marginal fields and find the necessary oil.
On the top tranche for the larger field, PRT is 45 per cent., which is a lower imposition than on the tapering tranche.
If the committee is to consider the various ways of dealing with marginal fields, whether it be through remission of royalties or in other ways, it should also look at the structure of the tax itself. My hon. and learned Friend the Minister of State has rightly stated that there must be stability in the tax. He also mentioned that it was possible that the system would be re-examined after several years of operation. We should bear in mind that very few companies are actually paying PRT. Our concern should be in determining where lies the greed. Is it with the companies, or is it with the Government who want to get hold of the money quickly? An important factor for this country at this stage is that it should be able to recover the oil it needs in the years ahead.
Hon. Members have referred to the level of oil company profits, and it has been suggested that they must be having a bonanza. I have before me one of the company reports in which Gulf Oil indicates that its return fell to 8.7 per cent, last year after peaking in 1974 at 14.6 per cent. If one examines the Petroleum Economist concerning the affairs of the Royal Dutch Shell group or other companies, one finds that the rate of return on capital investment is low, and that in some cases it is well below the return on capital of manufacturing industry. That level of return is unsatisfactory if the companies are to be able to put money aside for future investment.
333 The crucial consideration today is whether the Government are warranted in putting PRT up to 60 per cent., in cutting the oil allowance by half, and in bringing the uplift back from 75 per cent. to 35 per cent. It would have been advisable to consider these matters over a longer period up to 1980, and then to have dealt with this and other matters in the 1980 Finance Bill after the committee had thoroughly examined what could be done for the marginal fields.
I am satisfied that many points have been ventilated in the debate. I hope that the Government will take them into account and that the Treasury will consider them. In the light of that, I beg to ask leave to withdraw the amendment.
§ Amendment, by leave, withdrawn.
§ Clause 17 ordered to stand part of the Bill.
§ Clause 18 ordered to stand part of the Bill.