INCREASE OF PETROLEUM REVENUE TAX AND ENDING OF SUPPLEMENTARY PETROLEUM DUTY

HC Deb 26 April 1982 vol 22 cc668-96

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Mr. Jack Straw (Blackburn)

I beg to move amendment No. 17, in page 84, line 37, leave out subsection (2).

It may be for the convenience of the Committee if the debate on amendment No. 17 takes in remarks that we would make on the clause stand part debate, so that there is one debate rather than two. It may also be for the convenience of the Committee if I explain that the Opposition do not intend to push amendment No. 17 to a vote. We see this as an opportunity for a debate on the matter.

The proposals that we are debating are the eighth set of major changes to the oil taxation regime that the Government have made in 30 months. The consistent feature about the eight sets of changes is that each change has provoked a chorus of disappointment and anger from the oil companies, dismay from the Government Benches and incomprehension about the Government's intentions and actions from those who wish to see an effective but fair system of taxation for North Sea oil. This set of changes is no different in that respect.

When the new proposals were announced, they were met with a chorus of complaint from the oil companies.

The Scotsman reported that North Sea oil company cash flow will be severely curtailed during the next two years as a result of the Budget changes in taxation".

The Daily Telegraph suggested that the tax changes would sacrifice oil self-sufficiency. The Financial Times, which may be a more impartial reporter than The Daily Telegraph or The Scotsman, stated: The industry is dismayed that the proposed changes will still leave a tax structure vulnerable to more revisions. Companies have told the Chancellor that repeated changes—seven in the past two years—have inhibited long-term investment decisions. The Financial Times also stated: Offshore operators warned yesterday that some small North Sea oilfields might still be left underdeveloped following Budget changes in the oil taxation structure. Therefore, from all quarters of the oil industry, there has been criticism of the proposals.

Given that criticism and the criticism that we make, too, it is necessary, before we examine the detail of the proposals, to contrast the performance of the Government against their promise. As I have explained, there have been eight major sets of changes in oil taxation in 30 months. There is the possibility of more in future. How different that is from the Government's promise.

Many of my hon. Friends will recall that throughout the period from 1974 to 1979 Conservative Members lost no time in criticising the Labour Government for what they regarded as penal and capricious measures of taxation imposed on the oil companies, although those allegedly penal and capricious measures were considerably less than they are today. We also recall the fine words of the right hon. Member for Bridgwater (Mr. King), now the Minister for Local Government and Environmental Services, who was the official spokesman on energy during the election. In a statement on energy policy on 10 April 1979, he said: We are still at the point where, by restoring confidence, the North Sea success story could be prolonged into the 1980s … Confidence has been shattered by frequent changes in the rules and by Labour's hostility to private enterprise. I am glad to see that provoked a wry smile from the hon. Member for Enfield, North (Mr. Eggar). The Conservative spokesman further stated: We shall pursue a steady policy designed to secure the fullest advantage to the nation as a whole … We shall therefore review the Government's licensing and tax policies to achieve these benefits". Those were the benefits for the nation. The right hon. Gentleman attacked the Labour Government for the changes that they announced in October 1978. The Government implemented almost all those changes shortly after they came to power, but in April 1979 the right hon. Gentleman suggested that those proposals were cobbled together in a hurry without consultation as a gimmick for the election from which they shrank in October. Any tax changes designed to increase revenue which actually prevent the development of promising small oilfields will be self-defeating. The right hon. Gentleman went on to say that the oil industry needs a clear assurance that there will not be countless changes in the rules and that there will be full consultation. As a possible means of reducing the uncertainty we shall examine whether a more predictable formula could be incorporated in the tax system to take fuller account of the changes in the real price of oil and in interest rates without the need to introduce further legislation on each occasion. That was a statement of hope after the experience of the previous Government.

Seven changes later, The Sunday Times, in a major review of oil taxation in November 1980, stated: In a handful of minutes last Monday Sir Geoffrey Howe replaced Tony Benn as the oil industry's No. 1 villain. The Chancellor made the seventh change in oil taxation in 18 months and in the process tore up a whole book of election promises. In order to balance his own books he took a cool billion from oil company coffers without even a thank you.

That is the promise of the Government measured alongside their performance. It was The Sunday Times which said that by November 1980 the Chancellor had become the "No. 1 villain" of the oil companies, replacing even my right hon. Friend the Member for Bristol, South-East (Mr. Benn). I dare say that it still sticks to that view, since the one thing that the Government have not done in the changes that they have introduced is to alter the total revenue that they will receive from the North Sea.

Last year, the supplementary petroleum duty was justified to the Committee and to the House as a temporary measure pending a major review of the taxation system. We supported the Government's intention to hold a major review, but we doubted whether they would complete it on time. Indeed, in Committee upstairs, we proposed that the SPD should be carried forward for a further accounting period to 31 December 1982 to give the Government further time to consult and to form a proper judgment about the future of oil taxation. Interestingly, it was our judgment about the time scale that held the day, because supplementary petroleum duty is to run until 31 December 1982.

During this time of major review the Government have received many representations from UKOOA, BRINDEXindex, the Institute for Fiscal Studies and many other bodies which are all concerned to see whether it is possible to establish a fairer and more effective system of oil taxation, even accepting, as we do, that there is an overriding need to ensure that the total take from the North Sea is not very different from what it is under the existing regime.

As a result of that review, the Government have settled on only one change of any substance. It is difficult to see why the Government, given their commitment to a major review, and given the time that they have spent on this issue and the many proposals which they have received, have not come up with something more comprehensive and lasting than the proposals that they have made.

I know that most of my hon. Friends are familiar with the changes that the Government are proposing, but I shall spell out what they are changing and how, in one important respect, it is very little different from the supplementary petroleum duty that the new scheme is proposed to replace. Supplementary petroleum duty, which was introduced last year, is charged as a tax on gross revenue, not on profit, and it is charged at 20 per cent., less an initial allowance for each taxable period. The objection to that tax was that it was a tax on turnover, that it was deducted in assessing profits but not in assessing petroleum revenue tax liabilities, and that it could be paid only if an overall loss were made on the field during the course of its operation, which in most cases was very unlikely.

The Committee will see from the Bill the SPD is being abolished and replaced by a new tax—advance petroleum revenue tax. However, it is important, particularly when talking about the cash flow of the oil companies, to recognise that the assessment for advance petroleum revenue tax is done in exactly the same way as the assessment for supplementary petroleum duty. The APRT in the initial period is supplementary petroleum duty, because the charge to advance petroleum revenue tax is assessed at 20 per cent. on gross revenue, less an oil allowance, in exactly the same way as SPD is assessed at the moment. Of course, there is an important conceptual change within the framework of the tax. APRT is offsettable against liabilities to petroleum revenue tax, whereas supplementary petroleum duty is offset only against profits.

Moreover, it will be possible for companies to offset their APRT payments against their total PRT liabilities during the course of a field's life. Where the APRT that is paid exceeds the total petroleum revenue liability, the oil company concerned can receive a rebate. Although the company would get a rebate, I understand that that would be many years later, and it would also be without any payment of interest. Therefore, the company still has the cash flow problem of paying out the cash, even though, in the event, its total petroleum tax liabilities are less than its total payment of APRT.

8.15 pm

That is the essence of what the Government have proposed. They have also, as a consequential measure, proposed that the rate of PRT which is charged, which now forms the base of the tax, should be increased from 70 per cent. to 75 per cent. The overall effect is that the marginal tax rate, taking account of all the taxes, decreases from a little over 90 per cent. to a little over 89½ per cent. The effects are marginal.

Several suggestions were put forward for replacing the existing system of taxation. Before I come to them, I wish to raise some important questions about the effect of APRT, and I shall be glad if the Minister will answer them.

How many fields does the Minister expect there will be where the total payment of APRT is likely to exceed their liability to petroleum revenue tax? According to Wood Mackenzie, in its commentary on the tax—I can find no specific reference to what is said but I am sure there must be one, otherwise it would not be said—the Chancellor, in his Budget speech, expressed the view that it was unlikely that any fields would be in this position". In other words, where APRT payments exceeded their PRT liability. Much will depend on future oil prices, production rates and so forth. However, on the basis of our current calculations it would appear that Beatrice will at least pay considerably more APRT than the mainstream PRT liability. Wood Mackenzie suggests that the Beatrice field, the one being developed by BNOC, may come within that category. Will the Minister give some indication of the current assessment by the Government of how many fields come within that category?

My next point also relates to the comments by Wood Mackenzie on the effect of the tax on a company's cash flow. The claims of oil companies and stockbrokers who advise them are not necessarily or by definition statements of the truth. None the less, they pose questions which need answers. The claim is that the new timings for payments of APRT will squeeze an extra £500 million out of oil companies over the period until the first quarter of 1984. I shall be glad to have the Minister's comments on that aspect.

My next point is perhaps even more important. It relates to the effect that APRT may have on the extraction policies of oil companies where they are dealing with fields approaching the end of their life. A gentleman called Martin Lovegrove—I understand that he was a senior executive with BNOC before becoming an independent oil consultant—wrote what seemed to me to be a considered piece in The Guardian on 24 March 1982. He suggested that the facility for companies to obtain a rebate on APRT, where their PRT liability was not exhausted, would act as an incentive to companies to shut up shop and to close a field before the end of its useful life. He said: The APRT system, however, will encourage companies to shut down platforms early. It may even be more economic for many to abandon fields before the current estimates of reserves are recovered, because when the field's life is ended not only do the companies avoid paying more APRT but they will get a 'nest-egg' of past payments returned to them by the Government—albeit not inflation proofed. This effect is nothing short of disastrous and if left unchanged will most surely mean that Britain will be a net importer of oil by the end of this decade. That is a serious point about the, perhaps accidental, operation of APRT that would not have arisen under the supplementary petroleum duty because the companies did not stand to get back anything unless they made no profit. However, that situation is unlikely to arise. That serious point made by Martin Lovegrove requires an answer.

Having dealt with the proposed change to the oil taxation scheme, I come to whether it would have been possible to introduce a major reform in petroleum revenue tax as was suggested by some in the oil industry and by the Institute for Fiscal Studies. In addition, although I do not wish to rub in the point, during the election campaign the Conservative Party suggested that it would introduce a comprehensive and major change in the oil taxation system that would last and not need eight changes.

Many of the proposals received by the Government came straight from the oil companies. If the companies now find that their representations are falling on deafer ears than they expected, they have only themselves to blame. Their partisanship during the period of the Labour Government and the partisan manner in which they briefed the Conservative Opposition left them with few friends on the Labour Benches who are willing to take what they say at face value. Of course, they now find that the Government are far more avaricious in their desire to get their hands on the oil companies' profits than the Labour Government ever dreamt of. Therefore, to some extent the oil companies have only themselves to blame.

Mr. Tim Eggar (Enfield, North)

Is the hon. Gentleman saying that a Labour Government would have taxed the oil companies at a lower rate?

Mr. Straw

I doubt whether a Labour Government would have taxed them more. Had we sought to tax the oil companies as much as the Government have and had we made eight changes to the taxation system in 30 months, the Conservative Benches would have been packed with hon. Gentlemen well briefed by the oil companies.

It is ironic that, throughout the period of the Labour Government, Conservative Members and official Opposition spokesmen expressed great reservations about the level of oil taxation and the system. They committed themselves to introducing major and successful reforms. All they have done is to make a complicated system more complicated. They have simply added pieces to it, cobbled other pieces together on top of it and substantially increased the total take. They have justified that, as they did last year, by saying that they needed the money.

Having made those points about the partisanship of the oil companies, and although we take what they say with a pinch of salt and treat it with scepticism, we do not dismiss out of hand what they say. It is important that the Committee should not dismiss out of hand the considered report of the Institute for Fiscal Studies on the taxation of North Sea oil. That report was drawn up by a committee comprised of people with great experience in the oil companies and others who were expert and, perhaps, more detached.

I do not suggest, and nor does the institute, that its scheme is the last word in oil taxation. The institute produced a relatively slim report, and the details will have to be worked out, but it seemed to address itself to the problems in the present system, which is complicated and involves four different taxes. The Under-Secretary may say that the Government have reduced the number to three by changing SDP into APRT, but there are still four systems of computing the charge to tax, even if one of the charges is deductible against another.

My right hon. and learned Friends will remember from our discussions on last year's Finance Bill that the taxation system is fearsomely complicated and involves all sorts of problems about uplift, safeguard, separation and many other concepts that I thought that I could forget last year, and had to relearn for this debate.

The Institute for Fiscal Studies proposed a single system of taxation based on the profitability of fields. The tax rate would be brought in at varying levels as different rates of return on the fields were triggered. That seems, in principle, to be a system which deserves the greatest consideration.

I found it difficult to follow some of the institute's calculations, particularly the suggestion that the total take under its illustrative projection would be exactly the same as under the present system. I do not understand, though there may be an explanation, how £7.4 billion, which is the total take for 1983, under the present system is the same as £6.6 billion, which is the institute's proposed total take, excluding corporation tax. However, it seems that the proposed system could be used to produce more or less the same take as the present system produces.

As the Government have had so much time to consider alternatives and as they have received representations from the institute, we need a detailed explanation of why they chose not to go for a change in the system or for a system that would last, but have instead added to the present rather rickety structure, with the possibility that it will be changed in future.

The Opposition's interest is for the highest possible return to be achieved for the nation in the tax take from the North Sea, consistent with a fair return to the oil companies, the most productive use of North Sea resources and a sensible depletion policy.

We do not cavil about the Government's total revenue take, which is one reason why we will not divide the House on the amendment, but we question whether the Government's course of eight changes in 30 months is the best way forward, and there are many questions about the system that the Government need to answer.

8.30 pm

Mr. Eggar

I listened to the hon. Member for Blackburn (Mr. Straw) with considerable interest as he tried to attack the Government on the one hand and yet tried to retain the purity of his Socialist soul on the other. It was an interesting example of how far the hon. Gentleman has progressed from those heady days when he had a purity of conscience as leader of the National Union of Students. I agree with the hon. Gentleman on one matter. Oil taxation is in a mess, basically because the original scheme, put forward and accepted by the then Government, was unfortunately badly thought out and designed in particular with the interests of the two major oil companies, BP and Esso, which advised the Government at the time on the structure to be adopted, in mind. I have no doubt that this is the origin of the problem.

I was also extremely attracted by the proposal put forward by the Institute for Fiscal Studies. There is a good argument for radical reform of the oil taxation system. However, the more one goes into the implications of any radical reform, the more obvious the difficulties become. On balance, I felt that the analysis by the Institute for Fiscal Studies would not carry the day and that it would not have been right for the Government to adopt it. The structure makes the oil companies into utilities. It makes them into companies that need to have a fixed rate of return. That is not a position that any sensible company, even a State oil company, should be ready to espouse. Oil companies are, after all, in the business of risk-taking. It is reasonable for them to expect a higher return if they take higher risks.

The other difficulty with the IFS proposal is that once one tries to overturn an established system of taxation like PRT one inevitably gets winners and losers among the oil companies. Even if the logic of the IFS proposal had been followed through as fairly and impartially as possible, some companies would have benefited considerably and some companies would have lost considerably. For that reason alone, a modification of the existing system was probably preferable. This means, however, that there will have to be considerable, continuing changes as there are changes in the position in the North Sea in the sizes of the fields and in technology. One of the industry's criticisms of this and the previous Government has been the frequency of oil taxation changes. That is a cost and a problem that the industry has to bear because of the origins of the tax structure set down in the original PRT proposal.

Mr. Dick Douglas (Dunfermline)

Circumstances in the North Sea are changing now. The Government's proposals are based on existing fields and make no allowance for the fields that we need to develop.

Mr. Eggar

I could not agree more. I shall develop that point.

The hon. Member for Blackburn was unfair to the Government as, indeed, have been the oil companies. It was, after all, the oil companies themselves that put forward the argument against SPD and in favour of an advance PRT system. That was put forward by the United Kingdom Offshore Operators Association. The industry has been less than generous in accepting that the Government have followed the proposals that the tax subcommittee of UKOOA advanced.

The industry's major anxiety is that the Government's tax take has not fallen. A reduction in the overall Government tax take was an integral part of the industry's proposals. It argues, not unreasonably, that, just as the Government said that as oil prices increased so would the tax, when oil prices fall, and therefore companies are making less money, taxes should come down also.

It is obvious that any company and any individual would prefer to pay less rather than more tax. It must come as no surprise to the oil industry that the Government have not reduced their tax take. Those of us who talk to oil companies, including Opposition Members, gave as our considered view that, bearing in mind the state of the economy, there was no way that the Government would accept a system that involved a significant reduction in the tax take. That is the reality which the industry should have realised. I am rather surprised at the attitude that some have taken.

The Government are quite right to stress that the overwhelming criterion that they must apply is not the oil companies' but the national interest. The Government must make a judgment of what that national interest is. The Government should have considered several factors before making changes. Perhaps they have paid less attention to some than is appropriate. First is the lack of tax stability and certainty. On balance, we are landed with the present tax system, one of the unfortunate results of which is some uncertainty. I am afraid that the industry must accept that. We must welcome, as I notice the hon. Member for Blackburn did not, the Chancellor's statement that he hoped that this would be the last change and that we were going in for a period of stability.

Secondly, it must be the Governmet's intention—I recognise that this is more a matter for the Department of Energy than for the Treasury—to promote exploration for oil and to promote development of oil reserves once they have been identified and found. The Government say that there is no sign that their tax changes have had any effect on that because the level of exploration remains high as indicated by the interest in the seventh round.

The Department of Energy and the Treasury fail to recognise that it is extremely cheap, in oil company terms, to drill a well and to explore. It may cost £5 million or £10 million, which is big money to many companies, to drill a well. But compared with development costs in the North Sea which may be £500 million to £1,500 million, £5 million here or there on a well is not significant. Therefore, any Government who look to the level of exploration as an indicator of whether the industry has been put off by their policies is failing to take all the factors into account. Equally, no oil company will cease production on an existing field. That makes no economic sense. For an indicator of the effect of Government policy and other factors we must look to the level of development.

It is a sad fact that there has been remarkably little development recently. I understand that there will be no platform orders for the northern North Sea—that excludes the Morecambe Bay development—this year. It is the first year for many that there will be no major platform orders. That represents far more than a loss of profit by oil companies. It means a major loss of jobs in the United Kingdom—in the construction yards for the jackets and for the module builders. It is a considerable achievement by the Government that United Kingdom contractors win about 80 per cent. of all orders going to the North Sea. That is a lot of jobs. So it is not merely that oil companies are losing profit. It can be argued that Government oil taxation policy leads directly to a loss of jobs.

The Government also sometimes fail to appreciate that the PRT system was originally developed for very large fields producing anything up to 500,000 barrels a day and containing up to 1 billion barrels of reserves. We are now entering the second phase of development in the North Sea. There are at present 26 fields either producing or under development. The next 11 fields that have been defined as possible commercial developments are only a quarter of the size of those already in production. As the nature of the fields changes, the Government should adjust the oil taxation system to take account of that. Although the advance PRT was a significant improvement on the previous SPD—it is not just a tax on revenue, as the hon. Member for Blackburn rather mischievously suggested, as his smile now shows—it does not take account of the downgrading in the size of fields coming up for development now and in the future. Moreover, if we are honest, just as we argued that as oil prices rose, taxation must also rise, so the reverse argument should at least be taken into account.

My greatest criticism is not so much of the changes in the Bill as of the omissions from it. I had hoped that there would be specific proposals for three kinds of field. First, there are the highly marginal fields, which probably need a special taxation system of their own. Secondly, there are the so-called satellite fields, of which Claymore is an example. The North Claymore development would have required a unique platform system which would probably have been built by British Shipbuilders, but, because of the last taxation changes, it did not go ahead. It seems curious that an otherwise viable development which would have produced profits for the oil companies, extra taxation for the Government and jobs for the people producing the equipment did not proceed because of the nature of the taxation and the rules of PRT. The third area to which the Government should pay attention but, regrettably, so far have not done so is further investment to provide additional compressor stations or whatever is needed to increase recovery from existing fields.

All of those factors relate to small fields. We are not dealing with great glamour fields such as the Forties. Nevertheless, these smaller fields are important if we are to gain the maximum benefit for the country from the North Sea. As the territory matures and as additional secondary and even tertiary recovery techniques rare required, increasing attention must be paid to these factors.

The Government have some discretion to encourage developments of this kind. Two come to mind immediately. The Government can—although they never have—rebate some of the 12½ per cent. royalties normally due to them. I hope that the Minister will comment on that. The Government could give some encouragement to oil companies by saying that where there is a highly marginal field the Government will consider with an entirely open mind ceding some of the royalties that would otherwise be due to them.

8.45 pm

The other area that needs further investigation is field definition. Before the partners in the South-West Claymore field, which is another development of the Claymore field, decided that they were prepared to drill additional wells to discover what was in the field, they felt that in order to justify spending additional money they had to go to the Department of Energy and obtain a clear ruling as to whether the South-West Claymore field was separate from the main Claymore field. In that case, the Department of Energy was able to say that that was a geologically separate field and would be treated as such for PRT purposes. The Department of Energy has an element of discretion. I hope that the Minister will say that the Department of Energy will look carefully at applications for definitions of fields because the way in which a field is defined—whether it is a separate field or part of an original accumulation—can have a key effect on whether the field is to be developed.

The oil companies are not the most popular organisations to argue for. They do not have many friends on the Conservative side of the House or, obviously, on the Labour side. None the less, the North Sea and the service industries for the North Sea are the most dynamic part of our economy at the moment. They need more support than the present Government or previous Governments have given them. It would be a great tragedy if, through the need for money as dictated by the Treasury, we drove away the companies from those fields and destroyed the considerable technical and engineering expertise that has been developed in Britain. We should not be under any illusion. The oil industry is a world-wide industry. If British or American petroleum engineers feel that they have not a reasonable future and that a reasonable number of developments are not materialising in the North Sea for them to work on it will not need a decision by their companies to withdraw them from the North Sea and put them in part of their other world-wide operations. They will go of their own accord to develop their careers.

We have had considerable success in building up offshore technology in many areas. Of course, if there are no domestic orders available, companies will do their best to export, but traditionally any developing industry, particularly in high technology areas such as the North Sea, needs a sound home demand from which to build. Perhaps we are becoming a little too occupied with the immediate tax take. Perhaps we are not paying enough attention to the future and to the fact that if we allow a significant planned and phased development of our North Sea assets to continue the tax take in the long run and the tax recovery in future years will be much greater than the tax forgone in the immediate future.

I am not happy with what the Government propose. I hope they will keep the matter under close review and realise that the long-term future may dictate measures other than, perhaps, what short-term public sector borrowing requirement considerations may dictate and that we may hope for a sympathetic response from the Minister now and in Standing Committee.

Mr. J. Grimond (Orkney and Shetland)

The taxation system of Britain is now in such a muddle that every hon. Member is aware that even those with the simplest form of income are unable to discover what tax they should pay. It is high time that the system was overhauled.

It is particularly unfortunate that petroleum taxation, which is a fairly recent development, is constantly being changed and is already in a muddle almost equal to that of the general system. Consideration must be given to the weight of oil and petroleum taxation. There are still many applications for licences in the North Sea and a certain amount of exploration is taking place, but development has undoubtedly been slowed down.

There is a case for slowing down development. There are those who think that the oil is better kept at the bottom of the sea than constantly being exploited for temporary advantage. However, that is not the point taken by the Government. The Government assure us—or at least they were doing so until quite recently—that their taxation system is not preventing the development of the North Sea and that it is not part of Government strategy to damp down development.

The second drawback of the present taxation policy is uncertainty, because it is constantly changing. This is having an extremely serious effect not only on the oil companies, which to some extent can look after themselves, but on the whole of Scottish industry. The rig and platform builders and module builders now have no work. The problem does not end there, because it is filtering through to the whole of Scottish industry. Those who laid out large amounts of capital on the understanding that there would be steady development in the North Sea now find that they are without orders because of taxation changes.

I represent a constituency that is particularly dependent upon oil, as are other areas in the north of Scotland. In addition to the general damage that is being done to the Scottish economy by the uncertainty about taxation and the contraction of the oil companies, there are particularly serious results in the north of Scotland and in my constituency. For example, in Shetland and Orkney the local authority is liable to lose a large proportion of its income through the derating of the terminals at Sullom Voe and Flotta. There is no doubt that a few years ago the oil companies would have made good a considerable proportion of that loss. They showed every inclination to do so, and I must pay them a compliment, because they have been extremely co-operative in matters affecting the local economy. However, now that the Government have levied extra taxation upon them they are not in a position to make good the loss.

The Government are taking the extra taxation for themselves and depriving local authorities of revenue from the oil companies. The same is true of barrelage and the contributions that it makes to the charitable fund in Shetland and other causes. A large proportion of the economy of Orkney and Shetland has been geared to the steady development of oil. That is now problematical owing to the constant uncertainty about taxation as well as the high rate at which tax is levied.

If we are not careful, the companies will move their resources and skills to other places. I am informed that there is great interest in oil in the sea off China. Apparently many oil companies are investigating whether the terms offered by the Chinese Government will be easier for them than the terms offered by the British Government. There are other places in which the oil companies are beginning to feel that they might get a better deal than in the United Kingdom.

The Government must not be misled by the exploration that is taking place and the applications that will be made for licences when the next round takes place. Let them remember that development is not going ahead. Let them bear strongly in mind the effect upon the local economy and upon local authorities which, through no fault of their own, and no desire of their own, have become liable to great expenditure because of oil.

Shetland has been changed tremendously by oil, in many respects for the worse. It has had to lay out large capital sums. The oil companies are being squeezed by the Government and cannot make the contribution that was expected. Above all, the Government must not ignore the effect on the Scottish and English economies. I have in mind building and engineering and the expected benefits to industry from the development of oil.

There may be a good case to slow down development. There is a good case for conservation. But there is no case whatever for creating uncertainty throughout the oil and related industries, even as a means of pursuing conservation.

Mr. Richard Page (Hertfordshire, South West)

My hon. Friend the Member for Enfield, North (Mr. Eggar) put the case admirably. My purpose is to reinforce the warning that we gave in Committee last year. If the North Sea oil tax regime is not substantially altered, it will reduce the development rate of the fields.

I was glad to hear the hon. Member for Blackburn (Mr. Straw) singing a slightly different tune from last year. Special petroleum duty was introduced in 1981 because there was no time to work out a more integrated change to the tax structure. I do not particularly care for it. I do not approve of the principle of taxing companies on revenue. I much prefer the principle of taxing them on profits. It was acceptable for one year while the oil companies, through the UKOOA, worked out more acceptable alternatives.

The oil companies have cried wolf many times, and each time they have been found out. This year's Budget, with the increase from 70 to 75 per cent. PRT, and the introduction of advance PRT, will further hold back not exploration but development. I agree with the hon. Member for Blackburn that there is the danger that we could cease to be self-sufficient in oil in the tail end of the 1980s to the beginning of the 1990s and eventually become a net importer of oil. No new field has been developed since Hutton in 1980. Three days ago Shell turned down the opportunity to develop the Tern field. That confirms that exploration is going ahead but that development is coming to a stop.

I do not wish to labour the taxation point or to stray into clause 124. The new tax structure, especially with APRT and the Exchequer's natural desire to smooth tax payments, will not give an incentive to invest in satellite development. My hon. Friend the Member for Enfield, North made that point about the Claymore field. APRT will be a further restriction on the development of marginal fields. The restriction is a hangover from the Finance Act 1981.

APRT will hit hardest fields of low profitability which have low PRT liabilities. It is perhaps one of the most worrying parts of the Chancellor's approach. The UKOOA recognises that by proposing that temporary APRT could be offset against PRT or an allowance be made so that, as the field came to the end of its life and there are not the PRT liabilities, the advanced payments could be returned. At present APRT is becoming a forced loan to the Government, with no interest attached, for a period that could exceed 20 years. The effect on cash flow is obviously worrying and serious.

As a matter of principle I start to query the concept behind the tax. In short, I am sad that the new tax structure makes it difficult for North Sea oil operators to generate enough capital to finance the development of their new fields—developments that have to take place if we are to remain oil self-sufficient. I do not want to see this country held to ransom by oil producers from overseas.

9 pm

Dr. J. Dickson Mabon (Greenock and Port Glasgow)

The speeches so far have been of high calibre. The hon. Member for Blackburn (Mr. Straw) asked some pertinent questions. The principal one that I should like answered tonight is that of waste. There may be a serious threat to existing fields, particularly earlier ones that might be reaching the end of their production profile. There will be a strong temptation, because of the financial structure, prematurely to shut them, leaving a great deal of oil that will never be recovered. It would be utter waste on an unforgivable scale if some of the existing fields were to suffer that way.

The Minister may not be able adequately to answer this point tonight, and I do not criticise him for that. However, he should take back to the Treasury the point that it is in serious danger, as all Treasuries are, of overtaxing the golden goose and ensuring that we do not get a full and proper return for the nation.

If we tax oil at any time, we must examine the other industries that we want to succeed. We should maximise the amount of money going to the Exchequer from profits made in the field. I am glad that the hon. Member for Blackburn conceded that the oil companies expect and ought to get a fair return on their capital. It is a question not just of justice, but of the companies going to other offshore fields in other parts of the world—a problem to which the right hon. Member for Orkney and Shetland (Mr. Grimond) referred. They could start to invest in other areas, leaving the North Sea relatively undeveloped.

I do not believe that all the best fields in the North Sea have been discovered. There may be no more large discoveries to be made, but collectively there may still be a large amount of oil to be taken out of the North Sea. That is a second warning that the Treasury must heed. The nature of the production profile, as it is called, of the North Sea province over the next 20 years is important. It would be a tragedy if Britain slipped from self-sufficiency to being a net importer of oil. It is no consolation that oil prices seem to have gone down for the present. That does not mean that we can afford to return to being a net importer of oil.

The hon. Member for Hertfordshire, South-West (Mr. Page) said that we have not had an annex B approved by the Government since August 1980. By coincidence the SPD was announced in November 1980. I am not deceived by all that the oil companies have said in the past. One does not have to be an ex-Minister of State, Department of Energy, to realise that sometimes the oil companies cry wolf. Therefore, they are not listened to when they are serious. However, they are now serious and there is a possibility that they will not go ahead with pending developments.

The Minister of State, Department of Energy has gone on record in The Oilman of 24 April 1982. He said that there were three annex Bs pending. An annex B is a submission to the Department of Energy for permission to go ahead and develop a field that has been appraised in every conceivable way by the operator company, the consortium and the Department of Energy. Everybody knows the three possibilities. It is by no means certain that they will go ahead.

However, the Minister solemnly said that he was confident that none of them is likely to be retracted because of the current taxation structure. I hope that the Minister is right, but that is not my information. I hope that I am wrong and that they will go ahead.

The Minister of State said that the current depressed fabrication industry would significantly improve after the next 18 months as new orders came on stream. But he added that it was dependent on these annex Bs being approved. That is absolutely true.

I have always wanted to quote from the Largs and Millport Weekly News, the paper that I was brought up on as a little boy. On the front page of the current issue of this splendid weekly newspaper there is a reference to Ayrshire Marine Constructors. From my flat in Largs, I can see the growing platform being built there at Hunsterston, but the men building this novel and remarkable platform, which is due to leave for emplacement later, have been given a 90-day notice. It means that unless another order is secured within 90 days, they will be unemployed. That, in turn, affects 800 families who live in Ayrshire, Lanarkshire and Renfrewshire and even some whose homes are in England. It would have an impact which could spread quite extensively. Incidentally, these are not the only people under 90-day notices. In the Financial Times of 21 April there is a list: Lewis Offshore, Ayrshire Marine, Charlton Leslie of Wallsend on Tyneside and William Press on Teesside. All of them either have or are about to issue 90-day notices on substantial numbers of workers. I declare an interest. I am a deputy chairman of RGC Offshore. We employ about 800 men. We are not in danger of issuing 90-day notices because at present we are building the very large Beryl B jacket. But if no further orders are secured by Christmas of 1983 or by the spring of 1984, we could be in the same position.

That brings me to the third point that I wish to make. We do not have to beware just of waste because of the failure fully to exploit fields. It is not just a matter of self-sufficiency for Great Britain. We also have to consider the immense loss of talent which, under successive Governments, we have created in the last 10 years from very little information right up through a superb learning curve so that we are now in the position of having one of the best offshore fabricating industries in the world.

The Offshore Supplies Office has done a great deal to help the industry to get 80 per cent. of the United Kingdom market, and its director general is right when he says that we ought to go out and seek more orders abroad. That was the purpose of building up the industry. It was not just to capture our own market in a protectionist way. The intention was to be able to service offshore oil fields abroad as well as in the North Sea. If we sacrifice these men at these establishments, we shall not be able to go out into the export market. Therefore, it behoves the Department of Energy to press Treasury Ministers to realise that the Government are going too far. The warning signs are clear.

I do not join in the cries of wolf made by the oil companies, but this time I believe that they are sincere. They are immensely shocked at the way in which UKOOA' s submission has, in effect, been thrown out. Never before have the companies come together through UKOOA to put a submission to the Government in a united form. In my time, during the consultations between August 1978 and the spring of 1979, I had the pleasure of being with the right hon. Member for Heywood and Royton (Mr. Barnett), then Chief Secretary, and the right hon. Member for Ashton-under-Lyne (Mr. Sheldon), then Financial Secretary, and we had to interview each company. They did not want to be interviewed collectively or in groups. They wanted to be seen individually. It is all the more remarkable that the oil industry has come together in one submission to the Treasury and asked to be listened to.

I have no doubt that the reference made to the proposal of the Institute for Fiscal Studies is valid. I hope that the purpose of the debate is to persuade the Government—and probably their successors—to consider the revision of the system of taxation in the North Sea in order to achieve the four objectives that I have set out.

Mr. Robert Sheldon

I recall the discussions when the proposals for a different form of taxation were put to the right hon. Gentleman. He did not respond on that occasion.

Dr. Mabon

I wish that I had been in a sufficiently strong position to be able to respond and decide. It would have been much better if I had been listened to. Unfortunately, I was not in that supreme position. Perhaps time has not passed me by and I might yet have that opportunity, in which case I shall read this speech with immense pleasure so that I can carry out what I am advocating.

It is up to the Government—and I hope their successors—to try to review the system in order to be consistent with those four aims. I accept that, as a nation, we should expect to get a reasonable share of North Sea profits, but that is not the overriding objective of the British people. Another objective is to avoid wasting our oil and gas, either by fiscal nonsense or by inadequate procedures on the part of the Department of Energy. It is wrong that we should lose self-sufficiency at any time during this century. Only a genius of a Government could organise that. However, it is conceivable that, if the Treasury gets its way, we could see a dip in prodution before the end of the century and we would not have self-sufficieny in oil.

The offshore supplies industry has had a superb record of achievement in the past 10 years. Therefore, I plead with the Minister, apart from answering the various points that have been raised in the debate, to go back to the Treasury better informed and say that perhaps we are getting close to the point at which the law of diminished returns will apply and Britain's self-sufficiency will be prejudiced. An otherwise enterprising industry does not deserve to be penalised by heavy and awesome fiscal burdens.

Mr. Douglas

I listened with great interest to the right hon. Member for Greenock and Port Glasgow (Dr. Mabon), as I did to other right hon. and hon. Members who have participated in the debate. I hope that Ministers will note the degree of anxiety that is being expressed by hon. Members. As has been put rather whimsically, there is a feeling that we are liable to kill the goose that lays the golden eggs. We should be careful how we balance the need to obtain some of the economic rent, which undoubtedly can accrue to companies in the North Sea, against the need to ensure security of supply and self-sufficiency for as far into the future as we possibly can.

As my hon. Friend the Member for Blackburn (Mr. Straw) said, there have been a remarkable number of changes in taxation. We are now into the eighth change in 30 months. We used to talk of seven changes in a shorter period of 18 months. In the development of an area as complicated as the North Sea, some stability in taxation is needed. No one can argue that we have had such stability.

9.15 pm

Given the discoveries that have been made, it may be justifiable to play about lightly with the tax regime and to expect the companies to suffer. However, the statistics alluded to by the hon. Member for Enfield, North (Mr. Eggar) show that the average size of the first 25 or 26 fields has been about 447 million barrels. The average size of the next 11 fields that may be up for development is only about 91 million barrels. There are 37 other "marginal" fields whose average size is only 62 million barrels. We are going for smaller and deeper fields and the cost of production per daily barrel is rising considerably.

In the early 1970s, when I first began to pay attention to the industry, we were talking about £1,000 per daily barrel for production costs. The range is now anything between £10,000 and £20,000 per daily barrel. The report shows that the Government's fiscal mechanism may lead to the destruction of the onshore industry that we have built up over a considerable period, particularly in Scotland and the north of England. As the right hon. Member for Greenock and Port Glasgow said, it is all very well for the director general of the Offshore Supplies Office to say that he is encouraged by the way in which companies try to find work overseas. The Government may tell us how much overseas work is going to Scottish and United Kingdom yards. In the next few weeks there will be a massive British stand at the offshore technology conference and exhibition in Houston, Texas. However, how much work do we win against overseas competitors in their own areas? For example, how much work do we get from Norway and how much offshore work do we get from the United States of America? I doubt whether we win much work there. We have some work in Brazil and we cannot forget Canada.

The right hon. Member for Orkney and Shetland (Mr. Grimond) mentioned the possible and probable development of China. Our expertise is related to what is happening in offshore China. How many orders for United Kingdom yards are we likely to get from China? I recognise that it is difficult to maintain orders without a cyclical effect. However, the Government's policy is doing nothing to damp down the cyclical effect. Indeed, the Government's policies are designed to increase the cyclical effects of depression and slump and of boom. Unfortunately, we seem to be moving into a slump.

In its quarterly bulletin, the Bank of England had an excellent article about the longer term economic effects of North Sea oil and gas. Page 63 states: Clearly, then, the benefits of the North Sea accrue in great measure to the Government. In 1980, tax revenues from this source amounted to more than 4% of total receipts from taxes, and by 1985 this may more than double. But even after this taxation, North Sea cash flow is not a trivial proportion of UK industrial and commercial company gross after-tax profits, and it is expected to increase sharply in the next few years. Pre-tax, North Sea licences earned about one third of all gross trading profits, net of stock appreciation, in the UK in 1980. Perhaps the Minister can give us the projection for 1981, because these are considerable flows accruing to Britain as a whole. We wish to ensure that those flows are kept up.

If we consider an important item of depletion policy we find that, after discussing some technical aspects and other incidental developments, the article states: Severe though these technical difficulties are, they might prove less important than a failure to assess properly the economic consequences of a given depletion policy. One of these relates to the security of supply: it is likely to be of considerable economic and political value to the UK to be in a position to save itself, and its main economic partners, from the worst disruptive consequences of any future interruption to world oil supplies. That is above and beyond arguments about tax revenue. We must devise a policy to ensure that we keep the security of supply as far into the future as possible.

References have been made to the UKOOA submission to the Government, and I wish to ask some direct questions about it. I should declare my interest in offshore oil in that I advise a drilling company and a diving company. I am also being sponsored in the London marathon by some oil companies, which will donate 10 barrels of oil if I complete the course. Their view of the spot market price after 9 May varies. One company puts it at about £200, another at £170 and another at £150, so I am a little worried about the spot market.

Mr. Straw

Is my hon. Friend taking it in kind?

Mr. Douglas

It will be donated in cash to a well-known charity.

The UKOOA view of advance petroleum revenue tax is that there should be a sliding scale of tax. Will that argument be accepted or will we have 20 per cent. until kingdom come? As the hon. Member for Enfield, North (Mr. Eggar) knows, UKOOA argued for greater consideration to be given to the definition of satellite fields and to a consideration of how one gives incentives to develop deeper fields. I know that there is great difficulty in obtaining a balance between Government revenues and incentives to explore, develop and produce to the technical optimum.

The hon. Member for Enfield, North alluded to different forms of recovery. There is no incentive in the Government's proposals to give assistance to what we loosely call tertiary recovery. There has been some experimentation in the Forties field in different forms of tertiary recovery. Fortunately, the rate of recovery has been running at over 40 per cent. However, we should give incentives to ensure that the maximum technically possible amount of oil is taken, because it will be difficult to return to those fields once the primary and secondary recoveries have been carried out. That should be related to new developments in platform construction and design. The Government are lacking in that incentive and should give greater consideration to ensuring that the maximum amount of oil is extracted from the North Sea and that we maintain self-sufficiency for the longest possible time.

I shall allude to one or two matters directly affecting my constituency in clauses that are related to clause 117. During the Budget debate in a discussion on ethane I asked the Chancellor of the Exchequer if the provisions in clause 119 might be broadened to include propane and butane, which are extremely important. I wish to ask about the definition of ethane in that clause. I am sure that my hon. Friend the Member for Clackmannan and East Stirling-shire (Mr. O'Neill), with his interest, will want to cover this point, too.

The definition of ethane is extremely slim. Clause 119(6)(a) states: ethane means oil consisting of ethane to a level of purity consistent with normal commercial standards. That is an extremely slim definition, particularly as in the Oil and Gas (Enterprise) Bill we had a comprehensive definition of gas inspired by the hon. Member for Bedford (Mr. Skeet). Those are important considerations.

The right hon. Member for Orkney and Shetland (Mr. Grimond) has talked about the concern of Scottish local authorities about the derating of certain industrial aspects of petrochemical development. I do not expect the Minister to reply to that, although the right hon. Gentleman might expect it. That matter also affects my constituency.

Over a considerable number of years we have built tip an onshore industry related to the harshest and most difficult areas of offshore oil development. That expertise ought to be used internationally. The international credibility of our onshore and offshore industries will depend on the prudent use to which we put our scarce oil and gas resources. We know now that exploration is declining and that development is declining. The Government, by their taxation policy, cannot absolve themselves from their responsibility in relation to that decline.

Mr. Martin J. O'Neill (Clackmannan and East Stirlingshire)

Until my hon. Friend the Member for Dunfermline (Mr. Douglas) spoke, the emphasis in the debate had been on the offshore implications of taxation and the jitteriness that the oil companies are now experiencing. Those of us who have oil-related interests in our constituencies tend on occasions to look a little askance at the oil companies when they seem to be crying wolf. However, there is a consensus in the Committee that the plight of the oil companies is such that each of us has in his own way to look at ways of seeking to help them in this difficult time. The fact that there have been eight changes of regime in a short period has meant that a whole range of activities must be looked at with a view to saving money and to reducing the potential for loss.

British Petroleum is of considerable interest to my constituents. I am talking about Grangemouth, which abuts my constituency. My hon. Friend the Member for Stirling, Falkirk and Grangemouth (Mr. Ewing), were it not for family illness, would probably have made the representations that I am making this evening.

My hon. Friend the Member for Dunfermline referred to clause 119. Difficulties have arisen because we were inclined to believe that the assumption behind the clauses was that there would be a gas-gathering pipeline and that there would be ease of access to supplies from Brent and Magnus, which at present do not exist. There are implications for the pipelines on the mainland. Those of us who have knowledge of the geography of Scotland will appreciate that there is a missing link between Moss Morran and Grangemouth.

9.30 pm

Part of the problem is that about two-thirds of the ethane that will eventually arrive at Grangemouth will be subject to a different tax regime from that enjoyed by the crackers at Moss Morran. Thus, in the context of the difficulties in which the oil companies find themselves as a result of the constant changes and jitteriness of the industry and the recession, I make a plea for special consideration to be given to the old established petrochemical complexes which, ironically, could suffer as a result of the discovery of North Sea oil.

We recognise that in the past these complexes have been the first to benefit. Before Moss Morran comes into operation, there will probably be a period of about 12 months when the Grangemouth cracker facilities will be available for use and will provide the kind of revenue which is obviously the desire of the Government in this part of the Bill.

I should like the Minister to re-examine the definition of ethane, because we feel that, in the context of the difficulties in which the oil industry finds itself now, and in the light of the many graphic descriptions we have had this evening of the problems of the supply industries, those who are downstream are experiencing equal difficulties. Certainly the narrowness of the definition in clause 119(5) will create difficulties and could jeopardise the efficiency of the Grangemouth operation.

Scottish Members and those who wish to see the old established friends of the oil industry given a chance would like to think that the Government, in reconsidering the context of this legislation, will at the same time reconsider the effects of clause 119.

It would be wrong for us to cry wolf at this time, because this type of approach by the oil companies is no longer relevant. They are in serious difficulties. There is already a facility at Grangemouth. It was built in the late 1960s. It would now cost £250 million to replace it, and to adapt it to meet the challenge which would come from the supply of ethane at realistic prices would cost about £25 million. In the context of the oil industry such sums are not large, although they seem so to mere mortals such as ourselves. Nevertheless, these sums could be expended, the facilities could be made available and the production realised within a relatively short period. Therefore, I ask the Minister to re-examine the taxation of impure ethane, because it is an area in which one group could benefit quickly. Moreover, the revenue from it could be increased, because the financial position of this enterprise could be turned round in a very short time.

I am conscious that I could be accused of special pleading, and I do not deny that, but it is not special pleading that would disadvantage anyone else in the oil industry in the United Kingdom. The main consumer of the products of the chemical works to which I am referring is a wholly owned subsidiary of British Petroleum, and I understand that it would be possible for that wholly owned subsidiary to make considerable use of those products were the scheme to go ahead.

The Government have had criticism of varying degrees of severity from both sides of the Committee. None of us wants to throw up the chance of ensuring a reasonable tax take to the Treasury, but we feel that there are areas where account should be taken of mitigating circumstances. The figure of £5 million to £10 million in tax relief, if Grangemouth could be treated in the same way as Moss Morran, would be more than justified by the opportunities for the BP chemicals exercise in Grangemouth. It would be able to make considerable profits and to contribute in other ways to the wellbeing of the community and to the provision of additional revenues to the Treasury.

Mr. David Lambie (Central Ayrshire)

I add my voice to those of hon. Members on each side of the Committee who have said that the present problems of the North Sea oil and gas industries are caused by rising taxes and falling prices. As a country, we can do very little about the second of those factors—falling prices—but as a country—and this is the nub of the debate tonight—we can do a lot about the rising taxes being proposed by the Government.

The Government, by their taxation policies, are continuing to discourage new developments as well as sacrificing the extension of oil self-sufficiency for the United Kingdom. From the investment point of view, the Government must think again and provide incentives to end the hold-up of new oil developments. The effect of the very high taxation brought in by the Government is to create an enormous amount of uncertainty in the planning of the oil companies. Indeed, it is strange that in speaking to the chairmen and managers of various international oil companies and in listening to their criticism of present Tory Government policy one hears over and over again the phrase "Bring back Tony Benn—all is forgiven."

It seems strange that the international oil companies, the multinationals, are now looking back with a certain nostalgia to the period when my right hon. Friend the Member for Bristol, South-East (Mr. Benn) was the Secretary of State for Energy and when my right hon. Friend the Member for Greenock and Port Glasgow (Dr. Mabon) was the Minister of State at the Department of Energy. That shows how the confidence of the multinational oil companies, which supported the election of the Tory Government, has been shattered by the policies carried out by the Government during the last three years.

With the oil companies holding back on billions of pounds worth of North Sea development—not to say preparing to take up the battle of taxation—I believe that we are heading for a period of prolonged nervous indecision. New oilfields need to be brought on stream in the mid-1980s, because fields that have been producing since the mid-1970s will by that time start to go into decline.

A long period of uncertainty is not needed at this time. There has to be an assurance that the Government will not chop and change taxation policies every couple of years or so. The oil companies need, and are seeking, a much longer period of stability, and the Government must give it to them. Present North Sea tax changes are not in the best long-term interest of this country and of the people who work in the oil industry. In fact, last year's cancellation by the Government of the huge North Sea gas-gathering pipeline now places question marks over some of the more isolated marginal oilfields. This has created uncertainty among the companies that service the oilfields.

I wish to take up the point raised by my right hon. Friend the Member for Greenock and Port Glasgow, who dealt with the Government's changes in the oil taxation policy for the onshore industry. He quoted from the Largs and Millport Weeklyy, News. He said that he did so because he has a house in Largs. However, perhaps the reason why he quoted from that paper is that he is having difficulty in finding a seat in the Greenock or Port Glasgow area. I say that as a personal friend. If the boundary changes proposed by the Parliamentary Boundary Commission for Scotland are accepted there will be a new seat, Cunningham, North, in the centre of which will be Largs. Given my right hon. Friend's association with Largs, and being an avid reader of the Largs and Millport Weekly News, he might have the opportunity to become a prospective candidate for the new seat, but he might have to beat my son-in-law to get it.

I read in my own local newspaper, the Ardrossan and Saltcoats Herald, that there will be 900 redundancies at Ayrshire Marine Constructors at Hunterston in Ayrshire. Approximately 1,100 people work there and 90 days' notice of redundancy has been given to 900 workers. That might not be a serious problem in other areas, but, as my right hon. Friend the Member for Greenock and Port Glasgow knows, it is a serious problem in North Ayrshire where the unemployment rate is 25 per cent. Every third man is unemployed, yet one of the largest employers in the area is making 900 men redundant.

The majority of those men live in my constituency or in the neighbouring constituency of Bute and North Ayrshire. If they register at the employment exchange the ratio will be one in two men unemployed. Hon. Members on both sides of the Committee who have never experienced such high unemployment cannot realise how it can kill an area and any opportunity of development in it. Young people leaving secondary school with all their aspirations and qualifications have no opportunity or hope of getting a job. That is why I hope that the Government will change the taxation policy.

I agree with hon. Members who have spoken about the tradition among hon. Members who believe that the multinational oil companies cry wolf. The companies can shift profits and losses from one part of the world to another and the only people to benefit are the shareholders. But we have reached the stage where the Government must listen to the oil companies and to hon. Members on both sides of the House and reconsider their oil taxation policy. Perhaps we should go back to some of the policies operated by my right hon. Friend the Member for Bristol, South-East and my right hon. Friend the Member for Greenock and Port Glasgow. We have to reconsider those policies to try to get things moving again.

About 7,000 people work in the five main oil platform construction yards in Scotland, which are all at various stages of rundown. The first crisis will be at Hunterston. We must get more orders, and the only way to do that is to give oil companies the facilities and money to expand production and to search for new fields to bring in more oil and more work for our people.

9.45 pm

There are rumours throughout Ayrshire that large oil and/or gas finds have been made in the Firth of Clyde off the Isle of Arran. Every oil company denies that those finds have been made and are ready for exploitation, but we have heard in my area rumours of oil companies taking options on hotels and derelict areas of land. One area in a former local shipyard is being sought by the local authority for industrial development, but it is rumoured that the harbour company is holding on to the land for when the oil companies start developing the oil and/or gas fields off the Isle of Arran.

If those rumours are correct, we must get quick development to bring work to our people and the only way to do that is for the Government to change their taxation policy and to give oil companies money to develop fields in the Firth of Clyde.

In Norway, if an oil company undertakes exploration, it must publish the evidence and tell the Government and its competitors whether the searches have been successful. If we are to give our oil companies more money by reducing taxation, we must also ensure that we follow the Norwegian example and make companies publish details of their explorations.

I want to know whether BP has discovered oil off the Isle of Arran. Is it holding up development? If the company has discovered oil, it is the Government's duty to ensure that is has the money to develop the fields as quickly as possible.

I hope that the Government will listen to the hon. Members on both sides who have called for a change in taxation policy and that they will play fair by the oil companies, but will impose restrictions to ensure that work is given to my constituents who have been given 90 days' notice of redundancy. A new order is needed now.

The Minister of State, Treasury (Mr. John Wakeham)

This has been a wide ranging and valuable debate of high calibre. I hope that I can live up to the standard that has been set. I should like, first, to speak about the Opposition's amendment. They did not say much about it. I do not particularly mind that. I should perhaps say something about it, however, before dealing more generally with the difficult and complex problem of oil taxation together with some of the wider issues raised by hon. Members on both sides of the Committee.

I listened carefully to the hon. Member for Blackburn (Mr. Straw). I think that I am now clear about the purpose of the amendment. It was to have the valuable debate that has taken place. In legal terms, however, the amendment would have had the effect of leaving SPD to terminate at the end of June 1982 as provided by last year's Finance Act but without any replacement before 1 January 1983. This would have cost the Exchequer £460 million in lost revenue in 1982–83 or nearly three times the amount that the oil industry's proposals would have cost.

It was not a proposal that, at first glance, I would have expected to appeal to the Opposition. If, however, their intention is to retain SPD and raise the PRT to 75 per cent. as well, the effect would have been to endanger substantially future development. The revenue left in the hands of the companies, after tax at the margin, would have fallen by one-eighth and would have been substantially higher than the tax regime that existed in the days when the right hon. Member for Greenock and Port Glasgow (Dr. Mabon) was at the Department of Energy.

The hon. Member for Blackburn made a number of complaints about the changes on taxation that have taken place since the Government came to power. At the beginning of my career on this Bench, I would not want to go to the scaffold defending the fact that there have been a number of changes or denying it. I think, however, that the hon. Gentleman did slightly over-egg the pudding. According to my reckoning, there have been five sets of changes under the government—the Finance Act 1979, the Petroleum Revenue Tax Act 1980, the Finance Act, 1980, the Finance Act 1981 and this year's Bill. The first followed the previous Government's proposals. The last is to effect, by and large, the wishes of the industry.

The hon. Gentleman did not give sufficient credit to the substantial changes that have taken place in the environment since 1979. There has been the real increase in the sterling oil price of 30 per cent. even after the latest changes. The extension of the time limit of SPD was not to give more time for thought but to give the pattern of tax take that was considered appropriate by the Government. The Committee will be aware that the background against which decisions on oil tax are taken is always volatile but that the context in which our recent decisions were made was more turbulent than usual. This has served to emphasise the need to have for the North Sea a tax structure that is robust against rising and falling prices.

After the Budget last year, which introduced supplementary petroleum duty, the oil industry was critical of the new structure. My right hon. and learned Friend the Chancellor of the Exchequer therefore invited the oil industry to submit alternative proposals on North Sea taxation before deciding on the form of more permanent arrangements. The response to the invitation from industry representatives and others has been interesting and helpful. We have studied the representations carefully before deciding which elements of the proposals could be recommended to the House in this year's Finance Bill and those which we could not accept. There were two main issues to be considered—first, the level of Government take and, secondly, the structure and fiscal regime in the North Sea.

In considering the appropriate level of Government take, we must strike a delicate balance between the needs of the companies for an adequate return on their investment and the need of the nation to secure the full benefit from a national resource. The balance is not easily achieved and we have to look very carefully at the level of profits that companies may expect to make in the North Sea to ensure that the returns are fair and attractive. We looked both at the estimated level of returns on existing fields and at probable future developments.

We did not examine just one indicator of profitability or one future economic scenario. We looked at the estimates across a wide range of possible outcomes to judge the effect of changes in oil prices, costs and production on the profitability of the fields. The detailed analysis included falls in oil prices as steep as and steeper than those of recent weeks.

The results show that even on pessimistic assumptions profitability would have remained sufficient to make exploration and development reasonably attractive.

The right hon. Member for Greenock and Port Glasgow referred to the low return on capital. The companies still make handsome returns compared with the rest of British industry. Three-fifths of them achieve returns of between 10 per cent. and 20 per cent. on capital employed, and many make a good deal more than that.

Several operators are actively discussing development applications with the Department of Energy. It would be rash to speculate on the number that will materialise, but on the figures several remain very attractive.

We therefore concluded that a reduction in take of the size proposed by UKOOA of about £160 million this year and £500 million in each of the next two years could not be justified, but that some marginal reduction in the tax burden starting next year would be reasonable.

The hon. Member for Blackburn asked about the effect on cash flow. I cannot confirm the figure of £500 million that he gave. We estimate that it is more likely to be about £110 million in 1983–84. Looked at another way, we estimate that the saving in interest costs to the PSBR from the advance take would be about £10 million in 1982–83 or £40 million in 1983–84. I think that that gives a fair indication of the level.

Mr. Straw

The Minister may not be able to answer this immediately, but if the Wood Mackenzie figure is roughly correct and if we expect, say, a 10 per cent. interest rate in 1983–84, would not £40 million represent interest on £400 million which the Government would otherwise have to borrow?

Mr. Wakeham

I think that it would be rather higher than that. If I borrowed £500 million from the hon. Gentleman for a year and paid interest of £40 million, I should not do too badly. As I have said, I think that the figure would be rather less than £500 million, but I will check to make sure that we are right.

Turning to the structure, the main advantage of SPD was that it enabled the Government to share in the revenue on the large, profitable fields from the start of field life. The smaller fields were protected by the oil allowances up to 500,000 tonnes per year. The smaller the field, the greater was the relative importance and value of the oil allowance.

On the other hand, we regarded as matters of some concern the industry's strong opposition to a separate tax based on gross revenues rather than gross profits and the tendency of SPD to slow the rate of return on incremental projects such as satellite fields, coupled with its general insensitivity to costs. The industry urged the abolition of SPD and favoured a system of advance PRT payments to meet the Government's requirement to secure some yield from the fields in the early years of production.

My hon. Friend the Member for Enfield, North (Mr. Eggar) asked about highly marginal fields. Here the Government are prepared to consider royalty refunds and my right hon. Friend the Secretary of State for Energy will be happy to discuss with any company the setting up of firm proposals.

My hon. Friend referred also to the definition of fields. Fields are defined according to geographical considerations. UKOOA discussed some alternatives with us before the Budget but no alternative scheme was considered to be possible.

We were unable to accede to the industry's proposal that the advance payments should be on a temporary basis only, to be phased out over a period of years, because of the cost and the loss of future flexibility. But we did feel that a move in the general direction advocated by the industry was both possible and desirable. This underlines the decison to introduce a system of advance payments of PRT on a permanent basis.

However, in order to achieve from the North Sea the overall yield that was felt to be appropriate it was decided to increase the rate of PRT from 70 to 75 per cent. at the same time. The system of advance payments of PRT—APRT—will achieve one of the Government's main objectives—that of advancing some of the take from the larger profitable fields into the period immediately after production starts. The smaller fields will continue to be protected by the oil allowance. I agree with the right hon. Member for Greenock and Port Glasgow that the profile of future developments will indicate that there will be a great many smaller fields rather than the large ones of the past.

In most cases APRT will be completely set off against ordinary PRT liabilities within four years. It will be relatively rare for APRT to exceed PRT liability over a field's life and for the excess APRT to be stranded without being set off. But if this should occur, the excess APRT would be repaid at the end of the field's life. I cannot make a detailed comment on any one field, but not more than two or three fields would be affected.

The right hon. Member for Greenock and Port Glasgow referred also to the premature close-down of fields. There is no reason to expect that APRT will lead to premature close-down. Companies would have to face abandonment costs, and to close down early would advance those costs as well as their prospective repayment of APRT. We reckon that the repayments of APRT will be a rare occurrence. In addition, the cash flow after tax in those years will be substantial. The APRT allowance will mean that the fields stop paying APRT well before the closedown becomes worth while.

The other changes will smooth the collection of PRT so that the bulk of it is received in monthly instalments.

Dr. J. Dickson Mabon

Is there any way in which a company that is going to close down, contrary to the national interest, can consult the Treasury? Is there any mechanism, apart from royalty oil, by which the Treasury might be able to persuade the company to continue in production, perhaps, by fiscal relief of some sort?

Mr. Wakeham

I cannot say that such discussions would be useful, but the Treasury and the Inland Revenue would examine any problems to see whether there was any way in which they could help. As we reckon that only two or three fields are likely to have advance payments paid over and above their PRT liabilities toward the end of their lives, it is not likely to be a major problem. If it turns out to be so we must examine it.

I was about to deal with the smoothing of the collection of PRT so that the bulk of it is received in monthly instalments. It is a matter of concern to the money markets to have record-breaking cheques being paid on only two days in a year. I am sure that a smoother pattern of payments will be welcomed by everyone involved in the markets.

It has been suggested by the Select Committee on the Treasury and Civil Service that the change has been designed to bring 14½ months' revenue into 1983–84. That is a misunderstanding. The Select Committee wrongly assumed that the first instalment would be paid on 1 July 1983. There is a two-months' lag in instalments, and the first instalment will not be paid until 1 September 1983. There will be some acceleration of take, but the effect will be to increase revenues by only about 2 per cent. in 1983–84 and not 20 per cent. This will be more than outweighed by the cost of the structural changes. Even allowing for the interest costs of borrowing to pay earlier instalments, companies will be better off next year by about £70 million.

We believe that these changes should go a long way to meet the industry's understandable worries about future development. The UKOOA went further and proposed additional relief for satellite fields and the extension of oil allowance after the existing 10-year ration expires. The removal of SPD will improve the post-tax position of satellite fields as well as other forms of incremental investment so that the rate of return on such investments will be close to what it would have been if there had been no tax. We see no reason at present to give any additional relief in this area.

Moreover, the proposals would have led to considerable definition problems, and on examination did not appear to us to be practical. An extended oil allowance would be expensive in the longer term and would have little relevance in the short to medium terms. It is not clear at this stage whether the after-tax cash flow in the latter years of a field's life would be insufficient, and we did not feel able to propose a costly remedy to an unproven and remote problem.

I remind the Committee that the Chancellor announced in his Budget Statement that a consultative paper would be issued shortly with a view to legislation in 1983 on PRT relief for certain types of expenditure, especially expenditure on long-term assets, the use of which is shared, or the user of which is changed over the life of the asset, and the taxation of incidental receipts, including pipeline tariffs, accruing to the owner from the users of these assets. I hope that these will meet satisfactorily the taxation problems arising from changes that are occurring as developments take place.

The hon. Member for Blackburn and other hon. Members referred to the tax proposals which originated from the Institute for Fiscal Studies. The institute suggests that we should adopt a much more radical approach and replace some or all of the North Sea taxes with one progressive tax on return of capital. We accept that its scheme is ingenious and radical. However, it would be much more progressive than the present system on the rate of return. Of course, the rate of return is not the only indicator that companies consider. Net present values, for example, would also be significant.

The institute's scheme does not have an equivalent to the oil allowance and would therefore tax small fields, which are likely to be in the majority in future, more severely than do the Government's proposals, and so act as a disincentive to some types of needed development. It would be wrong not to apply the normal corporation tax to the oil industry. It would be hard in particular to justify exempting oilfields from all tax up to a 15 per cent. return while other industries had no such protection.

The industry made it clear to us that such a radical change in structure, with its inevitable upheaval, would not be welcomed. It was particularly concerned that a radical change would create uncertainty for investment and pose major transitional problems. Those last two points carry particular weight. Although more radical proposals are interesting, it is not desirable or sensible to implement sweeping changes of that nature at this stage with all the uncertainties that that would involve.

The right hon. Member for Orkney and Shetland (Mr. Grimond) raised a number of points. It is not realistic to suppose that local authorities will have to reduce their charges because of the recent tax increases. Of course we keep international trends in view, but they cannot be considered in isolation. Other non-fiscal matters also have to be considered. Compared with Norway, our tax regime is relatively more favourable to small fields, which is important for the future of our industry.

Several hon. Members raised the question of the definition of ethane. That will be debated under clause 119. As my right hon. and learned Friend the Chief Secretary stated, we are considering an extension to other feedstocks. Ethane was defined in simple terms of commercial purity. Any type definition will be a straitjacket for companies and the Revenue. I am not in a position to give results of the study at present.

Mr. Douglas

Does the Minister expect to have a view on propane and butane before Report?

Mr. Wakeham

I can go no further at present. We are considering whether we can come up with a satisfactory solution. We are willing to see what we can do.

I hope that the right hon. Member for Aston-under-Lyne (Mr. Sheldon) will not press the amendment to a Division. The changes proposed in this and subsequent clauses will provide a flexible system and a firm base for companies' development plans. There are major uncertainties about the future movement of oil prices. It is a risky business, but the returns are commensurate with the risk. The Government fully share in the risk through the tax system. The new tax system is a fair balance between the interests of the Government and the industry.

Mr. Robert Sheldon (Ashton-under-Lyne)

I congratulate the Minister of State on his appearance at the Dispatch Box in his new capacity. I first encountered him in Committee on the 1976 Finance Bill. Through a mishap with the Whips he was placed on the Committee and was subsequently found not to be a member of it. Our relations have been cordial, and I hope that that will continue.

The amendment was designed to afford a debate on a number of important issues. We have succeeded in that, and, at the end of my remarks, I shall beg to ask leave to withdraw the amendment.

My hon. Friends the Members for Central Ayrshire (Mr. Lambie), Dunfermline (Mr. Douglas) and Clackmannan and East Stirlingshire (Mr. O' Neill) and the right hon. Members for Greenock and Port Glasgow (Dr. Mabon) and Orkney and Shetland (Mr. Grimond) have all pointed out that we are dealing not only with a major source of energy but with a major industry. We have had the advantage of the expertise and experience of those concerned in this industry.

The history of the taxation of oil started with the Public Accounts Committee in 1972, which brought out its famous report showing that we were selling our rights ridiculously cheaply to the oil companies which were there to make use of the blocks that they were taking over. The introduction of the taxation system started in 1975–76 and dealt with these tax changes, the introduction of the royalty payments, corporation tax, petroleum revenue tax, and now the supplementary petrol duty that we are disposing of. Together with that, there was a ring fence, oil allowances for small fields, an uplift for investment and safeguards. It was an absurd structure, and the Inland Revenue did not distinguish itself in providing this structure of taxation.

The hon. Member for Enfield, North (Mr. Eggar) talked about the petroleum tax being penal and capricious, but he must remember that it was introduced at a rate of 45 per cent. Under this legislation it is being increased to 75 per cent. as a reasonable response to the way in which oil prices have moved and other factors have altered over the intervening years. He also talked about the clever and ingenious oil companies. We must remember that it is not in all countries that the oil companies are regarded in this way. He said that the oil companies did not have many friends, but he must compare the United Kingdom with other countries such as the United States and the Middle East where oil companies are disliked much more intensely than they are here.

Oil companies, with their enormous turnovers as big as the revenues of many medium-sized countries, are used to, and frequently do, negotiate with countries as equal to equal. One of the surprises that I can recall was that of having oil companies dealing with Governments rather differently from the way in which other companies do. This was not necessarily in a way that was suitable or advantageous to the oil companies. They had that feeling of excessive over-confidence and power in dealing with the country with which they have to co-operate and whose laws they have to accept.

Since then we have seen further taxes. Supplementary petrol duty is now being changed to the advance petroleum revenue tax. That will be offset against PRT whereas the old supplementary petroleum duty was offset against losses. The overall effect on the Government take will be much the same. For that reason, we are not opposing the legislation in principle, although there will be a number of matters of detail to which we shall turn in Committee.

My hon. Friend the Member for Dunfermline talked about the difficulties of cyclical movements. The price of oil normally goes up and up, but for the first time there has been a decline in the price of oil. There are those who can see where the cycle will end or how these things will come to change over succeeding years. I do not make any predictions, but I point out that the change in the price of oil is an unusual event and is something that we should not take as being a normal pattern for the future. Our history in these matters is far too short to determine for us any cyclical pattern of which we can make some use.

A very important point that was made underlined the problem of oilfields reaching the ends of their working lives. I recall that the intention behind the major reform that was promised by the Government, although there is no sign of its implementation, was to deal with some of those oilfields as they reached the ends of their working lives. The Institute for Fiscal Studies talked about the system which it suggested. It was based on the progressive rate of return, and some of us thought that perhaps the taxation system should have started at the very beginning on the basis of the rate of return.

The Minister of State talks quite rightly about the way in which oil companies are being successful. What criteria does he use to assess their success? Quite rightly he assesses their success on the basis of their rate of return; and there are those who think that that might have been the basis of an oil taxation system. Instead, we have produced complication upon complication to obviate the very errors in the way in which this taxation system has developed over the years. The right hon. Member for Orkney and Shetland described it as a muddle almost as bad as the general system of taxation, but at least the general system of taxation is based upon correct principles. It has become more elaborate, complicated and tedious, but it is based on the right principles. The problem about oil taxation is that some of us doubt whether the same can be said of it. So we have to look for some changes. Unfortunately, the changes mentioned by the Minister do not go to the heart of the change of principle which might be considered essential.

My hon. Friend the Member for Dunfermline talked about the depletion policy and a Government statement on it. I am afraid that we are still without a general statement on depletion policy. It can be looked at in two ways. We have gold in the vaults of the Bank of England which costs money to maintain, which requires guarding and which occupies very expensive space on an important prime site in the centre of London. We have oil in the North Sea which does not take up expensive space. In a number of cases it may save some cost. The argument is about which one is best: is it better to have gold in the vaults of the Bank of England under the terms and conditions that it is there, or is it better to have oil in the North Sea? There is argument for both. However, currently we are using about 75 million tonnes of oil a year and we are producing in excess of 100 million tonnes, and clearly the two are out of balance.

I appreciate that it is not possible to make short-term changes to production. But we have to realise that our asset is likely to remain an asset for a very long time to come. We need to take a long view of our oil since it is not possible to turn off the tap. Because of the amortisation of capital equipment, that would produce extra costs for a company which had organised its planned production of oil on one basis, and it cannot suddenly be changed to another. However, there are aspects to this depletion policy which need to be explored. I hope that the Government will give it more attention than we have seen so far.

As for the production profile mentioned by the right hon. Member for Greenock and Port Glasgow of course we really want a tax profile that copies the profit profile and the production profile during the lifetime of a field so that at each stage an incentive is there which is sufficient but which allows the tax revenue to be maintained.

My hon. Friend the Member for Dunfermline talked about tertiary recovery. It will be essential that there is incentive at the end of the life of an oilfield when the oil rigs are still in position. Once they are removed, in most instances that oil is likely to be lost for ever. It will be important, as a number of fields near the end of their working life, to ensure that those last elements of oil are extracted and that the tax system that we have devised does not harm that. That is sheer profit for Britain and must not be forgone.

Our present tax structure does not guarantee to do all that. I look forward to more work being done by the Inland Revenue. I believe that it owes that to the oil industry and to Britain for its lack of foresight at an earlier stage. The Inland Revenue needs to rethink. It has ability, and unquestionably it has the expertise. In addition, it now has the experience. It should provide us with a taxation system better than the one that we have today.

I beg to ask leave to withdraw the amendment.

Amendment, by leave, withdrawn.

Clause 117 ordered to stand part of the Bill.

To report Progress and ask leave to sit again.—[Mr. David Hunt.]

Committee report Progress; to sit again tomorrow.