§ The First Deputy Chairman (Mr. Ernest Armstrong)
With this we are taking the following amendments: No. 10, in page 57, line 14, leave out '1st January 1987' and insert '1st January 1988', and No. 11, in page 57, line 24, after '1986', insert 'and 1987'.
§ Mr. Straw
The Minister understands that I have moved amendment No. 9 to provide us with a vehicle for debate on the Government's proposals. I shall, therefore, use it in that respect.
This is the third debate on oil taxation in which I have participated. It is extraordinary how much change there has been in the Government's attitude towards the taxation of North sea oil in those two years. Two years ago, the Government introduced the supplementary petroleum duty and, with some justification, the oil companies complained that they had been severely clobbered. Last year, the Government withdrew SPD and introduced advance petroleum revenue tax instead. Again the oil companies shrieked at what they said was unjust treatment. This year, the pendulum seems to have swung almost entirely the other way and the Government appear to have given oil companies all that they asked for.
In a four-point package announced in the Budget, the Chancellor described the Government's decisions about 1051 phasing out advance petroleum revenue tax, which is the subject of this amendment. He also announced that there would be PRT release for new oilfields, that the oil allowance would be doubled and that no royalties would be payable for new fields except those onshore and in the profitable southern basin. The cost of those changes is estimated to be £800 million over four years or £200 million this year.
Although there have been three major upheavals in the taxation of the North sea in the past three Budgets, since the Government have come to power there have been 10 sets of major changes.
§ Mr. Straw
The right hon. Member for Greenock and Port Glasgow (Dr. Mabon) says that there have been 11. I calculated that there have been nine and the Financial Times said that there had been 10. As the Financial Times is the oracle, I took it at its word.
Irrespective of whether there have been nine, 10 or 11 changes, the Government's performance on this aspect of taxation, as with others, contrasts strangely with their promise. Many of us remember the criticism that the Conservatives, in opposition, made of Labour's oil tax regime. Many hon. Members may remember the statement on energy policy, which the right hon. Member for Bridgwater (Mr. King), then the Conservative energy spokesman, now the Secretary of State for the Environment, made 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… 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".He said that changes that the Labour Government announced in October 1978 had beencobbled together in a hurry without consultation as a gimmick for the election from which they shrank in October.He said that the oil industryneeds 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 the promise. As I have already said, the performance has been very different. The Government rejected the Institute of Fiscal Studies' proposal for a major reform of the oil taxation regime and they have not at any stage introduced a durable system of taxation which is designed so that they could respond, without major changes in legislation, to fluctuations in the real price of oil and interest rates which, we all accept, can make dramatic differences to the rate of return that is available from the North sea.
§ Mr. Straw
I am aware of that. Taxation of the North sea must balance three objectives. First, it must ensure efficiency and continuing exploration and exploitation. Secondly, it must ensure that those who invest in the North sea, be they private or public corporations, are ensured a reasonable rate of return. Thirdly, it must ensure that the Exchequer receives the maximum possible revenue that is consistent with the first two objectives.
It is difficult to secure the right balance between those three objectives. The Opposition do not deny that. The oil companies have not helped themselves because, too often, they have cried wolf at changes, so it has been difficult for others to judge whether they were telling the truth and not over-egging the pudding.
Nevertheless, we must criticise the Government about the way in which they have run North sea oil taxation in the past four years. Their policy has lacked coherence, continuity and judgment about the right balance between the claims of the oil companies, the need to continue exploration and the needs of the Exchequer. That is illustrated by the way in which the pendulum has swung between 1981–82 and this year. Their taxation policy has been in a mess, as has their depletion policy which is something that cannot be left to the market. My right hon. Friend the Member for Lanarkshire, North (Mr. Smith) will discuss that in more detail.
Moreover, the Government have had no strategy for spending revenues from the North sea in a sensible way which provides seedcorn for the future. Revenues from the North sea should have been used to invest in Britain's industry and infrastructure so that when this asset runs out —it will do so in the 1990s—there is a secure industrial base on which Britain's economic future can be built. Instead, more than the £32,620,000 that the Government have received in revenue from the North sea has been squandered on the costs of unemployment. I calculate that it has cost £40,000,000 to have an additional 2 million people whom the Government have thrown on to the dole, out of work. The revenues have been squandered on increasing unemployment.
I should like to ask some detailed questions about the effects of phasing out APRT and the changes in the tax regime that the Government have announced. The first is about the likely outcome with regard to new developments in the North sea. Wood, Mackenzie, whose record in assessing financial returns in the North sea is good, has estimated that the changes in oil taxation are equivalent to an increase of $10 a barrel in the price of oil from the new fields. When one considers that North sea oil is selling at about $30 a barrel and that the likely production costs of some of the new fields will be about $20 a barrel, an additional $10 a barrel will have a dramatic effect on the profitability of those new fields. The Wood, Mackenzie analysis suggests a substantial improvement in cash flow in several illustrative new fields that are described in its bulletin 119. The change in cash flow ranged from 24 per cent., through 45 per cent, and 57 per cent. to 64 per cent. Those are major changes and there has been a corresponding decrease in the Government's revenue from 70 per cent. to about 50 per cent.
However, the Committee will wish to know about the benefit to Britain and to industry of those changes. The Secretary of State for Energy was reported in the Financial Times of 30 March as saying that new developments in the North sea as a result of the Budget changeswill go ahead at the rate of one every six weeks.1053 The Financial Times energy correspondent said that this viewalmost certainly errs on the side of optimism.The Secretary of State for Energy gets the prize for hyperbole out of all the Ministers, but we should know the likely rate of development in the North sea. Shell has announced that it will develop the Tern field, although it said that it would stop developing the field this time last year. What are the prospects for other fields? Although there has been a rush of announcements recently, how will that development continue?
My second, and related, question is: what will be the impact of the changes on the supply and fabrication industry, which is vital to the economy of Scotland and to the future success of the British Steel Corporation? The fabrication and supply industry has gone through lean times, and the Committee should know that only orders from the British Gas Corporation — a much-maligned nationalised company — through its Rough and Morecambe Bay fields have, according to the Financial Times,kept the supply and fabrication industry's head above water in the past few months.However, if large sums of revenue are to be forgone in benefits to the oil companies to encourage exploration of new and marginal fields, we must be assured that the investment by the British public produces a flowback in security of employment and continued orders for that industry. The Minister must inform the Committee about that.
Does the Minister now consider that the present tax regime, after 10 tries, is a settled regime—although the Government may have only two or three months left in office—or are further changes anticipated if there are major changes in oil prices and in world oil supplies? I hope that the Minister will answer those questions.
§ Mr. David Crouch (Canterbury)
I must comment on a word used by the hon. Member for Blackburn (Mr. Straw), which I believed was a slip of the tongue until he used it twice. He spoke about the Government "squandering" money on the unemployed. Was it a slip of the tongue?
§ Mr. Crouch
The hon. Gentleman must agree that that money is not squandered but is spent properly and wisely on those who are in an unfortunate position because of economic problems that are not confined to this country. Although I regret that the amount spent on unemployment must be so much because the numbers are so high, I am proud that we spend that much in the 1980s and not as little as we spent in the 1930s.
§ Mr. Straw
It was no slip of the tongue. I used the word "squandered" advisedly. This is not the time to have a major debate on economic policy, but the Opposition believe that it would have been far better to run the economy with higher activity and lower unemployment, and to have used North sea oil revenue not to support millions of people out of work but to create work.
§ Mr. Crouch
I was being generous when I said that I believed that it was a slip of the tongue. I believe that it was a transferred epithet, although I understand the hon. Gentleman's argument.
1054 I must declare an interest in North sea oil. I cannot say that I am a tax adviser—who is a tax adviser? But I advise a small participator in the North sea oil industry, and I have run across the problems of the North sea tax regime for several years. During my speech I may reveal that I do not know as much about the complex problems as my preamble might suggest.
Clause 73 concerns the phasing out of advance petroleum revenue tax. I was glad that the hon. Member for Blackburn said that the amendments were intended to create a debate on the general tax regime in the North sea, and I am grateful to you, Mr. Armstrong, for allowing the debate to proceed on that basis. I hope that you will listen to me carefully to ensure that I do not go too wide of the debate on the phasing out of advance petroleum revenue tax.
My right hon. and learned Friend the Chancellor of the Exchequer said in a press release of 15 March that the proposed changes in the tax regime are designedto encourage future exploration and appraisal of United Kingdom oil and gas reserves and the development of new fields".The relief will total £800 million spread over four years, which means that the industry will be relieved of £118 million in the current tax year.
Clause 74—I refer to it only to illustrate points that are relevant to clause 73—contains some exemptions. The Chancellor has said that the oil allowance on petroleum revenue tax will be doubled from 250,000 tonnes to 500,000 tonnes. Such front end relief is most realistic, and we must congratulate the Chancellor on having accepted those figures as a realistic assessment of the problem. That concession will be valuable to North sea operators. Equally, the abolition of royalties will be of enormous value and is another essential relief to the companies developing our production of oil and gas from the North sea. The decision to abolish all royalties payable on future offshore oil and gas fields, other than in the southern region to which it does not apply, will also be valuable.
The advance petroleum revenue tax is an advance payment of tax in the early years of production of a new field. I would have said that it was iniquitous to pay tax in advance, but it replaced supplementary petroleum duty, which was even more iniquitous. I have talked to the Chancellor about this matter— I shall not reveal any confidences — and I know that he did not lose any money on the deal. He did not intend to. The tax will be phased out gradually over four years, and by the end of 1986 it will be abolished completely. In future the costs of exploration and appraisal will be allowed whether or not that expenditure was abortive, which is very valuable.
On the night of the Budget statement the Secretary of State for Energy issued a press statement that praised the changes in the Budget. I am sure that he played some part in making those changes. I am pleased that the Secretary of State for Energy has at long last been heard in the Treasury and that the Chancellor of the Exchequer has taken action on what he said.
The Secretary of State for Energy, in his press statement, said:The royalty concession, and the other measures announced by the Chancellor, are made after detailed study of the views expressed by the industry about lack of fiscal incentives to encourage development of the smaller more marginal future generation of off-shore fields. I now look for an early and positive response from the licensees concerned.1055 I am sure that the Secretary of State will get that response. I wish to thank the Chancellor, my hon. Friend the Minister of State and the Secretary of State for Energy for the concessions and for listening to the industry. The benefits enable the industry to keep in business, to explore, appraise and develop oil and gas fields, not just for the industry but for the nation.
The Chancellor was asked by the industry to make changes in the tax regime to encourage new developments that were simply not taking place, as the hon. Member for Blackburn has said, under the existing tax arrangements. He has made those changes and they will have the desired effect, but they are only just in time. The Secretary of State for Energy will be pleased with the response. It is valuable to discuss the complex subject of North sea taxation and I hope to reveal that I understand a little of it. The Government's present tax take on North sea oil, at least until the Finance Bill is passed, is 89.5 per cent. In simple terms, after allowances—the front end allowances are more generous than they were—the net return to the oil companies is 10.5 per cent. The proposed changes mean that the Government will be taking 1.5 per cent. less—88 per cent. — leaving the oil companies with 12 per cent. That does not seem as though the Government have been generous. The important factor is that the relief has been given at the front end—the oil allowance has been doubled — and that exploration and appraisal costs in new fields may be offset against profits chargeable to petroleum revenue tax. That concession is sensible, realistic and much appreciated by the participators and operators in the North sea.
I could stop there and hon. Members could have an early night. I should say thank you. No matter how I am regarded by the Government Front Bench, I will not stop at that point. The Minister gave me a dark look, but, like Oliver Twist, I would argue, not just ask, for more from the Chancellor. The Social Democratic party sometimes does that, but I am not thinking of following suit. I ask as a result of my own studies. There is no ethical logic in restricting these benefits — for which I thank the Government—to new fields where companies are not already committed. Surely the benefits should be extended to fields under development but not yet on stream.
Why could not the Government have extended the benefits to those fields that are about to produce oil? Unfortunately, they are exempt. Those fields will suffer from the effect of depressed oil prices. Future developments—I refer to fields that have not yet been developed—will not be on stream until the late 1980s and will, no doubt, enjoy higher oil prices than today. The Government have plenty of time and opportunity between now and then to deal with such an eventuality to their own advantage and to adjust the tax balance accordingly. Clause 73 does not involve just the phasing out of APRT. Behind this tax and clause is the price of oil.
In the Finance Act 1981 the Chancellor introduced a rigorous tax regime for the North sea. He was riding high because oil prices were riding high. In the first half of 1981, as the right hon. Member for Greenock and Port Glasgow (Dr. Mabon) will appreciate, having been a Minister of State responsible for this sphere in another life and in another party, the BNOC market price was $39.25. It is hard to imagine that price today, when oil is $29.50 a barrel. The Chancellor wanted revenue and he spotted 1056 a gold mine in the shape of a North sea oil well. He got his money, as the hon. Member for Blackburn has reminded the House, but we did not get the oil. There was virtually no new development taking place in the North sea, with the exception of Clyde and North Alwyn.
§ Mr. Crouch
They were sanctioned last autumn. Oil prices moved in the opposite direction to that which the Government expected. They cannot be blamed for that. That is one of the extraordinary occurrences today in the oil market. The 1981 Act was based on high oil prices. That was the basis of the Government's thinking and their taxation policy. High prices were the basis on which oil fields in the North sea were being developed. The basis was one of continuing high prices. These fields are now coming on stream and some will be coming on stream in the near future, but instead of a price of $39 the price today is $29.50. I argue that such fields and fields under development but not in production should benefit from the doubling of the oil allowance—for which I am grateful —and the abolition of royalties. For some reason they are excluded under clause 74.
If the economic justification is to align current fiscal structure with the present perspective in oil prices, surely the benefits—the reliefs— should be extended to fields about to come into production. Those fields will suffer the effect of depressed oil prices.
Great complexity is involved in these topics. It is not easy to understand the tax regime for North sea oil. The Minister and the Chancellor have shown that they understand the arguments of the industry and of the Department of Energy. Prices have gone a long way, from the $39 at which they started to $29.50 today.
The phasing out of APRT and the other reliefs are welcome. The Government must avoid the risk of the oil companies phasing out their North sea operations. If we are not careful, they might consider doing just that.
Will the Minister bear in mind those simple thoughts, and consider the possibility of extending the reliefs backwards?
§ Mr. J. Grimond (Orkney and Shetland)
As the terminals at Flotta and Sullom Voe are in my constituency, the taxation of oil is of considerable importance to my constituency and to the country. The taxation of oil revenues is a highly complicated subject and, as with the rest of our taxation, it is not becoming less complicated. In addition, in many ways the activities of Governments are contradictory. It is only recently that a development grant of £61 million has been made to the consortium at Sullom Voe, at the same time as it is being taxed at almost 89 per cent. No Member of Parliament would complain about a development grant being made to his constituency, but, on the face of it, it is rather a curious contradiction.
I am afraid that that is rather typical of the way in which we run our affairs. As the hon. Member for Canterbury (Mr. Crouch) and my right hon. Friend the Member for Greenock and Port Glasgow (Dr. Mabon) have pointed out, recent taxation has virtually put a stop to exploration in the North sea. In the fairly recent past, the rates of taxation have been altered about 11 times, thus making it extremely difficult for oil companies to plan ahead and causing considerable anxiety to those who are dependent on the industry. I welcome the fact that, as I understand it, these changes will greatly assist the smaller fields and 1057 encourage new exploration. I take the point made by the hon. Member for Canterbury, that, although they will encourage new exploration, the fields that have not yet come on stream will not gain, and may be faced with a difficult oil price when they begin to produce. There is strength in the hon. Gentleman's argument and it should be considered.
Naturally I am particularly concerned about the fields that feed directly into Sullom and Flotta. There has been some speculation about the future of Occidental Oil, which is engaged in very large operations in America and which, I understand, is running up a considerable debt. I imagine that these changes will not be so important in the fields that feed into Sullom Voe. Perhaps the Minister can give us a breakdown of the effect of the changes on the different North sea fields and can tell us of the effect on the new exploration round the Claymore field and to the west of Shetland. Obviously they will benefit the whole industry. We are grateful for that and hope that exploration will start up again.
Of course, oil is important to Great Britain, and the economy of Orkney and Shetland is now deeply affected by it. It would greatly help if the Government could give us some intimation of their expectations. I can hardly believe that the very optimistic forecasts that have been referred to in the Financial Times have any very solid foundation. Was it said that one new field would be opened up every six weeks? Surely that is optimistic. However, it would help if the Government said something about that. Some stability of outlook would also be of great advantage. May we take it that the Government — as long as they are still in office—will continue along the path that they have taken and that, as far as possible, there will not be any abrupt changes in the taxation of oil, although I appreciate that some may be necessary, due to the changing price of the economy? In general, the proposals are to be welcomed, especially by my constituency. I should imagine that they will be welcomed by the whole country, and certainly by the industry itself.
§ Dr. Mabon
I wholeheartedly agree with what my right hon. Friend the Member for Orkney and Shetland (Mr. Grimond) has said about welcome proposals. We are talking about 11 changes. In all fairness, the Government have met more than half of the requests made by the industry. Admittedly, it is a last-minute repentance. Indeed, they have inhibited the development of the North sea in the past two or three years. My right hon. Friend mentioned the suggestion that every six weeks there would be a new field. That means, at the very best, that there would be an agreement by the Minister—what is called the annex B sanction — every six or eight weeks. I would be very surprised if that were bureaucratically possible. Nevertheless, I accept that we are talking about smaller fields than we approved in the early 1970s.
The hon. Member for Canterbury (Mr. Crouch) is very loyal to his Government; indeed, excessively loyal at times. On the other hand, he can be extremely bold in his candour about them. The Government have failed several times to deal with oil taxation. However, on this occasion, I agree that they have done very well in the Bill. I certainly would not criticise the provisions. We are told that the amendment is to act as a peg. It will not involve voting, 1058 but offers a means to talk about petroleum revenue tax. I hope that the Government will consider petroleum revenue tax and the possibility of a fall in the oil price.
The hon. Member for Canterbury spoke about oil prices falling from $39 to $29.50 a barrel. That 50 cents is important. If Nigeria has difficulty with its oil sales, the chairman of BNOC has warned us that we might have an oil crisis, even over 50 cents. In that case, the Government would have to admit fairly quickly that, although PRT has not changed, they would have to respond to a drop in oil prices. Fortunately, no Government have had to face up to that yet. They have always had to deal with rising oil prices, and therefore with companies making a lot of money. However, falling oil prices would have a substantial effect on companies. I hope that the Minister will tell us that he has not given in on the basic rate of PRT, but that he will keep a careful eye on it if the oil price drops.
The Government have not given an inch over the taxation of the smaller fields. I refer to the fields mentioned by the right hon. Member for Orkney and Shetland, which we shall develop in the next 10 years. They will be tiny compared with the splendid Brent and the Forties fields. There will be smaller fields of less than 100 million barrels. Therefore, we should tax them less. The industry must find out how to get the oil out more cheaply. That is a problem, not for the Government but for it. However, the Government have a serious problem in deciding how to tax the smaller fields in a way that will produce the yield in volume of oil and also revenue. After all, there is a possibility that the North sea oil province will become very unattractive to overseas investors.
I am sorry about the concluding remarks of the hon. Member for Canterbury. The Government have given inspiration to the industry, not so much by what they have done arithmetically in the concessions, but by giving the impression that, despite what they said in opposition, they are not willing to tax the oil industry for ever and ever, amen. They now realise that they have gone too far. The hon. Member for Canterbury talks about the eleventh hour—or perhaps it is the twelfth hour. The Government have just managed to stop the fall-off in North sea development. We have just managed to stop the spread of international opinion that the North sea oil province is not worth investing in, because taxation is too onerous and there are other attractive provinces elsewhere. I give the Government credit for that. For two years they have been sinful, but the fact that they have been converted to Christianity at the eleventh hour is a blessing, and we should rejoice in that. I agree that what they are doing is quite sensible. However, the Government should consider further not only the price of oil—which I hope will not change — but the so-called marginal fields. The oil industry expects them to look closely at that.
We often forget that the gas fields in the shallower seas, particularly in the Southern North sea, are possibly at risk if we do not look more closely at the structure of taxation. It is proper and correct that we, the elected representatives of the people, should demand a proper return to the people from the development of these resources. At the same time, we cannot, by our insistence, and against ourselves, impose taxation that is too high. That is just silly. The Government have awakened to the fact at last. They have made a great advance in the Bill but there is a little more still to do.
§ Mr. Tim Eggar (Enfield, North)
Oil companies are not the most popular group in the House, on either side of the Committee, and it is a demonstration that the Government have the right answer in the Bill that there has been no criticism from any hon. Member about the fact that the Government have seen it right to give some £800 million back to the industry over four years. The silence and the lack of criticism constitute praise of the Government and a recognition of the strength of the industry's case. They are also recognition of the major role that the industry is now playing within our economy.
I remember that the Chancellor in his Budget speech tried effectively to put the North sea and the contribution of the oil revenues into the context of the overall economy. We should not forget that about 200,000 people are employed directly in the North sea, either by the oil companies or by the oil supply companies. Many hundreds of thousands of people are employed in the companies that make the hardware that goes into new developments. We should not forget that the oil industry has a fine reputation for ordering from United Kingdom companies. I recognise that the right hon. Member for Greenock and Port Glasgow (Dr. Mabon) had something to do with level of ordering from the United Kingdom, as did my hon. Friend the Minister. None the less, the oil industry has played the game as regards ordering from the United Kingdom
I give an unreserved welcome to the changes. Over the past two years I have never made any secret of the fact that I have been extremely unhappy with the level of taxation on oil companies, particularly those oil companies faced with developing new and marginal fields. I admire the way in which the hon. Member for Blackburn (Mr. Straw) presented what was undoubtedly a rather difficult case, because he could not be seen to be overtly supporting the oil companies but he had to acknowledge the logic of the Government's case. I rather regret that when we went through the same arguments this time last year in Committee the hon. Gentleman did not feel able to support the various amendments that I moved, arguing for a reduction in oil taxations.
§ Mr. Straw
I did not feel able to support the hon. Gentleman's amendments, but we were concerned about the effect of APRT upon the cash flow of oil companies. There was a dispute between ourselves and the Government about who was right. It has turned out—and one result is the changes announced today—that the APRT has had a more adverse effect on the companies' cash flow than the Government expected this time last year.
§ Mr. Eggar
I accept that point, but the fall in the real oil price has also had an effect.
The package announced by the Chancellor was particularly well designed. The hon. Member for Blackburn made this point well by quoting the increase in the rates of return that Wood, Mackenzie drew on the new marginal fields. It quoted those returns by way of saying that the Government had gone too far. That the increases are so significant in the marginal fields shows how effective the Government have been in zeroing in on the fields that need assistance and making sure that the tax concessions go to those fields. The industry has recognised that. My hon. Friend the Member for Canterbury (Mr. Crouch) was being a little less than fair to the Government 1060 about fields that are under development and in production. Those fields, in so far as they are paying APRT, will benefit from the phasing out of APRT payments.
In addition to the way in which the Government have been able to zero in on marginal fields, the industry has particularly welcomed the simplification of the tax system in the changes. By 1987, instead of this crazy system of four different levels of tax, with each different level reacting in a curious way to the level above, or below, there will be two levels of taxation — PRT and corporation tax. That will make the life of hon. Members much easier, even if it might reduce the bills and fees of the oil taxation lawyers who have been growing fat on giving advice to the oil industry.
Other hon. Members have asked how many fields will result from these concessions. About five or six fields have already been announced, and a number of other plans have been dusted off. The old drilling results are being looked up and the teams are being put together again. Progress is being made and I understand from the industry that over the next few weeks and months we shall see a new annex B submission.
The right hon. Member for Greenock and Port Glasgow referred to the problem of the length of time, administratively, that annex B took to assess, but he is rather out of date. My right hon. Friend the Secretary of State for Energy has introduced a new system, which one could roughly call the rolling annex B submission. That means that the awful fandango that everybody had to go through to get everything ready then slap it into the Department of Energy, with all the delays that ensued, and the strains that that placed on the officials in the Department are no longer necessary, because the annex B submission can be phased. I am sorry that the right hon. Member for Greenock and Port Glasgow is not willing to be at least as generous to my right hon. Friend over this reform as he was to my hon. Friend for the general tenor of the tax changes.
§ Dr. Mabon
I admit the criticism of myself as old-fashioned and wrong, and agree that the Department has become enormously modern and is able to process annex Bs at the rate of one every six weeks. Is the hon. Gentleman telling us that the new system will give us one annex B every six weeks? I am asking him to give a hostage to fortune.
§ Mr. Eggar
I would not have given that assurance anyway, but certainly not after the right hon. Gentleman's last words. The point is that under the old system the annex B had to be submitted as a whole. Now it can be submitted section by section, and that makes the work load on the oil companies and the Department that much easier. They are not suddenly faced with the whole thing, with a famine followed by a feast of paper, and then another famine and so on. That is a welcome reform, which I am sorry the right hon. Gentleman does not feel able to accept. I have one final technical point that I should like the Minister to clarify, if not now perhaps later. He will recollect that last year, as a result of an amendment introduced in Committee, it was agreed that APRT that had not been offset against PRT within five years of the first payment of APRT would be refunded after those five years.
It is rather curious that if APRT has not been offset against PRT payments by the end of 1986 no refund is due to the companies from the Government. If my 1061 understanding of clause 73 is correct, I do not understand the logic of that. Logically, the APRT should still be refunded. It may be that the Inland Revenue believes that no APRT would be refundable because of the phasing out. I would be grateful if my hon. Friend will confirm whether that is the case.
Finally, may I pay tribute to my hon. Friend for the way in which he has handled this extremely complex matter. He has involved himself in detailed discussions with the industry and, although I have no interest to declare, I know that the industry is extremely grateful for the open way in which he has approached the problem. While his proposals do not meet all the industry's wishes, they are as much as it could reasonably expect.
§ 8 pm
§ The Minister of State, Treasury (Mr. John Wakeham)
This has been a short but good debate—good for the Government because everybody has basically welcomed what we are seeking to do, and good for the Opposition because the hon. Member for Blackburn (Mr. Straw) did not reveal too much of what the Opposition might do were they to take office. When the Opposition amendment was first tabled I considered it carefully to discover their strategy. Perhaps I should not have been surprised when I could not find it. The hon. Gentleman admitted that the amendment's purpose was to obtain a debate and to that extent he has succeeded.
In the course of his speech — some of which was reminiscent of his speech last year, about certain changes in the tax arrangements for the oil industry, irrespective of whether they were what the industry wanted — the hon. Gentleman chided the Government for a volte face but admitted that we were in a difficult area in which it was difficult to get the balance right. I hope in the course of my remarks to be able to deal with the charge that there has been a complete volte face, because that is not so. APRT and its predecessor SPD were specifically designed to reduce the too generous front-end loading in the then oil tax regime as against the Government's need to reduce their borrowing generally following the substantial increase in oil prices in 1978–79.
However, the position has changed. The priority must now be to provide the right fiscal environment for the development of a new generation of smaller fields against the considerable uncertainty of future oil prices. APRT will continue to play its part for a period, but the time has now come to start phasing it out for existing fields. It will have disappeared by the time future fields come on stream.
§ Mr. Wakeham
Certainly not. It was necessary at that time because there were considerable economic difficulties. It was a time of massive increases in oil prices and generous front-end loading on the first generation of fields. It was right that a tax of that sort should have been introduced. I know that the right hon. Gentleman speaks eloquently for the oil industry, but I suspect that if he had been in government he might have taken a slightly different view. That is something we can speculate about.
1062 When we debated oil taxation in the House a year ago, many hon. Members expressed anxiety about the position of smaller, marginal fields under the fiscal regime. The industry was making representations on that and other points, so the Chancellor agreed that there should be continuing discussions with the industry about future field profitability. As I said on Report:I hope that in the forthcoming discussions with UKOOA about the tax regime companies will feel able to support their arguments with chapter and verse about individual projects." —[Official Report, 13 July 1982; Vol. 27, c. 981.]The point that I was making was that we wanted to use the best and most reliable data available in the profitability analysis which was central to the way that we go about reviewing the North sea fiscal regime. There was, perhaps, a natural reluctance on the part of companies to divulge commercially sensitive information about future possible projects and in previous reviews we have had to rely primarily on data for hypothetical future fields. While that can be useful, it is always difficult to tell how representative of prospects the models will be.
In the review leading up to the Budget we were determined, if at all possible, to base our analysis on actual future projects. We sought that information from the operators and I am pleased to say that we had their fullest co-operation. We also had extensive and helpful consultations with UKOOA, both in relation to its study of profitability and representations about tax.
The results of that survey showed that the level of profitability of existing fields was generally satisfactory and, viewed in isolation, the results did not suggest that fiscal reductions were required for existing fields. On our middle market price assumptions, the average pre-Budget return for the future incremental projects was an attractive 22.8 per cent. The 10 free-standing future fields were split into two groups — five more profitable, five less profitable—with average pre-Budget returns of 13 and 8.7 per cent. respectively. Those returns were significantly less than those that we found on average for existing fields and prospective incremental projects.
The finding that future free-standing fields are likely in general to be less profitable than hitherto reflects the fact that they are likely to be smaller, geologically more complicated, and proportionately more costly to develop than previous fields. The industry shares that conclusion. Indeed, because of the work done by both sides this year, Government and industry are closer together in their understanding of the future profitability of the North sea than ever before.
Therefore, we thought it right to target relief selectively and cost-effectively to benefit future free-standing fields, as my hon. Friend the Member for Enfield, North (Mr. Eggar) pointed out. That is consistent with our twin objectives of encouraging future exploration, appraisal and development in the North sea, while at the same time securing the maximum benefit for the nation. If there are those who feel that even the projected rates of return sound relatively high, I remind them that the risks that the companies are running, and the uncertainties about price, production and costs, are considerable. The returns need to recognise that.
The Budget changes improve post-tax returns for future free-standing fields by around five percentage points. Post-budget, and on middle oil price assumptions, the average post-tax return for the five more profitable fields was 18.2 per cent., and for the five less profitable, 13.7 1063 per cent. Those were some of the figures that the hon. Member for Blackburn sought. Where companies are able to get immediate corporation tax relief for expenditure on such fields that may add a further six percentage points to the post-tax rate of return.
My hon. Friend the Member for Canterbury (Mr. Crouch) was supportive of the Government in the main. He referred to the rates of tax on the oilfields. He quoted the marginal rate of tax at the top end, which is by no means the average rate of tax. My hon. Friend rightly pointed out that the cut in the marginal rate was from 89.5 per cent. to 88 per cent. The new fields benefit much more from the extra oil allowance. The average rate of tax is down from about 70 per cent. to about 60 per cent.
§ Dr. Mabon
In fairness to the hon. Member for Canterbury (Mr. Crouch), the Minister has the audacity to talk about a reduction in corporation tax. It is conceivable that a marginal field would reach the stage of not paying PRT at all and could be developed only if it were below the level at which it would be liable for corporation tax. There is no provision to allow a marginal field to be below that level, which is what the Minister critically implied.
§ Mr. Wakeham
I was not criticising my hon. Friend. I was trying to widen his remark, which I thought was a touch selective, about the returns from fields. What my hon. Friend said was correct, but it was not the whole picture. The average rate was more indicative of returns than the highest of the marginal rates.
The two reliefs targeted towards future free-standing fields are the abolition of royalties and the doubling of the PRT oil allowance. I do not propose to say very much about these measures now because we shall have an opportunity to debate the separate royalty Bill shortly and the double oil allowance later in Committee. But, taken together with the clause we are now considering, which ensures that future fields will pay no APRT, the measures will significantly relax and simplify the fiscal regime for future free-standing fields. The taxes they pay will be entirely profit-related— just PRT and corporation tax. That is an important point.
The right hon. Member for Greenock and Port Glasgow (Dr. Mabon), in his generous remarks, criticised the fact that we have not helped small fields to the same extent. That is pricisely what the abolition of royalties and oil allowances does. Fields below 1 million tonnes production a year will pay nothing but the normal corporation tax, which all companies pay. That is substantial help for those fields. The average rate of tax over field life as a whole on the future fields we examined will be reduced from more than 70 per cent. to around 60 per cent.
Another important element in the Budget package is the new PRT relief for post-Budget expenditure on exploration and appraisal outside existing fields. Again there will be an opportunity to consider this in detail later. Suffice it to say that the Exchequer will provide rapid tax relief worth up to 75p in the pound for expenditure on the essential acitivity of finding and providing the commerciality of new oil reserves.
The purpose of clause 73 and schedule 11 is to phase out advance petroleum revenue tax by the end of 1986. This will be achieved by progressively reducing the rate from its present 20 per cent. to five per cent. in 1986, 1064 whereafter it will be abolished altogether. The 1983–84 cost is estimated to be £50 million and the average annual cost over the next four years is put at £165 million.
As its name suggests, advance petroleum revenue tax brings forward into earlier years tax that would he paid later as petroleum revenue tax. It was introduced to continue acceleration of receipts when, in response to the industry's representations, supplementary petroleum duty was abolished in last year's Finance Act from the beginning of 1983. After the 1979–80 oil price rise it was reasonable for the Government to advance some of their receipts into the early years of production from the larger first generation fields.
The industry has been unanimous in seeking the early phasing out of APRT, which it dislikes because it was calculated by reference to revenues, not profits, and reduced cash flow early in a field's life. We believe that APRT remains justified for the first generation fields, which remain generally very profitable, but we accept that, on the basis of our analysis of future fields, it should not apply to the new generation of future fields. We also accept that, although existing fields are generally profitable, there is a case for some boost to companies' more immediate cash flow to encourage reinvestment in the North sea. The phasing out of APRT over four years meets both those objectives.
Taking the changes together, we believe that the Government have made an important move to safeguard the future rate of development. I would hesitate before attempting to put a figure on how much extra development will take place as a result of the changes. There are many other factors besides tax. But I do know that the Department of Energy is already discussing with companies four oil and gas condensate fields and four southern basin gasfields. The Department believes that another five oil or condensate fields and another four gasfields are likely to come up for discussion in the next two years. As the right hon. Member for Orkney and Shetland (Mr. Grimond) pointed out, that is another 17 developments. That represents one new development about every six weeks over the next two years. This is a substantial amount of activity. Exploration and appraisal drilling was already last year, before the Budget measures, at levels only just below the previous record of 1975. This represents a substantial number of jobs. Again it would be rash of me to comment on the precise estimates of the number of jobs involved which have been made from time to time. But once the new developments have got under way, they should provide a valuable boost to the offshore supplies industry, with nearly 75 per cent. of orders currently going to British yards and factories.
The Opposition complained last year, and this year, that the system was too complicated and that it changed too often. They seemed sympathetic to the idea of another radical review, and to the possibility of a totally new system, perhaps on the lines of the proposal of the Institute of Fiscal Studies. I recognise that it has not been possible in the past two or three years to provide the stability in the fiscal regime which in principle may be desirable. But the changes have been made necessary, first, by the need to meet massive changes in the outside environment following the 1979–80 price rise; secondly, by the Government's willingness to modify the regime to meet the industry's criticisms as far as is compatible with the 1065 need for a fair Government share of the take; and, thirdly, by improving information about the next phase of development in the North sea.
§ Mr. Crouch
May I remind my hon. Friend of the gentle criticism I made about what is a relevant new field. I am grateful for the concessions that help the marginal fields but I was talking about those developers who have taken the risk and started to develop under the old tax regime. They will not be entitled to the concessions under clause 74, which is unfortunate. I have never understood why the Treasury and my right hon. and learned Friend the Chancellor did not recognise that those who took the risk under the old regime should enjoy similar benefits to those who take risks now, which are lesser risks.
§ Mr. Wakeham
We still considered the existing fields to be reasonably profitable after our review, but we were concerned about the marginal new fields, many of which were smaller than the established fields. That is why we have made the distinction between future fields and existing fields. I remind my hon. Friend that the phasing out of APRT will benefit existing fields — the fields about which he is concerned—as well as new fields. The existing fields will enjoy some benefit in improved cash flow. As its title suggests, APRT is an advance of tax, and at the end of the day the companies will "hope" to pay PRT because their projects have been successful.
§ Dr. Mabon
I understand the difficulty of drawing a line, but why have the Government chosen 1 April 1982? I realise that if the Government moved back one year there would be complaints and assertions that they should have moved back two years. However, what is the intellectual justification for drawing the line at 1982 rather than at 1981?
§ Mr. Wakeham
There are two justifications. First, 1 April 1982 was about the time when we started to have detailed discussions with the industry about future fields. It seemed a reasonable point at which to start. Secondly — perhaps this is more controversial — there was something of a gap between first generation and second generation fields, and it seemed that 1 April 1982 was about the right time to draw the line. It was the time when we started seriously to investigate the changed circumstances that were becoming apparent for marginal fields in future.
It has been suggested that the oil companies cannot rely upon this year's reliefs because they will be taken away before they are of any help to the companies—in other words, a further reflection to the companies, to repeat the charge of the hon. Member for Blackburn, of the changing situation. I recognise that no Government can constitutionally bind their successors or themselves, but there is a common interest between the Government and the industry in future successful North sea oil developments, and history has shown that changes have not produced profits of unacceptable levels from existing fields. Our figures show, however, that existing fields are still very profitable, and the phasing out of APRT is a sign that we are ready to help such fields to the extent that is necessary.
Our carefully balanced package, coupled with the full discussions that we have had with the industry, should give the companies confidence in our future intentions. With 1066 companies such as Shell, BP, Texaco, Philips, and Esso reported to be reassessing development plans for the North sea, it is clear that our Budget strategy represents an excellent basis for encouraging future investment.
§ Mr. John Smith (Lanarkshire, North)
It is some time since I participated in debates on this subject. I remember the days of 1974–76 when the then Conservative Opposition were complaining about the taxation structure proposed by the then Labour Government, which in retrospect seems moderate. It was claimed the the Labour Government would over-tax North sea developments and drive oil companies from our waters. One develops an acute sense of irony in the House of Commons, but I feel that I have been restrained during the past two or three years, during which the Government have moved in to take a much larger share of profits from the North sea than the Conservative party had ever contemplated. We have seen that happen, in a reversal of Government policy. It is slightly odd for Ministers to take credit for removing burdens which they themselves imposed.
Since the Government took office in 1979, they have been the beneficiaries of the most fantastic bonus that any Government in our history have received. The Labour Government received revenues of about £800 million in 1978 and 1979, the two years when they first became available. This Government have received over £20 billion from North sea revenues. They have received about £20 billion more than their predecessors, £20 billion more than they would have had if the United Kingdom had not been the beneficiary of oil and gas revenues.
What have the Government done with the £20 billion? They have spent it all on paying for the extra unemployment that they have created. The cost to the Government of an unemployed person is about £6,000 a year. If the Government are responsible for creating only another 2 million unemployed, they have incurred the responsibility of finding another £12 billion a year. However, North sea oil revenues are running at about £8 billion a year. The total of North sea oil revenues does not equal the cost of the extra unemployment that the Government's economic policies have created.
When I had ministerial responsibilities in 1975–76, I often reflected on the use to which North sea revenues would be put. The Labour Government knew that they would be high, but they did not know that they would be as high as they have proved to be. However, we knew that they would constitute a windfall for whichever Government happened to be the beneficiary. I thought that if the beneficiary were a Government of the Left the revenue would be spent on social projects, Government pump-priming, and support for industry and social services. I thought that if it were a Government of the Right the revenue would be handed back in tax cuts and tax concessions. I thought that it might be argued by them that the latter course would be a better way of using the revenue because it would allow a series of individual and personal economic decisions to be made, rather than Government decisions.
I do not think that anyone ever dreamed—if anyone had done so and recounted the dream, he would have been treated as mad—that a Government would say, "We will not spend the revenue through the state and we will not spend it through individual choices or tax cuts. We will spend it on funding the extra unemployment that we shall manage to create at the same time as we receive the 1067 revenue." When the history of this country comes to be written, the public will wonder how it was possible for a Government to contrive to misspend the largest windfall the country had ever had.
The question which must insistently be put to the Government in the weeks or months that lie ahead is what happened to the £20 billion, what is happening to the £8 billion and what will happen to the money if they are returned at the next election? Not only are they misusing the revenues on a scale we never thought possible; they are pumping oil out of the North sea for all they are worth, far more than the nation needs, to try to satisfy the Government's addiction for North sea oil revenues. Because they have an enormous army of unemployed whom they must pay, they must pump the oil out as fast as possible, to maximise their revenues, and, at over 103 million tonnes a year, we now have the highest production ever.
We are exporting 60 per cent. of North sea oil. As we import 30 per cent., our net exports are 30 per cent., which is far more than we need to achieve. We are doing that exporting in an era of some uncertainty about oil prices, when there is not exactly a shortage of oil. It is being pumped out at such a rate that it will leave us with a sharp gap between supply and demand in only a few years. The Government must drain the oil out and squeeze the revenue out for all they are worth so that they get the maximum advantage, denying it to their successors and future generations.
Any sensible depletion policy tries to match supply and demand for as long as possible. The Government are just raiding the funds of the country, misspending them in a tremendously stupid way and denying future generations the benefits of revenues which, if properly garnered, could be of enormous economic benefit to the nation. That is a staggering indictment of the Government.
Apart from that, the Government have managed the development of the North sea foolishly. The North sea oil industries have had to go from famine to feast, staggering from a surplus of orders at one stage to a terrible scramble for orders at the next. The latter has been the situation for some time; whenever there is a platform order, the companies scramble for the work. Instead of organising matters to achieve sustained development over the years, we have seen a crisis in the North sea, and that has happened in the last three or four years as a result of Government policy. Now, however, they say, "It will be all right. We have changed our policy and instead of having only a few fields coming forward, as has been the case in recent years, we have 17 coming forward."
§ Mr. Smith
Yes, if one cares to believe that. The right hon. Member for Greenock and Port Glasgow (Dr. Mabon) expresses the scepticism that is felt in all parts of the Committee. Nobody in his right mind believes that a new oilfield will be developed every six weeks. Indeed, it is amazing that the Minister should have been prepared to offer it, but there is no obligation on us to believe it, and anybody connected with the North sea must take the same view. Instead of getting sustained development we are back to the rush for orders, although certainly we need the work and the employment it will provide. That is one 1068 reason why we on these Benches do not in principle oppose these taxation changes. After all, most of the taxes were imposed by the Government, particularly APRT.
§ Mr. Eggar
In Standing Committee last year I moved a series of amendments which it would have been possible for the right hon. Gentleman to support, but all Opposition spokesmen did was sit on the fence; they were not prepared to come down on one side or the other. Why is he now uttering such strong words? Why did we not have strong action last year?
§ Mr. Smith
I did not have the benefit of knowing that, but it occurs to me that the hon. Gentleman might not have attracted support because he did not argue his case persuasively or successfully. That is usually why people do not get support. We are now -asked to shower the Government with compliments because they have changed their mind, and that is ridiculous in this instance.
A balance must be struck between what is the appropriate take for the nation and what should be left to the companies in the North sea. Every Government must think about that balance with great care. If they leave too much money in the pockets of the companies, that places an additional burden on the taxpayer. On the other hand, the Government could, if they overdid their taxation policies, bring development in the North sea and the supporting industries to a halt, or at least present them with extreme difficulty. That becomes most acute for the small marginal fields which are extremely expensive to develop. The taxation policy that should be shaped is one that brings forward development and therefore creates the revenues, but does not give absurdly generous incentives that turn out not to be beneficial to the taxpayer.
The Minister referred to royalties. We will have a debate shortly on the Petroleum Royalties (Relief) Bill. It has to be taken into the picture. It cannot be approached in this manner. I am far from convinced that it is appropriate at this stage to say that there will be no royalties whatsoever for any new finds in the North sea except for the southern basin. There would be a case for —it has always been recognised that there is a case—and there is in the existing legislation a possibility of, remitting royalties in appropriate cases where the company can show that it is necessary for the development of the field not to pay the royalty. Why should we say that in all cases, in all fields in the North sea, there will be no royalties at all?
That is another lurch of Government policy. It is lurching wildly in one direction, having lurched wildly in the other. I give notice to the Government that we shall probe them carefully on that point when we discuss the Petroleum Royalties (Relief) Bill. We shall expect them to make a convincing case, which has not yet been done, why there should be such a sweeping change in North sea oil taxation.
If nothing else, this short debate has allowed us to ventilate some of these subjects. We shall return to them in the Committee on the Petroleum Royalties (Relief) Bill. 1069 If the Government want to get it through, the way things are going, they had better move smartly. We shall be happy to debate it as soon as possible. With the thought that we are not leaving this subject for ever, I beg to ask leave to withdraw the amendment.
§ Amendment, by leave, withdrawn.
§ Clause 73 ordered to stand part of the Bill.