§ Order for Second Reading read. 33.41 pm
§ The Financial Secretary to the Treasury (Mr. John Moore)
I beg to move, That the Bill be now read a Second time.
I congratulate and welcome the hon. Member for Birmingham, Perry Barr (Mr. Rooker) on his move to the hard nails of the shadow Treasury Bench. I do not imagine that this will be the most contentious Bill that we shall consider together.
The Bill completes this year's Budget package on the oil industry. The package is designed to encourage future exploration and development. The main tax provisions were the double oil allowance for future fields, the new PRT relief for exploration and appraisal and the phasing out of APRT. Those were enacted in the first of this year's Finance Acts. The other main element of the package, the abolition of royalties for future fields, is contained in the Petroleum Royalties (Relief) Bill, which received its Third reading last Wednesday.
Last year, to assess the impact of the fiscal regime on future developments, the Government undertook a thorough analysis of the profitability of future fields. That showed that the next generation of fields were likely to be much smaller and geologically more complex than the current generation. A study of their prospective profitability revealed that some relaxation of the fiscal regime was required to encourage the industry to develop the new prospects.
The Budget package was, therefore, designed to provide incentives to develop future free-standing fields and to encourage further exploration and appraisal. The industry has welcomed the measures and there has been clear evidence that companies are reconsidering projects that they had previously put aside as uneconomic. We have been further encouraged by the number of development applications approved or under consideration. That justifies our confidence that if the fiscal environment takes account of changing oilfield economics, private enterprise will continue to ensure the successful development of the nation's oil and gas resources.
Criticism is sometimes expressed at the number of changes in recent years in the oil taxation regime. In the debate on the resolution introducing this Bill, the hon. Member for Blackburn (Mr. Straw) expressed the hope that it wouldbring more coherence and permanence into oil taxation." —[Official Report, 26 October 1983; Vol. 47, c. 402.]I recognise that it has not been possible in the past two or three years to provide the degree of stability in the fiscal regime which is, in theory, desirable. But we have to be realistic about this. The regime has had to be adapted to meet major changes in circumstances in the outside world, such as oil price changes. It has had also to respond to changes in the prospects and profitability of likely North sea developments in the years ahead, as compared with the first generation fields. This year's package of changes was drawn up in the light of a thorough analysis of the 308 economics of existing and future fields. It was a carefully balanced package which followed very full discussion with the industry, and should give it confidence for the future. I certainly hope that we shall now have a period of stability in the main structure of the PRT system; but the House would not expect me to guarantee that there will be no changes in the way we tax oil production where those seem right.
The Bill, in completing the package of measures we have introduced this year, relaxes the rules for PRT relief for expenditure on assets with shared use such as pipelines, and charges related receipts, such as pipeline tariffs, to PRT, subject to an exempt allowance. The provisions are highly technical; and although we introduced most of the clauses in chapter II of part IV of the spring Finance Bill, they were of great length, not quite complete, and were capable of further refinement in discussion with the industry. We thought it wrong to ask the House to consider them for enactment in that form in the short time available for the truncated Finance Bill in the spring, or the short summer Finance Bill. The Chancellor of the Exchequer therefore announced last summer that they would be the subject of an Oil Taxation Bill to be introduced in the autumn. This is the promised Bill.
§ Mr. Donald Stewart (Western Isles)
Should not a higher priority be given to a depletion policy and some arrangement with OPEC, than to taxation?
§ Mr. Moore
The right hon. Gentleman knows that the Select Committee on Energy examined the Government's depletion policy and, overall, recognised that it met the interests of the nation.
It has for some time been recognised that the present system of relief, especially for expenditure, had not been designed for the position that was beginning to emerge in the North sea, and was not well suited to it. To rewrite the rules would clearly be a complex matter, as it has indeed turned out to be, but after due consideration the then Chancellor announced in his 1982 Budget speech a commitment to introduce legislation. Then, in May 1982, the Government issued a consultative document setting out at some length the changing scene in the North sea that had made it necessary to review the way in which PRT relief was given for expenditure on long-term assets. It described the existing system of relief and explained why it was no longer suited to the changing position. It discussed possible solutions and outlined positive proposals.
We are now seeking to implement the proposals we outlined there, but that follows representations from the industry and discussions with it, first about the general outline, and later about the very many details which had still to be considered in order to create a set of rules that fitted the many and complex permutations of circumstances that exist in the North sea.
Hon. Members will recall the background to the proposals. North sea projects have typically involved very large front-end outlays before any significant income is generated. Each field development has generally involved a more-or-less complete dedicated production system—comprising offshore production and treatment, transport to shore, onshore storage treatment and loading facilities, or the facilities have been shared between fields from the outset on an equity basis. The pattern of development was reflected quite directly in the existing PRT structure. PRT is charged on a field basis, and allows for each field full front-end loaded relief for the assets dedicated to that field.
309 However, the indications were that the pattern of development would change significantly over the next few years. Two separate but linked trends point in that direction. First, there is by now a substantial infrastructure of North sea assets already in place — platforms, pipelines and shore facilities. Those facilities are sized to serve the relatively large first-generation United Kingdom fields. Thanks to the characteristic peaked profile of field production many of those assets are, or will shortly be, under-used in the service of the fields for which they were built and will have spare capacity to take on other non-field uses.
Secondly, it is generally expected that the next generation of North sea fields will be smaller than fields to date. They will also in many cases be located in the vicinity of infrastructure already in place. Some new fields may be uneconomic to develop if they cannot tie in to existing assets rather than use purpose-built provision of their own, and others may be significantly more productive in resource terms if developed in that way. The likely result will be a significant growth in arrangements to share existing North sea assets. Indeed, that has already started in the case of agreements to share existing pipeline systems. Even where no existing assets are available to be shared, there may be increasing resource gains to be had from developing new assets so as to maximise the potential for new uses later in asset life. For example, it may be sensible to size a new pipeline somewhat larger or lay the line on a more expensive route than is immediately required so as to create scope for future tie-ins. Those trends in development are clear, and it has been becoming increasingly important that the fiscal system should adapt to and support the trends rather than conflict with them.
The existing rules for giving relief for expenditure on the assets involved were clearly no longer appropriate. As the law stands, relief for the necessarily costly expenditure on long-term assets is restricted—or, if already given, clawed back—by the proportion referable to use by a third party when that can be estimated. Nor can it even always be estimated. For example, it may have become an unrealistic assumption that a pipeline will be used only for the owner's own field. But while it may be clear that the asset is likely also to be used by other fields, it could be very difficult or impossible to estimate what proportion of the use will relate to that and what to the owner's own field. In short, it may happen that while there is a clear possibility of shared use, no one can say how much will eventuate. The existing law then requires the expenditure to be spread over the life of the asset and a proportion allowed period by period. Where that uncertainty applies from day one of a new development, only this slow-train method could be used. That would discourage such a venture from the start.
No expenditure had, at the time we issued the consultative document, yet been treated under this second rule. As a holding matter we authorised the Inland Revenue not to restrict or claw back relief under existing law where no restriction would be due under the proposals in the document. That was announced in paragraph 53 of that document. It was becoming increasingly probable that relief already given should be clawed back and new relief restricted under the second rule. For example, if relief for a pipeline and terminal system costing £500 million had to be put onto that basis after half its life, relief on £250 million would be clawed back. A switch to this basis could cost the industry hundreds of millions of pounds on 310 existing assets alone, only part of which would be restored later and then possibly over a long period. We could not leave the industry with that potential liability and disincentive hanging over it. In most cases the provisions in the Bill will remove both the existing rules so that third party use is no longer a ground for restricting relief. Full relief will be available from the start with no possibility of its being lost.
At the same time, it is right—as the consultative document proposed—to charge incidental receipts, such as tariff income or sales proceeds, attributable to the assets which are being given this more favourable relief treatment. That is partly as a corollary of giving full relief for an asset even where it is, or is going to be, or is likely to be used in part not for the owner's field, but for another's field. Now that we are giving full relief for an asset partly used by a third party, it is reasonable to take receipts from that party into account. There is already a provision with that intention, but it applies only to hire receipts, and most of the sharing arrangements do not constitute hire. It is also in any case anomalous that tariffs received by the owner of an asset for the use of his pipeline are not liable to PRT in his hands, although they are an allowable PRT expense for the field which pays for them.
On Third Reading on the Petroleum Royalties (Relief) Bill, my hon. Friend the Member for Bedfordshire, North (Mr. Skeet), who with his enormous expertise in this field has consistently worked to support the development of our North sea resources, asked whether the proposal to charge tariffs was not inconsistent with the general thrust of this year's oil taxation package. I hope that the explanation that I have given will show why it would have been quite wrong to give full front end loaded relief for an asset which had shared use but to ignore the receipts arising from that use. I realise that my hon. Friend had none the less a particular and practical concern. He suggested that the new charge might drive up tariffs, so making certain small fields uneconomic to work. The level of tariffs, is not, of course, set only by the tax system, but I know that my hon. Friend's worry is also a concern to the oil industry. It was partly for that reason that, following the consultation process, in addition to the increased relief for the relevant expenditure on the tariffed assets, we introduced the tariff receipts allowance, and set it at a generous level. That allowance will be available in full to the owner of a pipeline to set against his tariff receipts from each new user field. It will offset pressure for an upward trend in tariffs, particularly as they affect the smaller marginal fields.
§ Mr. Dick Douglas (Dunfermline, West)
Is the Minister under the firm impression that the smaller fields to be developed would have to use pipelines in order to qualify for the type of relief about which he is speaking?
§ Mr. Moore
Not necessarily, because there are other methods of development. It is my belief — I shall confirm it when I have checked the point—that the other methods of extraction and movement will also be covered by this measure. The hon. Gentleman is right to remind the House that it is not related only to pipelines and that other forms of assets are covered.
I do not expect the revenue effect to differ significantly from that given in the spring Financial Statement and Budget Report— a cost of £15 million in the current year and a yield of about the same amount on average over the next two or three years. Hon. Members will realise that 311 the further into the future we get, the more difficult it is to make any estimate, since that depends not only on which fields are developed, when and in what ways but on the extent to which relief under the existing system would have been restricted because of shared use, which is only probable or not quantifiable at all. The figures that I have quoted do not reflect the unquantifiable amount. As I have already said, and as was said in the footnote to the FSBR, those could run to some hundreds of millions of pounds over a period of years. Therefore, those figures do not show the full benefit to the industry, or the nation, from the development of fields which otherwise might not take place.
I have made available to the House notes on the clauses and schedules which explain in some detail what each is doing, and I hope that the House has found them helpful. I propose now to indicate the general purpose of the provisions and to comment on one or two particular matters.
The first five clauses with schedule 1 spell out the new rules for giving PRT relief for expenditure on long-term assets. The key provision is in clause 3(4) which provides for the whole of the expenditure to which the clause applies to be allowable to capital expenditure on long-term assets used for an oilfield, except the small class of assets of the kind which is not used for any great length of time in any particular field but moved about. We have introduced a new concept here — the non-dedicated mobile asset—to describe that residual class of asset.
The distinction that we are making is between two kinds of mobile assets. The main class of such assets consists of those which will be used over most or all of their life, or the field's life if shorter, for the owner's field or fields. An example is the shuttle tanker used for a field which loads directly into a tanker offshore. Another example is a purpose-built support vessel which provides fire-fighting and diving facilities for an oil platform. A floating platform would also come into this class. But there can be mobile assets which will never be used for long in any one field. The only obvious example is a drilling rig, which might be used for exploration or appraisal in a mature field, then in a new area and then perhaps outside the United Kingdom sector altogether. There are few such assets owned by oil companies, but it would clearly be wrong to give them 100 per cent. relief.
Clauses 6 to 8 with schedule 2 provide for the incidental receipts in respect of fixed or dedicated mobile assets to count as part of the income to which PRT applies, with ancillary provisions in clauses 10 and 11; and the tariff receipts are subject to the allowance provided for in clause 9 and schedule 3. This is one change made from the proposals in the consultative document, but it is one which was announced by the then Chancellor in this year's Budget speech. We decided that it would be right not to bring into charge the whole of the tariff receipts, as had originally been proposed.
Sharing one's facilities involves some largely unquantifiable risks — for example, corrosion to the assets or loss of production—and it seems reasonable to make some allowance for that. As I explained, we wanted to make it possible for the owner of the asset to charge a lower tariff than he might otherwise have felt constrained to do had we simply taxed the whole of the tariffs without any allowance. For this reason, the full allowance is 312 available to a pipeline owner for each user field. The way in which the allowance works is especially helpful in this respect where the quantity of oil being transported is small. In that way it is geared to the case where the user is the owner of a smaller, marginally profitable field.
A matter which was announced in the May 1982 consultative document was the extension of the charge on receipts to those relating to fixed assets in our territory or in our sector of the continental shelf which are owned by licensees of overseas oilfields. The obvious example is a pipeline used for a Norwegian field but which runs through our waters to the United Kingdom. Where such an asset generates receipts attributable to United Kingdom use—for example, a pipeline also picks up oil from a United Kingdom field on the way — we propose to bring the receipts within the PRT charge. Clause 12 and schedule 4 provide for this and for giving appropriate relief for related expenditure.
These provisions were not ready in time to be included in the March Finance Bill, but we gave general notice of our intentions in a parliamentary answer by the then Minister of State last April. Unless we could be sure that they would be subject to an equivalent tax in their own country, foreign oil producers who owned pipelines to the United Kingdom would otherwise have been left in a better competitive position than our own people; they would have been able to offer the use of their assets for a lower tariff.
That apart, foreign oil producers are on a similar footing to our oil producers, and it is clearly right that any receipts generated by the United Kingdom use accruing to assets in United Kingdom waters should come within the same taxing scope for PRT as applies to our producers, as they already do for corporation tax. There have been discussions at official level with the country which could be affected in the near future — Norway — and I am happy to tell the House that we expect no difficulty in reaching agreement to ensure that any double taxation is relieved.
Clauses 13 to 15 with schedule 5 contain transitional and supplementary provisions. In the consultative document we had recognised that asset owners who happened already to have entered into agreements for third party use and suffered restrictions or clawbacks would have had a less favourable PRT treatment than will be secured under the new rules. The industry at first urged that we should exempt all future receipts arising under such agreements, but we did not think that would be right. We had intended, and now propose, that the new rules should give back relief which had already been restricted because of shared use, so putting all relevant assets on the same footing. In addition, where agreements were already in existence at 8 May 1982, when the consultative document was published, the tariff receipts allowance will be increased for five years from 250,000 to 375,000 tonnes for each chargeable period.
I recognise that the provisions of the Bill are highly technical. That is because the situations for which they have to provide the right answer can themselves be complex and take many forms; but, in essence, the main effect and purpose of the Bill are relatively straightforward. There has for some time been general agreement that the new situation in the North sea required the rules in question to be rewritten. We have had extensive 313 consultations both on the outline and on many of the more detailed provisions, and I know that this consultative process has been much appreciated.
We have taken the opportunity of postponement from the spring to improve and complete the measures. We now need to introduce these provisions with all due speed so that negotiations for sharing assets can continue without uncertainty as to what the tax effects will be. That is why we are introducing these measures now rather than leaving them to form part of a longer Finance Bill next spring.
§ Mr. David Crouch (Canterbury)
The tax effect on the Revenue of activity in the North sea last year was about £8 billion. Can my hon. Friend say what the minus effect of this concession on expenditure will be in the first year of its operation?
§ Mr. Moore
I have referred to the revenue impact, which is a cost of minus £15 million in the first year, with a modest net addition later. I was saying more particularly that, although that was minimal, it did not take into account the ways in which relief had been allowed since the May consultative document, or — and my hon. Friend is right to draw our attention to it—in the long-term development of the North sea, where fields which would not otherwise have been developed would produce major new sources of revenue to the state. These are unquantifiable benefits, but we all welcome them.
With those comments, I commend the Bill to the House.
§ 4.6 pm
§ Mr. Jeff Rooker (Birmingham, Perry Barr)
I thank the Minister for his opening remarks welcoming me to my new post on the Opposition Treasury team. I suspect that he is right to say that there will not be as much of a clash on this as there will be on other Bills.
The situation concerning oil taxation seems to contain exactly the same ingredients as were present in my previous role dealing with social security; massive amounts of money are involved, running into billions of pounds, with the need for a good deal of arithmetic, and consequently an empty House. I suspect, too, having spent a few days looking into the subject, that in this sphere one must learn a new jargon, and there is no lack of jargon in social security. There must be people in the Treasury so involved with these issues that their language becomes totally consumed in jargon. Their eyes glaze over when they discuss the subject. Although that happens in other Departments, it is more prevalent in Departments dealing with billions of pounds.
When we consider the cost of getting oil and gas out of the North sea, we must not forget that, while the Bill is extremely technical, human beings are involved, and it is a dangerous operation for them. Between 1973 and 7 November, a couple of days ago, 130 lives were lost in accidents involved in oil and gas extraction. That is a heavy cost in human terms.
As the Minister said, the Bill was announced as long ago as 1982, at the time of the Budget of that year, and it was referred to again in this year's Budget speech. The consultative document of May 1982 stated that the measures in the Bill would take effect from July 1982. In other words, we are legislating retrospectively.
It makes sense to encourage the exploitation and development of the resources in the North sea. To put it 314 another way, it makes sense to ensure that there are no barriers in the fiscal system that would discourage exploitation and development, and I agree with the Minister that the Bill is designed to provide encouragement.
As for our depletion policy, while it may be thought we are taking oil out of the North sea too quickly, that is an energy, not a tax, matter. Depletion policy is crucial but, as it is not the main subject to be discussed when considering whether the Bill should be given a Second Reading, it is not an avenue that I propose to follow.
We have reached a stage in the development of North sea resources when increasing effort is required in neglected territories, some of which may have been involved in the early rounds of licensing. It was realised that they were marginal fields and it was decided to leave them until the larger fields had been exploited. The time has come when encouragement needs to be given to placing more assets in existing fields or to change the use of assets so that we may obtain resources from what were considered to be small marginal fields.
One of the consequences of the Bill, along with the other measures to which the Minister referred, including the second Finance Bill of 1983, may be a requirement for new assets at the margin to take full advantage of the extra reliefs. The assets would create crucial new jobs, but I suspect that that factor is unquantifiable now.
A Bill which is essentially an instrument to provide tax relief on shared asset expenditure by different operators deserves the support of the House. I suspect that it will be claimed that some of the new reliefs do not go far enough. If we want to secure a fair share of North sea wealth for the British people and if we are to grant extra relief that is designed to encourage new development and existing developments, it is consistent with the Government's aim —it was the aim of the previous Labour Government—to accept that somewhere there has to be a cut-off point. Therefore, the Government are right to limit the relief and to incorporate in the Bill some anti-avoidance measures such as the one involving the definition of remote associated assets. That is a piece of jargon that appears in schedule 1(2). Its purpose is to ensure that the oil industry does not obtain reliefs for work that it is already doing or would have done without the benefit of the Bill.
There have to be controls on the private sector oil companies in the North sea operations. It is a generally held view that the companies cannot be allowed to operate in an uninhibited fashion to maximise their incomes. Whatever the exponents of crude capitalism—I suspect that there are a few of those in the Treasury — might claim, it does not follow that maximised company incomes lead necessarily to maximised incomes for the Inland Revenue.
I understand that oilfield experience throughout the world has shown that too rapid a rate of depletion in the early years of a field's life can reduce the amount of oil ultimately recovered from it. In these circumstances, it is not necessarily true that what is good for the companies is good for the nation. That was the view that was expressed by the former Chancellor of the Exchequer in July 1982 in a memorandum written in reply to a Select Committee that was considering depletion policy. It is a sentiment with which I wholeheartedly agree.
Petroleum revenue tax, with its front-end loaded relief emphasis, gives companies relief at an earlier stage than that which is provided for in the Norwegian system, 315 although the final marginal rate of take by the Government appears to be very similar, being between 85 per cent. and 89 per cent. The legislative provisions for the tax passed through the House during 1974–75, during the first two Sessions of my membership of the House. In the previous Labour Government's lifetime it brought hardly a penny piece to the Revenue. I can remember many Members who specialised in these matters complaining that the Revenue was not collecting any money from the tax. It was said prior to the 1979 general election that the following period of government, whichever party was in power, would start to scoop the pool from the North sea. How right that assessment was.
In 1978–79 the revenue obtained from PRT was £183 million. In 1982–83, only four years later, the revenue had increased to £3,280 million. There had been a 20-fold increase in only three years. In November 1974 the hon. and learned Member for Dover (Mr. Rees), who is now Chief Secretary to the Treasury, spoke about expectations of revenue from North sea oil development during a debate on the then Oil Taxation Bill. He said:The Hudson Institute—not that I have a great regard for either its analysis or its conclusions— has pointed out that there is at least a possibility that we shall find ourselves tied to a source of high-cost oil when prices are declining in the Middle East. We must consider this carefully before launching into any grandiose projects … In all candour, I think that the real danger is, not that the proceeds will go to the British Treasury, but that they will go to service the inordinate borrowing to which we shall be committed in the intervening years." —[Official Report, 27 November 1974; Vol. 882, c. 529.]Total take from the North sea last 'year was greater than the public sector borrowing requirement.
The oil companies did not put the oil and gas in the North sea, and I have already said that the cost of extracting it has been heavy in terms of human lives. The idea is to increase the gains that can be derived from North sea oil development because of the limited measure of relief that is contained in the Bill. If we consider total oil tax from 1978–79 to 1982–83, including royalties, special petroleum duty, PRT and the relevant element of corporation tax, it has increased from £562 million to about £8 billion. The figure fluctuates because the Government estimated the 1982–83 take in their 1982 Budget as £6.2 billion but in the 1983 Budget the estimate was £7.8 billion. There are enormous fluctuations for various reasons that are not related entirely to the rate of tax.
North sea production is either at its peak or close to it. The tax take lags behind production by five, six, seven or eight years due to the front-end loading of reliefs that is implicit in the system. It is clear that the income of £8 billion that the Government or Revenue obtained in 1982–83 will increase. Some estimates suggest that it will increase to as much as £12 billion to £13 billion over the next few years.
I am sure that everyone accepts that £8 billion is a large sum. I shall give the House four examples before posing a question which is crucial for the well-being of the nation. The take of £8 billion would pay all the wages and salaries of those employed in the National Health Service in England and Wales as well as the wages and salaries of those who are engaged in the provision of personal social services. The latest public expenditure White Paper tells us that the total salary bill is £7.8 billion for every nurse, 316 ancillary worker and doctor in the NHS. The salary bill of the Ministry of Defence and the law and order and protective services comes to £8.6 billion, which is almost the same as the oil take. I do not say that a choice has to be made between the two but that is the scale of the income that the nation is receiving from the North sea.
To put it another way, if we wished to maintain the services we have and we had not got the income from North sea oil, income tax would have to rise by 9p in the pound from 30p to 39p, which would mean that the average worker would have to pay another £20 per week in income tax. That is the scale of what the Government are getting from the North sea. The last example is that VAT would have to go from 15 per cent. to 27 per cent. to bring in the £8 billion.
What is being done to plan decades in advance for the day when oil and gas run out? There will be a catastrophe if there is not adequate and new investment. We are getting this massive wealth from the North sea, but what are we doing with it to create a fabric of society that can be sustained after the oil and the gas have run out? Those four examples show the scale of the task.
§ Mr. John Townend (Bridlington)
Would the hon. Gentleman not agree, in view of the remarks which he has just made—and I accept that there is logic in them—that the Government were wise to take off exchange controls and allow our overseas portfolio of investments to build up because that will provide increasing income for the country as oil revenues are reduced?
§ Mr. Douglas
Would my hon. Friend accept that someone who is very knowledgeable about overseas investment and who is not a representative of this party, Professor Andrew Bain of the University of Strathclyde, has placed increased strictures on the Government because the oil revenues have gone mainly on consumption and to subvent unemployment?
§ Mr. Rooker
My hon. Friend is right. I gave two examples of consumption: all the pay and salaries of the National Health Service, although I am not advocating that they be cut, and all the pay and salaries of defence, the armed forces, the police and the prison officers. That is all consumption. There is no new investment for the future in it.
Oil tax is affected by many factors. This is why long-term planning is difficult. The price of oil, the exchange rate and production levels are just three factors that can affect the revenue. There is no one magic formula. As the Minister said, the system is extremely complex. However, it is serving the nation well, even if the resources from the North sea are being misused, which is a charge we make against the Government.
The taxpayers concerned in this are few in number and highly sophisticated. They are supported by massive resources of computer skills. They have no difficulty, nor has the Revenue, in calculating the effects of the fiscal regime in the North sea, or the interactions of its different elements on the basis of any given set of assumptions. The framework and the problems are known. Assumptions can be made and the results considered. Therefore, there is no excuse for not planning for the day when the resources run out.
317 The changes in the Bill will not add to the industry's costs. They are relatively modest compared with the massive global sums which are involved. The relatively modest reliefs in the Bill have to be weighed against the massive revenue that the companies and the nation gain from the North sea. That being the case, we are more than happy to facilitate the passage of the Bill.
§ Mr. T. H. H. Skeet (Bedfordshire, North)
I congratulate the hon. Member for Birmingham, Perry Barr (Mr. Rooker) on his appointment to the Opposition Front Bench. He paid a warm tribute to private enterprise for what it has done. Of course, the Government do not produce oil; it is private enterprise that does it. The hon. Gentleman said that the revenue from the North sea would pay the salaries of people working in the National Health Service or was equivalent to 9p in the pound on income tax. I am sorry that more plaudits have not come from the Opposition. Has the hon. Gentleman considered that, while unemployment in the United Kingdom is high, the number of jobs provided in the oil industry, not merely in England but in Scotland, is another glowing tribute to what private enterprise has done?
I should pay tribute to the close co-operation between the United Kingdom oil industry taxation committee, the United Kingdom Offshore Operators Association and the Treasury. They have got together to iron out some of the problems. The clauses that appeared in the Finance Bill 1983 do not bear the closest resemblance to the clauses in the Bill. Substantial modifications have been made. I understand from the Minister that conversations are taking place. I hope that they will result in more changes in the Finance Bill of 1984.
§ Mr. Skeet
I think that the Minister is much happier than Opposition Members, who have not opted for a Committee stage for the Bill. There are matters that I would have liked to raise in Committee, but I understand that the only way to deal with them is on Second Reading.
We have had 11 major oil and gas tax changes since 1975, barely eight years. We have had two Oil Taxation Bills — that of 1975 and this one. There have been relevant sections in seven Finance Acts. There was the Petroleum Revenue Tax Act 1980, and the Petroleum Royalties (Relief) Bill is going through the House. That is a fair selection of legislation for any industry. The Bill is very complex because there is so mach cross-linking with the principal Act of 1975. I make a plea for consolidation.
I congratulate the Inland Revenue on bringing out the book setting out the Oil Taxation Acts up to 1982. When I telephoned the Inland Revenue to find out when a new book of statutes was coming out, I was told that the Inland Revenue would have to consolidate a lot more before it appeared. It is extraordinary that one industry should be subjected to so much legislation. Now it is faced with many provisions in another mini-Bill which it will have to digest.
The Bill is so closely drawn that it is impossible to amend it satisfactorily, but an opportunity has been missed in not including other major matters of interest to the industry. The Minister said that three pieces of legislation 318 —sections 35 to 41 of the Finance Act 1983, the Petroleum Royalties (Relief) Bill and the Oil Taxation Bill—are to be treated as a single package, but the question remains whether those measures have been fully integrated and aligned. Perhaps the aims outlined in the Finance Act 1983 have not and will not be fully realised in this Bill. Can the Minister tell me whether the preparation on this Bill preceded that of the 1983 Act? More was accomplished in the Finance Act 1983 than many people expected —perhaps less on this occasion.
There are other provisions that I would recommend for inclusion in the Bill. First, there is a case for diminishing PRT, because the real price of oil has fallen. It will be recollected that Mr. Edmund Dell, when a Minister, stated in the House of Commons on 27 November 1974:Our policy would, however, be to avoid frequent changes of the rate but to be prepared to review the rate of tax if substantial changes in the situation were to occur. One such change would be a significant shift in oil prices. We should certainly be prepared to look at the impact of the tax if that were to happen…if there is a substantial change in the circumstances relating to the extraction of oil on the Continental Shelf, the Government will be ready to review the rate of tax." —[Official Report, 27 November 1974; Vol. 882, c. 473.]Not only do we find that the real price of oil has declined, but we find that Professor O'Dell of Erasmus university in Holland said in the Financial Times on 2 November 1983 that a decline in the real price of oil was in prospect and likely to occur during the next 30 years.
One should see the matter in perspective. According to the Inland Revenue, North sea oil provided— in PRT and supplementary petroleum duty—13 per cent. of all Inland Revenue net receipts in 1981–82, compared with less than 1 per cent. in 1979. We are dealing with big figures in a big industry, and, as the hon. Member for Perry Barr pointed out, this industry seems to be carrying the rest of the nation. He was not gallant enough to appreciate what has been done by private enterprise, or applaud its sophistication, or pay tribute to what it intends to do to help the nation in future.
§ Mr. Rooker
The hon. Gentleman need not labour the point. Have the oil companies any plans for the time when the oil and gas run out? That was the question that I put.
§ Mr. Skeet
One is aware that private enterprise never stays still. It is always on the move. It is trying to locate more oil and gas in the first place. In many parts of the world it is moving into coal. It cannot do so in the United Kingdom, because that is precluded by a statute passed in 1946 by the Labour Government. It has acted in other parts of the world. For example, British Petroleum has, through the Selection Trust group entered, mining. Moreover, in cable television there is the principal company Mercury, whch scored a great victory in the courts today, with which Barclays bank and others are associated. British Petroleum is involved there, too, making its contribution to the welfare of society.
§ Mr. Skeet
No, we can defer that. We shall play the National Anthem on the hon. Gentleman's demise.
Second, uplift is covered by section 2 (9) (c) (ii) of the Oil Taxation Act 1975, when it was set at 75 per cent. of authorised expenditure. In 1979, it was reduced to 35 per cent. There is a case for it to be set at between 40 and 50 per cent. and more discrimination made in favour of 319 selected investment. An alternative case can now be made for the introduction of an allowance to cover interest on loan charges, particularly as the world has been passing through an era of higher interest rates and steadily advancing costs on the continental shelf. I hope, therefore, that my hon. Friend the Minister will say something about uplift.
The third point concerns safeguards, as provided in section 9 of the 1975 Act. It restricts or eliminates the charge on PRT when the rate of return on investment falls below a specific limit. Difficulties for fields in decline, especially towards the end of their life, should be dealt with by legislation now, or the matter at least studied.
The fourth point is the oil allowance. An increased oil allowance for marginal fields is prescribed in section 36 of the Finance Act 1983, and a parallel relief called the tariff receipts allowance is made available to offset non-oil receipts designed to favour smaller and less profitable fields. That is in clause 9. The oil allowance surplus to field production utilisation should also be made available for offset against such receipts, insofar as there is a surplus of current entitlement on the cessation of production. The tariff relief allowance goes some way to meet the point, although it is not on all fours with section 36.
The fifth recommendation—one can see the clauses building up here; of course, they do not appear, because the Government have decided to keep the Bill short on this occasion and confine it to reliefs and receipts—is the closing down of oilfields and the removal of facilities. That is not covered by a satisfactory allowance. Section 3 (1) (i) of the 1975 Act covers onlypurposes of safety or the prevention of pollution".There is also a difficulty with corporation tax at this stage.
My final recommendation—I notice that Opposition Members are not jumping up with recommendations as to what further points should be made—is that there should be an incremental investment allowance, covering at least secondary and tertiary recovery to ensure that an oilfield is drained as far as modern technology will allow.
§ Mr. Skeet
We know, of course, that some unions produce extremely unreliable information, but if the information comes from the hon. Gentleman I am always prepared to give it a certain credit.
The scope of the tax has moved a long way from its original base. Fundamentally, PRT was a tax on oil and gas. It has moved on. It is now a tax on non-oil receipts, for example, pipeline tariffs and hire charges for drilling rigs and so on. It is now a form of capital gains tax. It has moved even further.
There is to be a tax in this Bill on the return from assets within the United Kingdom, but dedicated to oilfields outside the jurisdiction—for example, the Ekofisk, and the Norwegian Frigg facilities, making capacity available to fields on the United Kingdom side of the median line 320 —but what about the pipelines for the United Kingdom continental shelf platform, which may in the future move to Norway or West Germany, to carry natural gas? This Bill goes one way, but not the other way. Perhaps my hon. Friend will have some suggestions about that.
The most intriguing suggestion of all has probably been eliminated for the time being. I saw a press release from the Inland Revenue on 12 April 1983, saying that it is prepared to eliminate inclusion in the Bill of companies that might be set up in future specifically to transport or treat other people's oil. A tax ultimately to be levied on services through the inclusion of non-licensed holders, for example, companies set up to transport or process oil, is apparently to be temporarily excluded. However, the reasons for that are not clear. A company that may be operating, and which is the holder of a licensed area in the North sea, going through another licensed area would be included, but if a company is established particularly and only for the purpose of removing oil it is regarded as a service enterprise and is not to be included. That seems extraordinary. What was the reason for the decision to exclude such a company? I dare say that the industry was adamant on the matter, but we shall have learn the reasons from the lips of the Minister.
In the consultative document, the Inland Revenue made one or two useful suggestions. In paragraph 35, it made the following statement:There are precedents—for example in the United States—for stringent regulatory' powers to enforce third-party access to 'shareable' assets, and to police the prices charged".The Inland Revenue said that it would be preferable to avoid wide new powers of discretion if an alternative could be found that it considered more suitable.
I do not believe that the Minister has considered this properly. If one goes to the Treasury, one gets a Treasury answer; if one goes to the Department of Energy, one is given an answer that is in conformity with the experience and tradition of that Department. Provision has already been made in legislation to deal with pipelines. For the sake of convenience, reference should be made to section 9 of the Pipe-lines Act 1962 and section 23 of the Petroleum and Submarine Pipe-lines Act 1975. Those sections cover the acquisition of rights to use pipelines belonging to others. Section 23(3)(c) of the Petroleum and Submarine Pipe-lines Act 1975 states that notice may be served by the Secretary of Statefor regulating the charges which may be made for the conveyance of things by virtue of the right".We know that the Bill's draftsmen have selected the Treasury solution, but should they not have selected legislation passed as recently as 1962 and 1975, which seems to be utilised, recognised and tested, and which would probably be the most practical solution? I am sorry to see the hon. Member for Knowsley, North (Mr. Kilroy-Silk) leaving the Chamber. He is the last of the Mohicans in his great party, but I cannot detain him if he wishes to leave.
The reasons for the changes are these. The development of the North sea fields is undergoing a fundamental change that will lead inevitably to a myriad of sharing provisions in common ownership, and sharing arrangements with third parties that were not unfamiliar in Texas several decades ago.
The legislation should be designed to encourage a trend that could ensure full recovery of North sea resources. I believe that that is accepted across the House. Pipeline 321 treatment plant and other assets are envisaged, which will cause a problem in the allocation of reliefs and receipts. The allocation of receipts, and the admixture of equitable apportionment between owners, with periodic review to take account of significant changes in circumstances, is commended. However, it may be desirable to leave the relief with the first field, permitting the owner to exercise an irrevocable election for a different method of apportionment.
We must recognise that to become self-sufficient, and maintain our self-sufficiency, we shall require between 60 and 90 new oilfields by 1990. I cannot see those coming, even with the encouragement given by the Acts that I have mentioned.
I am further disturbed because, as a long lead time is involved in the provision, it will not be possible for many of the fields to be brought into full operation until the mid-1990s. However, those who have done the analysis have decided that those fields will be required in 1990.
I agree with the Minister that full and unconditional front-end loading relief for expenditure on North sea assets should be maintained. Accordingly, PRT will be applied to incidental receipts as a corollary to granting front-end loading for expenditure on shared assets. Apparently, that is acceptable to the industry. However, non-oil receipts should not he brought fully into charge. Many marginal fields could afford to pay only low tariffs, based on the assumption that the next generation of oilfields will be much more costly and less profitable. I stress this point. Companies may wish to recoup tax within the tariff structure. Hence tariffs could be doubled, and future development curtailed.
I realise that since the ideas have been put forward the plan may have been scaled down because the Treasury has moved some way towards meeting the industry's proposals. However, there are still difficulties. I have three propositions. The benefit of full and unconditional front-end loading would be more than offset by the reduction of net income caused by PRT charges on tariffs. The tariff receipts allowance under clause 9 provides some relief, but the clause is still not on a par with section 36 of the 1983 Act.
My second proposition is this. There is no matching relief for the payer. There will be a possibly lengthy period during which the owner pays taxes on receipts, with no matching relief to the payer, even when in due course the payer becomes a fully paid PRT-paying field.
My third proposition is a step in the dark. I think that neither the Treasury nor anyone else knows it, but this is my impression. There will be no PRT leakage, but the legislation will result in another increase in the tax taken over a longer period. That is obvious. If there is encouragement for work to be done in the North sea and if there is a realisation of greater investment, with more oil, the result will be more revenue for the Government via the PRT tax take.
§ Mr. Skeet
I am much obliged to the hon. Gentleman for not underlining what I regard as obvious. Sometimes it is not so apparent.
How can the problem be best resolved? The Bill has laid down the tariff receipts allowance under clause 9, but I suggest that it should be fully aligned with section 36 of the 1983 Act. Alternatively, a new oil allowance could be 322 announced, designed to help to reduce the impact of PRT on marginal fields, constituting a fixed percentage of gross receipts—these are not new suggestions—or excluding from PRT a percentage of the gain element in receipts, or establishing a threshold below which tariffs would be exempt, or providing a safeguard to protect marginal and less profitable fields.
Full and unconditional front-end loading relief from expenditure on North sea assets is to be maintained, as enshrined in the Oil Taxation Act 1975. We discover that in the consultative document, paragraph 37. However, that principle has been breached in schedule 1, part I in relation to tariff-generating assets associated with field assets, particularly where the association is remote. The Minister mentioned that. The relief is to be deferred until the tariff receipts arise.
Schedule 1, part II is concerned with an asset that is acquired for use in connection with more than one field. Relief is apportioned on a just and reasonable basis. I do not know what that is, but I assume that it is equitable. That is a further deviation from the general principle. However, I am glad that at least the general principle has been maintained.
I do not want to weary the House for too long. I realise that other speakers will make long speeches. I understand that we shall have a truncated Committee stage. Therefore, I shall ask some questions on several clauses, which may be useful.
I can find in the Bill no reference to the definition of "assets". Many things are defined. Long-term assets are defined in clause 3(8) and clause 5(8). Mobile assets are defined. Dedicated mobile assets are defined in clause 2. Brought-in assets are defined in section 4(12)(a) of the principal Act. Qualifying assets are defined in clause 8(1). However, there is no definition of "assets". I dare say that the parliamentary draftsmen considered that in depth. There must be a special reason why the definition has been left out.
The concept of remoteness in relation to associated assets is tantamount to a breach of the pledge in the consultative document on full and unconditional front-end loading relief. I appreciate that the Minister has attempted to deal with that matter, but I hope that we shall have a more detailed explanation. There is little justice in the 100m qualification as it could lead to an increase in tariffs, much to the chagrin of the small fields.
Clauses 1 to 5 give a fragmentary presentation of the new law relating to fixed and mobile assets, as section 4(6) is left in the Oil Taxation Act 1975. Paragraph 37 of the United Kingdom OITC response to the consultative document states:The present relief rules should be retained only for mobile assets which are, or are likely to be moved, in and out of field use … Section 4(6)" —this relates to the principal Act—
works efficiently for really mobile mobiles such as drilling rigs; it allocates to a field that part of the cost which actual field time use to date bears to the asset's useful life.I assume that the intention is to retain such provision in its entirety and to build on any deficiencies.
I regard clause 3 as crucial. The concept of dedication may comprise a great number of variables. Equipment may be dedicated to one, two or three fields. What would be the result if an asset were dedicated to the entire North sea? Would not that cause problems for the Inland Revenue?
323 Clause 9, in conjunction with schedule 3, deals with tariff receipts allowance. Will that allowance be available for inter-oilfield facilities? Clause 9(2) and (3) refer to the determination of each "user field". Will the Minister tell the House what criteria will be used when referring to such matters? Can the Minister also say what criteria will be used for designating foreign oilfields under clause 9(5)(b), which is a matter at the discretion of the Secretary of State?
It seems that an Order in Council will be required to determine the Minister's discretion or the criteria that he proposes to use. The House would be assisted if such criteria were available.
I consider there to be little need for the gas banking provisions as proposed in clause 9(10). Regulations have been made on at least two occasions under section 108 of the Finance Act 1980. Occidental and Elf Total have been affected by such provisions.
I understand that a defective provision appears in schedule 3(3) but I understand that the Minister is moving an amendment to that.
I wish to deal with receipts for disposals. Should there not be a de minimis provision in the Bill for disposals and receipts below a certain figure to be exempted from charge?
May I move to clause 12 in conjunction with schedule 4. What is the nature of the agreement between the United Kingdom and Norway governing the use of clause 12? Would the existing double taxation agreements cover a charge to PRT and corporation tax? I believe that the clause is best portrayed as an attempt to impose transit dues by the occupying state, and it may ultimately become the thin end of the wedge for imposing levies on non-licensed holders. Why should we attack foreign participators when companies specifically set up to operate pipelines or drilling rigs—such as Santa Fe of Kuwait—are exempt from levies? I appreciate that the Minister referred to that in opening, but I hope that he will say more about this important matter. If Britain is to receive tax revenues on such an arrangement, the Norwegians will lose the benefit. If, at a later date, oil flows to Norway or to western Europe, I assume that those countries would receive the tax revenue instead of Britain.
I wish to raise two further matters. What assets, other than pipelines, will clause 12 cover? Could processing plants upstream and outside of the jurisdiction be affected?
Paragraph 35 of the consultative document refers to several ways in which the untaxed profits of pipelines can be dealt with. Would a non-tax solution prove more acceptable? Should we not make use of the Pipe-lines Act 1962 and the Petroleum and Submarine Pipe-lines Act 1975?
I appreciate that I have asked several questions. It is extremely awkward to deal with the matter in this way, and I should have preferred to deal with the matters in Committee. Perhaps I am asking too much in expecting the Minister to answer the questions straight away. If he is unable to answer them all, perhaps he will write to me in due course.
§ Mr. James Wallace (Orkney and Shetland)
The Minister acknowledged in opening that the hon. Member for Bedfordshire, North (Mr. Skeet) had great expertise in 324 this sphere. The hon. Gentleman has now demonstrated that fact to the House. I hope that he will forgive me if I do not refer to all the points that he made. The Minister and the hon. Member for Birmingham, Perry Barr (Mr. Rooker) said that the legislation was very complex, and it is difficult to follow many of the arguments to which the hon. Member for Bedfordshire, North referred. This provision is too complicated to deal with immediately.
I agree with what the hon. Member for Perry Barr said, in that when the House discusses North sea oil revenues we tend to overlook the great risks taken and courage displayed by many of those who work offshore. Recent events will have brought home to all hon. Members the nature of the risks involved. The hon. Gentleman was right to stress how much Britain has been propped up by North sea revenues in recent years. Although not unique, it must be rare for a country to discover sizeable oil resources and yet, after 10 years of development, find its economy in a worse state than before the resources became profitable. The opportunities given to us by the oil revenues have, I regret to say, been misused. The revenues still offer Britain a great opportunity to invest in the public sector and in the national infrastructure including many of the suggestions put forward at the Confederation of British Industry conference. We should also be developing alternative sources of energy for the days when the oil and gas resources run dry.
The Bill is the third in a series of measures relating to North sea oil taxation which have come before the House this year. The first was the Finance Act and the second was the Petroleum Royalties (Relief) Bill which received its Third Reading last week. The way in which these measures have been treated tends to reflect the piecemeal approach to North sea oil taxation in the past eight years. My predecessor, Lord Grimond, said in a debate on 28 April:The taxation of oil revenues is a highly complicated subject and, as with the rest of our taxation, it is not becoming less complicated." — [Official Report, 28 April 1983; Vol. 41, c. 1060.]The Bill is ample testimony to that.
In an article by Professor Anthony Clunies-Ross in the most recent quarterly economic commentary of the Fraser of Allander Institute it is said that PRT istoo clever by half and too complex by several orders of magnitude.When the Ways and Means resolution relating to the Bill came before the House, the hon. Member for Blackburn (Mr. Straw) complained about the number of changes in the rate of PRT and the number of measures of this kind. The tax was created by a Labour Government, and many of the complexities, especially those relating to definitions of receipts and outlays, arise because it is a cash flow tax rather than an income tax. As circumstances in the North sea and oil prices change, it becomes necessary to change the rate of taxation and to make provisions such as this to cope with the changing circumstances.
Despite its complexity, the Bill can scarcely be described as revolutionary, but I believe that it will be beneficial. The Minister said that the expected loss of revenue this year and in the next two years will be small, but the Bill is generally welcomed by the oil companies because it provides a further incentive for them to develop and explore some of the more marginal fields.
As companies move into fields in which major finds are not expected, mobile assets can be used in more than one 325 field and it makes good economic sense to share such assets. The Bill gives increased scope for allowable deductions for investment, removes certain disincentives and will stimulate new exploration. It should therefore command the support of the whole House, as I believe that it does.
The right hon. Member for Western Isles (Mr. Stewart) referred at an earlier stage to depletion policy, but we can have a sensible depletion policy only if we are aware of a large proportion of the resources that will be available. That means that we must have a continuous exploration programme. The Bill, in its own small way, will contribute to that.
In last week's debate on the Petroleum Royalties (Relief) Bill the Minister of State, Department of Energy said that Members with constituency interests in oil development and related industries generally supported the package of measures introduced this year to encourage future development. The operations at Flotta and Sullom Voe terminals are of great importance to the economy of my constituency and they are well placed to deal with new developments in the west Shetland arid west Orkney basins. Because the Bill will help such new developments and help to offset expenditure on any required expansion of those terminals, my right hon. and hon. Friends and I are pleased to support it.
§ 5.2 pm
§ Sir William Clark (Croydon, South)
It is a pleasure to welcome the hon. Member for Birmingham, Perry Barr (Mr. Rooker) to the shadow Treasury team. When the Labour Government were in office the hon. Gentleman made a name for himself with the Rooker-Wise amendment — much to the dismay and disgust of the Labour Treasury team. I hope that he will continue to dismay the Labour Front Bench.
I agree with the hon. Gentleman that North sea oil has brought great benefits to the economy, producing between £8 billion and £10 billion a year in revenue, and that if public expenditure remained at its present level without that revenue we should have to increase the standard rate of income tax from 30p to 39p, or VAT from 15 per cent. to 27 per cent.
All parties in the House realise the benefits of North sea oil. The difference between the two sides relates to the way in which the revenue should be used. The hon. Member for Orkney and Shetland (Mr. Wallace) fell into the same trap as other hon. Members when he suggested that North sea oil revenue was different from any other revenue handled by the Exchequer. In fact, it is exactly the same kind of revenue as the Exchequer receives from income tax, corporation tax, or whatever. It is suggested, however, that the revenue from North sea oil should be spent in a different way and that the Government are wasting national assets by treating the money as revenue. It must be used to meet current expenditure if the public sector borrowing requirement is not to be increased, and in any case the total public expenditure of £126 billion contains an element of capital expenditure.
§ Mr. Wallace
The hon. Gentleman is somewhat disingenuous when he says that North sea oil revenue is the same as any other tax. The oil assets are a windfall —we did not put the oil under the sea—and provided an opportunity that we were fortunate to have but which so far has been missed.
§ Sir William Clark
I am sure that there is something in that for the Liberal type of philosophy, but there are many other such assets on which we have taxation — coal, for example. Any mineral which can be taken out of the ground is automatically a wasting asset. The Chancellor receives income from taxation. Whether it be Customs and Excise duties, income tax, corporation tax, North sea oil tax or petroleum revenue tax, he has the same pound notes to spend.
I do not think that my argument is disingenuous. Many Oppostion Members seem not to realise that one cannot talk about North sea oil tax as though it were different from anything else and should be used in a different way. It is suggested that it should be spent on infrastructure. The benefits of that depend on the kind of infrastructure involved. It may produce a marginal reduction in unemployment, but on some infrastructure expenditure the return is nil or even negative. If we have enough money, of course we should replace our sewers and some of our roads and hospitals, but improvements to the infrastructure can be carried out only if we have the necessary cash. The cash comes from the taxpayer, whether it be from North sea oil tax, VAT or whatever. It is stupid to argue that North sea oil revenue should be used in a different way from other taxation revenue.
The Government will no doubt be accused of wasting money on unemployment benefits, and so on, but the hon. Member for Perry Barr will be the first to admit that North sea oil taxation produces about £8 billion or £8.5 billion per year for the Exchequer, whereas the cost to the Exchequer of unemployment is £5.6 billion or £5.8 billion. If expenditure on roads and other infrastructure projects were increased, as the CBI requests, the public sector borrowing requirement would have to be increased unless we increased taxation. All hon. Members must agree that if taxation is not increased the PSBR must rise. The PSBR is the difference between the amount that the Government pay out in expenditure and the amount that they receive in taxation. This year the overspend will be about £8 billion or £8.5 billion, and that will be added to the national debt.
We must put the national debt and the cost of unemployment into perspective. I deplore unemployment as much as any other hon. Member, but when one compares the cost of unemployment with the cost of servicing the national debt one finds that the national debt costs the taxpayer nearly three times as much as unemployment benefits cost. I do not suggest that the Government should do nothing about unemployment benefit—Opposition Members cannot accuse me of that —but we must get the matter into perspective. If we use North sea oil revenue to increase investment, which will not necessarily produce revenue to the Exchequer, we shall also increase the public sector borrowing requirement. It is ridiculous for the Opposition to suggest that the Government are wasting North sea oil. I accept that the oil was a bonanza for our economy, and the hon. Members for Perry Barr and for Orkney and Shetland will accept the fact that no British Government have put a farthing of investment into North sea oil. All the money has come from private enterprise.
I have no vested interest in the oil industry, but I am sure that my hon. Friend the Minister will agree that we had reached a point where taxation on North sea oil exploration was far too high and was inhibiting extra 327 investment. That was the only reason why the Chancellor's Budget before the general election provided this relief, which the industry accepts gratefully.
§ Mr. Rooker
If I have understood the position correctly, the hon. Gentleman's remarks are not true. The structure of the North sea oil extraction industry was, by definition, changing over the years, so the tax and fiscal regime that was set up to deal with the initial years of exploitation could not cope with the changes. There had to be a change in the tax arrangements when the first fields came to their peaks, because of the time lag. What the hon. Gentleman said bears no relation to the Bill or to the reasons given by the Minister.
§ Sir William Clark
The hon. Gentleman did not understand what I said, or does not understand what happens in the oil industry. The oil companies have pumped million of pounds of investment into the North sea—
§ Sir William Clark
Of course they are getting it back, but in any commercial enterprise it is essential to obtain a profit after tax. It is only when one has sufficient profit after tax that one can continue to reinvest in new fields. We had reached a stage where the amount of money left to the oil companies after tax was too small for them to continue the development of other fields. The Chancellor realised, as did Opposition Members, that the Government were in danger of taxing the oil companies out of existence. I appreciate—I do not say this unkindly—that the hon. Gentleman has just taken over this new job, and no doubt he will read himself into it. When he does, he will see that many oil companies were reluctant to invest more money in North sea oil and were going instead to other countries. We wished to stop that, and the Bill is a step in the right direction.
I shall not go into the technicalities of the Bill, but the industry has accepted that it is a step in the right direction. Of course, if the Government give relief to any industry, it always wants a little more. Industries are no different from politicians — whatever one gives a politician, he always wants more of it.
In other industries, if a company sells an asset and reinvests the proceeds in another asset, it gets roll-over relief. However, the oil industry is unique in that a company can sell an asset and use the proceeds to develop other oilfields, but it will not receive roll-over relief. I make it clear again that I have no vested or direct interest in the oil industry—I use petrol in my motor car but that is the extent of my interest. Many oil companies have licences for many fields. A company might be developing one field, but it finds that its development costs are too much and its cash flow is insufficient. It then wishes to sell one of the licences that it does not intend to use. If it sells the licence and there is a capital profit on it the Exchequer takes capital gains tax from it. If it sells an asset and invests the money in another oilfield, it should get the same roll-over relief that is afforded to other industries.
Many fields and licences lie dormant because the company that owns them does not have enough cash. If the Government did not take capital gains tax from the sale of an undeveloped licence, the company might sell that licence and develop another field.
§ Mr. Douglas
Is the hon. Gentleman trying to persuade the House that the Department of Energy is falling down in its duties and responsibilities, and that some companies are standing over substantial North sea assets and are either failing to embark upon an agreed drilling programme or are not developing fields? Will he name one company or one such field?
§ Sir William Clark
I shall not name any company. The hon. Gentleman knows as well as I do that oil exploration companies have licences that they are developing at present and other licences that they may wish to develop in three years' time. The same position applies with house building. No house builder buys only one plot of land and builds houses on it; he has four or five plots of land. It is all very well for the hon. Gentleman to laugh, but if he had experience of business he would realise that a business man must know where he will put his next development. It is not a question of the Department of Energy falling down on its job. However, I go some way towards meeting the criticism of the hon. Gentleman, because in many cases the Department of Energy is fairly ignorant about what the Treasury is doing and vice versa. However, that is a different matter and you will not allow me to pursue that point, Mr. Deputy Speaker, because it is not mentioned in the Bill.
I welcome the Bill, but the Government should give thought to allowing roll-over relief to the oil industry. If an oil company can sell some of its licences to another company that wishes to develop them, the Exchequer would benefit. I hope that hon. Members on both sides of the House will welcome the Bill. I am delighted that the hon. Member for Perry Barr has joined our deliberations, and I am delighted that, despite his muted criticism of the Bill—it was hard for him to criticise it at all—he will support it.
§ Mr. Dick Douglas (Dunfermline, West)
This extremely complicated measure deals with the Government's view as to how best to rearrange part of the tax structure for the North sea. A look at history reveals how cautious this and previous Governments have been in their attempts to ensure that we do not kill the goose that lays the golden eggs.
During the passage of the Oil Taxation Act 1975, the then Labour Minister was extremely cautious, because he consulted the oil companies to ensure that so far as possible we did not endanger the development of fields by imposing too heavy a burden on front end loading. If I recall correctly, the Standing Committee on that Bill began its discussions at clause 10 and then returned to the fundamental clauses so that consultation could take place with the oil companies. At that time, I said that initially we had a wonderful measure for raising revenue, although it had very little to do with circumstances in the North sea.
The basis for taxation of this type is found in the report of the Public Accounts Committee, which in 1973, for the first time, clearly said that if what was happening in the North sea was allowed to continue the major oil companies would reap "substantial" windfall profits and the nation would achieve very little revenue from the operation. It also warned that the offsetting arrangements with OPEC would mean that very little tax revenue would flow to the United Kingdom.
No Government could tolerate that, and the oil companies recognised that Governments were entitled to 329 impose on them a tax regime that equated with the revenue going to the companies. In addition, the oil companies wished to resist any form of tax that resembled a barrelage tax, which has an aura of certainty about it that other forms of tax do not have.
How much does this measure breach the ring fence? We must be told, because the fundamental principle of the 1975 Act was to impose a fairly strict ring fence which the oil companies did not like. For some time the oil companies have wanted to breach the ring fence. That is understandable, but it must be resisted to protect public revenue.
The whole structure of tax and royalties that has been discussed in the past few weeks must De set against the background of the Government's North sea strategy—if they have one. As I said earlier this week, we are now producing 2.4 million barrels of oil a day and selling it at $29 to $30 a barrel.
Although there have been certain modifications in the OPEC quotas, in effect OPEC members are saying, "Why should we as a cartel operate restrictions on our output when the United Kingdom has an extreme vested interest in maintaining its price of oil?"
Metaphorically speaking, the hon. Member for Bedfordshire, North (Mr. Skeet) bounces off Professor O'Dell—an expert who is perhaps better on tap than on top. If the hon. Gentleman's projections are accepted, some North sea investments will look extremely sick. Therefore, whether they like it or not, any Government would have to do a deal with the members of OPEC in particular to maintain stability in the price of oil.
§ Mr. Skeet
Dr. Otaiba has recommended that we restrain North sea production, but the Minister has already said that we have no intention of doing so as we are governed by other proposals. However, OPEC cannot even control its own people. Its production has increased from 17.5 million to nearly 18.5 million barrels a day. If OPEC cannot control its own folk, why should we control ours?
§ Mr. Douglas
That is an interesting view, and I notice what the Minister of State, Department of Energy, said the other day. However, if we are to achieve understanding, we cannot hide behind the Varley assurances. The Minister now has the opportunity to say how many fields under production are subject to the Varley assurances. More than 20 fields in the North sea are now in production, but not all are subject to those assurances. Our domestic requirements are about 80 million tonnes, yet we are producing well in excess of 100 million tonnes. We are doing so for one reason only—the Government's need for revenue.
As a Scot who has taken part in all these debates, I resent this misuse of a once-for-all asset. This is Mrs. Finchley's folly. We have a one-off opportunity to use this resource to alter and refurbish our industrial fabric, yet we are throwing it away. It is clear from what Professor Bain said in the Glasgow Herald earlier this week that the Government are using this revenue to bolster up consumption. Our level of investment is pitiable. We should be using these resources to bolster our investment.
More factors will affect production in the North sea than taxes. There is the supply and demand for oil internationally, and the state of the art; and it is on this that I wish to probe the Minister about the Bill. Does the Bill 330 cater for such developments as BP's concept of SWOPS. I am speaking in shorthand terms. I am not maligning the device of a dedicated type of tanker that could be used not just for one field but for a number of fields. Will the Bill deal with such a development? How does the Bill deal with multi-purpose support vessels, which are used for emergencies over a large number of fields?
Can the Minister give us some guidance? If we had the provisions in the Bill, would we in Scotland have had the gas-gathering system? Would the provisions have facilitated us in obtaining the gas-gathering system on which the Government were so niggardly in giving us some assurance?
The state of the art is extremely important, as we know, for the marginal fields. The impression given is that we are now capable of discussing fields that may be marginal down to the 10 million barrel field. That will be important, as the hon. Member for Bedfordshire, North will. I hope, concede, for ensuring self-sufficiency as far into the future as we can.
New techniques are being developed and sub-sea completions must be considered in relation to tethered buoyant structures. I do not expect the Minister to give us replies today, but what is not in the Bill—at least I cannot see it and I admit that I do not have the competence or understanding of tax matters to cover it fully—is how leasing of such devices is likely to be treated. It might be possible in North sea terms for a firm to build a number of tethered buoyant structures and to lease them. How would such leasing arrangements be treated in the Bill?
Political factors also come into consideration when we are speaking of developing oil. This is one of the factors that the oil companies have considered over the life of North sea oil. We have an extremely stable political regime in the United Kingdom. Although we have changes of Government, there is an agreement that we change by democratic means. This Government have upset the oil companies by numerous changes in the tax regime. Are we to understand that the arrangement that has been concluded between the United Kingdom offshore operators and the Government is satisfactory and has some chance of sticking?
I have already referred to Mr. George Williams, who was director-general of the United Kingdom Offshore Operators Association. I hope that hon. Members on both sides of the House will not take it amiss when I say that this country owes a debt of gratitude to Mr. Williams for the views that he has expressed. Although I disagree with some of them, I recognise that he wants to promote the oil for United Kingdom purposes. He has served well his masters in the oil companies, and the United Kingdom operators. I understand that he will be retiring shortly. Although I am not speaking on behalf of my party, as I have not consulted it on these matters—I do not usually —it is my wish, and I think that of the House, to place on record our thanks to Mr. Williams for the work that he has undertaken. We look forward to meeting his successor and having discussions with him. Shell men seem to have a remarkable facility in this business. I understand that Mr. Williams' successor, Mr. Band, is also a Shell man.
The Government are correct in promoting the range of measures in the Bill and the royalties relief measure. Although I have expressed certain views about royalties relief, it is the timing to which I have objected. As the Government have not anticipated properly the effect of their policies, they have had to concede too much, 331 particularly on royalties relief. They have given carte blanche relief, regardless of the size of the field. That would have been unnecessary had the Government anticipated what they were doing.
Exploratory drilling was being halted in the North sea because of uncertainty. Oil companies, like other institutions, need stability. I have a little knowledge of this matter—and I declare my interest—as I advise a certain oil drilling company. Therefore, I recognise that the oil companies need some stability. In these circumstances, the Government have an opportunity to make it clear that they will ensure a stable regime whereby exploration, development and production drilling can take place. This is where the United Kingdom is deficient, although we have 72 per cent. total activity. The object is not just to raise revenue. We are concerned about jobs, as about 100,000 jobs relate to the North sea. Theefore, the companies need stability of revenue and of work for oil platform production makers, for shipbuilding concerns and for other organisations related to the North sea.
If the Government give concessions to the oil companies, what is in it for us for work, not revenue? There is no implication that the Government have pressed the oil companies to ensure that any work emanating from the tax concessions will be related to United Kingdom activities. It would be wrong for us to discuss this in detail in the House, but we hope that the rig order for Britoil will be maintained in Scott Lithgow on the lower Clyde. I hope that the Government will use their good offices to ensure that these negotiations are not frustrated by a company —Britoil—in which we still have a major interest.
We are concerned about getting work, and continuing work. I know it is difficult, but, if we can, we want to ensure that the knowledge, experience and expertise gained in the North sea is used to get us export orders as well. However, I agree with my hon. Friend the Member for Birmingham, Perry Barr (Mr. Rooker) that it will be difficult for us to frustrate the passage of the Bill.
The Government have reaped a bonanza from the North sea. No other western industrialised nation would have been so foolish with such an asset. We shall pay the penalty in the future. In 20 years—perhaps even fewer —people will look back and ask how a nation with so many advantages could have allowed its manufacturing industry to be thrown to the wall and its level of investment and output to decline when there were so many opportunities. Only a Tory mismanaged, misplaced Government could have done such a thing.
§ Mr. David Crouch (Canterbury)
The hon. Member for Dunfermline, West (Mr. Douglas) declared his interest, and obviously spoke from his specific knowledge about the working of oilfields and the fall-out that has occurred for industry. We have listened to him before, and he knows what he is talking about. The hon. Member for Orkney and Shetland (Mr. Wallace) also has an interest in oil, because his constituents have an interest in the North sea. Indeed, there are perhaps 100,000 people who have such an interest. However, we all have an interest in the North sea. The Government's interest amounts to £8 billion per annum, rising to perhaps £10 billion in the next two years. Every hon. Member has such an interest, 332 because the North sea is vital to our economy and to the development of industries that are associated with oil and its development.
I also declare an interest in that I advise and act as consultant to an oil company, and have done so for some time. I very much appreciate the way in which my hon. Friend the Financial Secretary to the Treasury is now able to speak knowledgeably on oil matters, having been a former Under-Secretary of State for Energy. In a way, we are lucky that the Chancellor of the Exchequer was once Secretary of State for Energy. The Treasury now has a greater understanding of the Department of Energy's arguments than it used to have. This concession may be the result of the Chancellor of the Exchequer's appointment followed quickly by that of his younger colleague, the Financial Secretary.
I welcome the Bill, and have long hoped for this concession. The measure has been prepared with a certain art which only the Treasury could devise. We have bandied around the figure of £7.8 billion as being the Government's take in 1982–83. Of that, the Treasury has given up an estimated £115 million. Small as the gift is, it is a valuable nest egg for the oil companies that are developing — for that is the word — the North sea's marginal fields. Therefore, as far as the Bill goes, I am delighted.
However, this cannot be the last relief by any means. More concessions will have to follow if we want more oil, and at a good price. What is a good price? Today $30 per barrel may be a good price, but what will the price be tomorrow or five years from now? We live in an era of oil surpluses although production is restricted in Iraq and Iran. There is a cartel restriction by the OPEC countries on the delivery of oil that they produce. Some OPEC countries are dismayed by the restriction on their production. For example, Nigeria depends even more than us on oil for its cash crop. Nearly 100 million people in that country are dependent on a good price being sustained. Therefore, price is the key.
There is a lot of oil still in the North sea. I believe that 40,000 million tonnes are available, which would ensure that we were self-sufficient well into the next century. However, the cost of extraction and delivery must be considered in addition to the price of oil on the world market. Such factors will determine whether we take those 40,000 million tonnes of oil out of the North sea during the next 20 to 25 years. As is well known, the Forties, Frigg and other big fields in the North sea are the last of their sort. As has been said, it is almost certain that the rest of the fields will be marginal and small. Of course it is possible that in difficult areas in the north-west approaches and elsewhere we shall once again find a large source of oil. However, if the oil is in a geologically difficult position, it will be hard to extract. Again, in asking whether it is worth doing so we must consider the ruling price at the time.
We should not confine ourselves to oil when considering this Bill. An oil tax measure must be considered alongside the energy options available both to this country and the world. There is a surplus of coal in Britain. There is a surplus of 58 million tonnes lying on the surface that is not being used. We know that there is a surplus of coal in the world, and that in some parts even of the United Kingdom it is not being used because other fuels are being used to generate electricity.
333 Last week I visited Scotland and Torness, the home of the last of the advanced gas-cooled reactors. I learnt from the South of Scotland Electricity Board that 39 per cent. of electricity in Scotland was generated not by coal but by nuclear power. I believe that the figure for the United Kingdom is more like 15 per cent.
§ Mr. Crouch
I could not have had better advice.
However, it must be recognised that there is a surplus of fuels, particularly hydrocarbons. There is also a surplus of electricity. Indeed, something else happened last week that must he taken into account. One of the factors in energy today is conservation. The Secretary of State for Energy quite properly introduced a new, big campaign last week in order to conserve energy on a large scale both at home and in industry. Therefore, we may see an even greater reduction in the consumption of electricity and other fuels. I understand that the consumption of it in this country has fallen by about 35 per cent. in the past 10 years because of conservation, greater efficiency and, to some extent, a lack of utilisation on the part of industry, which has not been running all out recently.
I value this concession, but we shall have to consider whether there should be more in future. I believe that we shall want the extra oil and will have to take exceptional measures to obtain it. Therefore, the Treasury will have to consider whether it wants to provide those extra concessions. I imagine that this concession has taken about three years in its passage through the Department of Energy and the Treasury to its embodiment in this welcome Bill. I hope that the forecasters at the Treasury and the Department of Energy consider the total energy option when deciding whether it is necessary to make further concessions in future. They must take into account coal, nuclear power and possible alternative sources of energy.
Alternative sources of energy supply may need encouragement in preference to giving further encouragement to the oil industry. We may have to say that enough oil has been taken out of the North sea and that we do not want to go in for expensive, new, scientific systems of enhanced oil recovery. Of course, that would not happen without more concessions. However, for every oilfield now being worked in the North sea there is still a lot of oil left in the strata that can be extracted only by chemical means or other enhanced oil recovery systems. At present they cannot be considered when the price of oil is $30 per barrel. Nevertheless, things may change.
The Government, Parliament and the nation at large must now consider what we really expect from the North sea. The Government are looking closely and technically at the smaller fields to see what might be necessary in the future further to encourage their working and development.
§ Mr. Crouch
I heard a murmur from behind me about a tax process known as roll-over relief. I think that my hon. Friend the Member for Croydon, South (Sir W. Clark) may well be right to say that we should be considering such an extra concession later. The concession in the Bill is a minor but valuable one. It has done the trick, as we have heard from the oil operators and others in the North sea.
We must look not only at the marginal fields, which have needed this help, but at the big production fields 334 which may benefit from enhanced oil recovery. They are being operated by the big oil companies, Exxon, Shell and BP—I have spoken with them myself—which all have different ideas about how it can be done. Experimentation is being considered in Houston to this day and I hope that we shall not be far behind in this scientific activity.
We must not consider these matters in the context of oil alone. In some ways we have been through a remarkable revolution since 1965 when oil and gas were discovered in the North sea. That was less than 20 years ago. There has been a revolution in thought and that has produced a revolution in our economy. Whatever anyone may say about how this great revenue should be used, the arrival of oil on the British scene has caused us to forget some of the things that perhaps we should have been doing instead of drilling for oil in the North sea and pumping it out. This great treasure of a resource in the North sea has lulled us into a false sense of security not only about the economy but about what we should be doing about energy in the next 50 years. When one talks to colleagues in the National Assembly in France and in industry, one realises the enormous investment France has made in another resource, because it does not have our resources of oil and coal — nuclear energy. France has gone a bundle on nuclear energy. France has done a deal to get Soviet gas piped in because it regards that as a necessary alternative source of energy.
We in this country, lulled into a false sense of security, have allowed things to fructify—
§ The Under-Secretary of State for Energy (Mr. Giles Shaw)
That is a beautiful word.
§ Mr. Crouch
It is a beautiful word. Oil has been a wonderful thing for the Treasury. Graphs in the Treasury have shown oil production rising and will show it falling. When oil production starts to fall and we no longer get £10 billion a year — perhaps in three years' time — the Treasury may by then have a plan for the Minister so that the Chancellor can say in Cabinet that the time has come to do something to get that 40 billion tonnes of oil out of the sea.
I say to the Ministers on the Treasury Bench and to the Chancellor—all know the argument on energy and the technicalities of oil energy—that they cannot make that decision and expect something to happen quickly. It will take 10 years to gestate. I say to them, think about it now and if the Government have to come back to us with another concession I shall welcome it.
§ Mr. Moore
We have had an extremely well informed debate, crossing both sides of the House. It has been relatively non-partisan in the sense that both sides of the House welcomed the measures. I thank the hon. Members for Birmingham, Perry Barr (Mr. Rooker) and for Orkney and Shetland (Mr. Wallace) for indicating that they will be supporting the Bill. I am sure that the hon. Member for Perry Barr, as spokesman for the official Opposition, will wonder, with me, about the absence of the SDP throughout the whole of the debate. I assume that the SDP has a view on the North sea and on our nation's key tax and energy policy. It would have been beneficial to the House had we had the benefit of those observations. However, I am sure that we can always hope on that score.
The hon. Members for Perry Barr and for Orkney and Shetlands rightly referred at the beginning of the debate to the high risks involved in the activities in the North sea. 335 All of us would put the problems of safety before anything else in our deliberations. We are conscious of the risks and the deaths that have occurred during the development of this asset.
The hon. Members for Perry Barr and for Dunfermline, West (Mr. Douglas) referred to the problem of future jobs. We share their views on the need to see new jobs created in an oil industry that has already seen 100,000-plus jobs directly created over the past decade. It is hard to quantify. All we know from examination of this area is that development of new fields, which might not otherwise have occurred, might now come as a consequence of the measures this year and should create more jobs. I wish that we could quantify this but I know that the hon. Member for Dunfermline, West with his knowledge of this area will be aware that 70 per cent. and more jobs have come to the United Kingdom in the offshore industry. We hope to maintain that British content and I recognise the importance of that point.
The hon. Member for Perry Barr referred in part of his speech to the use of the actual resource. He made some legitimate points but I think that my hon. Friend the Member for Croydon, South (Sir W. Clark) pointed out that we have used North sea revenue in the best way possible, to seek to reduce public sector borrowing and non-oil taxation below what they would otherwise have been. This has given more room, as my hon. Friend rightly suggested, in the capital market for private industry to borrow and invest, and more freedom to the private sector to choose how to use the benefits of oil. By using the revenue to reduce interest rates we shall have encouraged investment and thus provided income for the day when the oil runs out. I agree with my hon. Friend that we cannot be accused of frittering away the benefits of oil.
The hon. Member for Perry Barr referred to the time when the new rules come into effect. The hon. Gentleman was right to remind the House that the consultative document of 7 May announced the clear intention that the new expenditure relief rules and the PRT charge on asset-related receipts would have effect from 7 May 1982. In the event, we selected the more convenient date, 1 July 1982, which is the beginning of the first six-monthly chargeable period following publication of the proposals. The industry was aware of our intention to make the changes from that date and certainly was not objecting. On the charging receipts, once the intention was known, it had to take immediate effect to prevent forestalling, for example, by rolling up future tariffs into a lump sum payment.
My hon. Friend the Member for Croydon, South understandably asked about roll-over relief, about which he speaks quite often. I am aware of his interest in the subject of capital gains tax roll-over relief for disposals of North sea licences. We shall certainly consider the proposal but it obviously interacts with other aspects of the tax treatment of such disposals. My hon. Friend the Member for Croydon, South, the hon. Member for Dunfermline, West and my hon. Friend the Member for Kent—
§ Mr. Moore
I apologise to my hon. Friend. We must correct the latest edition of Dod, which does not seem clearly to state the honourable place that he represents. 336 My hon. Friend the Member for Canterbury (Mr. Crouch) — I tried partly to tackle this in my opening speech—referred to the problem of seeking stability. Although we shall obviously wish to maintain a stable regime—that is a clear goal for those in industry and in government — the Government must reconcile themselves to the changes that occur and must retain flexibility. We shall constantly examine and constantly listen to the comments that are made. I share the views of the hon. Member for Dunfermline, West on Mr. Williams. I am only too pleased from my personal background in another Department to acknowledge not only his but the industry's activities in this area. We continue to have useful discussions with the industry on many aspects of North sea taxation. We have a responsibility for bringing forward proposals for tax legislation when we are convinced that to do so would be in the national interest. We shall be considering many of the points made in the debate.
I shall now try to answer some of the more detailed points. If I neglect to answer them all, I shall ensure that every one is replied to in such a way that it can be put into the record.
The hon. Member for Dunfermline, West asked whether the proposals in the Bill would breach the ring fence. They do not involve any breach of that principle, which applies for corporation tax purposes. He asked how the Bill would treat tankers used for off-loading and multi-purpose support vessels that are used for more than one field. A company may own assets that it will use not only for one field, but for two or even more fields. An asset used in that way would be a dedicated mobile asset, for which front-end relief is available under clause 3. Whether any particular asset satisfies the conditions must be decided on the facts of the case, but the Bill provides for that position.
The hon. Member for Dunfermline, West and other hon. Members asked about the Varley assurances and how many fields were covered. The assurances were reaffirmed and supplemented by a statement by my right hon. Friend the Member for Blaby (Mr. Lawson) — now the Chancellor of the Exchequer—when he was Secretary of State for Energy. He said that the Government did not intend to make any production cuts before the end of 1984. That statement was reiterated on 3 March by the then Minister of State for Energy.
I was asked by the hon. Member for Dunfermline, West whether the tariff receipts allowance would be available for receipts from the the use of assets, other than pipelines, used to get oil from a new field to shore. I confirm what I said in answer to his intervention during my opening speech. He also asked whether the gas-gathering pipeline would have come about with the help of the measures in the Bill. I doubt that tax considerations were the decisive reason why oil companies were not prepared to make a sufficient commitment to the GGP project. Their fundamental problem was the lack of flexibility in relying on one line. The solutions that the industry has brought about since the demise of the GGP are much better.
The hon. Member for Dunfermline, West also asked how the Bill would apply to a company that leases assets. The Bill does not charge receipts on any company that is not a participator in an oilfield. A leasing company will not usually be an oil producer. For reasons that I shall explain to my hon. Friend the Member for Bedfordshire, North (Mr. Skeet), we have not extended PRT to such companies.
337 I have spent four years of my ministerial career in the Department of Energy. We all recognise the astonishing expertise of my hon. Friend the Member for Bedfordshire, North. Tonight we heard a classic example of the diligence he has brought to the subject of energy over the years. I know that the House will not object if I spend a little time trying to answer some of the important points that he raised. If I cannot answer them all, I shall write to him.
My hon. Friend asked why there is no definition of the word "asset". We did not think it necessary to define the word, and in the absence of such definiton the word takes its natural meaning. We have lived without a definition since the inception of the oil taxation legislation. As far as I am aware, we have not encountered any problems.
My hon. Friend also asked about a particular asset, which I shall deal with in a moment. I endeavoured to obtain exhaustive lists of fixed assets and dedicated mobile assets for the debate. The list could go on and on. That illustrates one of the essential dilemmas in the inventive technology referred to by the hon. Member for Dunfermline, West. My hon. Friend asked whether process plant is within the scope of the new rules. Any plant used for initial treatment as defined in section 12 of the Oil Taxation Act is within the rules. An example is a plant used for stabilising oil or separating gas into its component fractions, but not further down-stream processes such as refining.
My hon. Friend mentioned the nature of the powers under the Petroleum and Submarines Pipe-line Act 1975. He and I sat on the Opposition Benches during that Committee. The powers are not exercisable at the Government's option. Even if they were, I would not wish to rely on that sort of compulsion in preference to allowing market forces to work unimpeded by tax laws.
My hon. Friend made three propositions about the value of front-end relief—that it would be less than the cost of charge on reliefs, that there would be no matching relief to the payer, and that it would lead to an ultimate increase in the tax take. Propositions one and two would depend on the circumstances. Has my hon. Friend taken into account the value of relief now as against charges that must be paid later?
On the third proposition, I agree that if, as a result of these proposals, fields are developed that would not otherwise have been developed, there would be additional tax for the nation as well as additional profits for the companies.
My hon. Friend asked whether we had reached agreement with Norway about the taxing proposals in clause 12, and whether the existing double taxation agreement applied. Inland Revenue officials have had talks with Norwegian officials. They recognise our right to tax receipts in the circumstances covered by clause 12. They have agreed that the existing double taxation agreement will cover the circumstances likely to arise in practice.
§ Mr. Moore
I cannot answer that question in specific terms now, but I shall write to the hon. Gentleman. The only current physical link is with Norway.
My hon. Friend asked about the criteria for determining what constitutes a user field for the purposes of the tariff receipts allowance. He is especially concerned with the 338 criteria that will be used when tariffs are received from a foreign field. He asked how the Secretary of State would determine a foreign field. We see no reason to use different criteria from those used for determining United Kingdom fields. No hard and fast rules govern the determination of our fields. Each field is considered on its merits on a case-by-case basis. Determination is based solely on geological and geophysical criteria. The same criteria will be used for determining a foreign field.
My hon. Friend asked what would happen if United Kingdom oil flowed to Norway. The current PRT system is designed to cover oil and gas activities on the United Kingdom continental shelf, and the transmission of the oil or gas to the United Kingdom. No provision is made in the Oil Taxation Act to allow expenditure for transporting petroleum by pipeline directly to a place outside the United Kingdom, nor is that allowed. But there is a concession covering direct exports from tanker loading fields.
It follows therefore that if there is no statutory provision to allow the expenditure on those pipelines any tariffs arising from the transportation of petroleum cannot be charged under the provisions of the Bill. If oil or gas were at any stage permitted to be transported by pipeline directly to a place outside the United Kingdom, we would need to consider how the present rules should be altered, and would have to take account of the international implications of so doing. In principle, if petroleum was derived from a United Kingdom source, and the activity took place on the United Kingdom continental shelf, there would be nothing in international law to prevent us from taxing the tariffs.
My hon. Friend asked why we proposed to tax participators in foreign fields, but not to tax the profits of service companies—that is, companies that are not oil producers but that might own an asset such as a pipeline, which it lets to others in return for a tariff. We are charging participators in foreign fields because they are in a position that is more directly comparable with our own oil producers. For them, the main expense is incurred in acquiring the asset, for example, in building a pipeline in connection with the production of oil. Any tariff that they receive for the use of the asset is a bonus, and will usually occasion only some incremental cost. But while for oil producers, whether our own or foreign, tariffs are likely to be a highly profitable marginal addition to income, non-oil producers will have to rely solely on tariff income for their profits. Given the large front-end costs of North sea assets, we doubt whether such companies could generate profits from tariffs large enough to bring them within the scope of a special additional tax such as PRT. They will be subject, however, to corporation tax.
My hon. Friend the Member for Bedforshire, North asked why we had to make provision for gas banking schemes. Where a tariff is paid for transportation of gas transferred under such a scheme, the tariff will be charged to PRT. Except where the regulation applies, the receipts would not have qualified as receipts to which the tariff receipts allowance applied. The reason is that it would not be gaswon otherwise than from the principal field—clause 9(6)(a). Clause 9(10) ensures that the receipts will qualify for the allowance.
My hon. Friend questioned us on the intrafield tariffs. He asked why we do not give an allowance for receipts from within the same field. That can happen where one participator in the field does not own the field assets and 339 so pays the participator who does for their use. The argument that persuaded us that the full charge to PRT should be mitigated by an allowance does not apply sufficiently to justify an allowance for tariffs paid by one participator to another in the same field. We are trying to encourage the development of new fields.
My hon. Friend asked about the treatment of remote associated assets. The Bill provides for one kind of associated assets in a different way from the clauses of the 1983 Finance Bill that were taken out after the announcement of the general election. It was realised that the Finance Bill's provisions on associated assets were drawn more widely than necessary so that the owner of a mature producing field might, largely at the taxpayers' expense, contract a pipeline to bring in oil from a distant field when it would be economically more sensible for a shorter link to a different, existing pipeline to be built.
The provisions originally envisaged might have helped some companies that paid more tax more than others and subsidised the development of pipelines that were not just marginal but uneconomic. Therefore, it was decided to amend the rules but only in respect of the remote associated assets. We are distinguishing that class which we would not ordinarily expect the mature field to pay for — as a practical test, those that are not on or close to other mature fields assets. A pipeline to another field is the obvious example. We are proposing that relief for expenditure on those assets should continue to be available but not until, and only to the extent that, they generate receipts. My hon. Friend argued that that is tantamount to a breach of the principle of full front-end relief, but that cannot be said to be so. That principle was set out in the consultative document in the context of assets used for the participator's field. We are providing that he will obtain front-end relief even if he shares them. An associated asset, whether remote or not, is by definition not such an asset. It is one that is not in itself used for the participator's field but used typically to bring in another field's oil or gas.
My hon. Friend asked about relief for any incoming tariff. He was talking about the interrelationship of the Bill with other oil measures this year and the doubled oil allowance. If a field has been taken out of PRT, it is true that it cannot then obtain PRT relief. As I have already said, the tariff receipts allowance should substantially reduce increases in tariff that could otherwise have tended to occur as a result of charging tariffs to PRT. Its effect will be particularly relevant for smaller fields of the sort that the doubled oil allowance might take out of PRT. I cannot say that there will be no increases in tariff in such cases, but they seem likely to be modest and tariffs are deductible for corporation tax as well as PRT.
The allowance has been welcomed by the industry, which has not sought to argue in any of the detailed consultations that have taken place since the Budget that the allowance should either be increased because of the form taken by the other elements in the Budget package, or that there is evidence in any particular case of increases in tariffs being likely to meet the cost of future development — the future development that we are concerned with.
I hope that I speak for the House when I say that we welcome the detailed contribution of my hon. Friend the Member for Bedfordshire, North. He has helped enormously in the understanding of this area. I also hope 340 that I have answered most of the main points in what has been a most interesting and helpful debate. It is a highly technical Bill, but it has had the benefit of unusually detailed and prolonged consultation with the industry since our original proposals were brought forward in May 1982, as my hon. Friend the Member for Canterbury said.
I have explained why we have not met some of the suggestions. The industry would doubtless have preferred to have had them covered, but that does not detract from the general view that, following the consultation that I have described, the Bill is reasonably balanced in its substance and technically satisfactory in its detail. Therefore, despite its undoubted complexity, soundings taken through the usual channels suggested that it is not a Bill on which the House would want to spend a vast amount of time.
There is also a positive reason for the Bill being enacted without unnecessary delay. The proposals to make changes in this complicated area were announced as long ago as May 1982 when we issued the consultative document. We have done our best to minimise uncertainty since then but it would be a grave discourtesy to the House to imply that that could give the same assurance as an Act of Parliament.
We all want developments in the North sea to continue. In the interests of both the nation and the industry, it is desirable that the Bill should be enacted without unreasonable delay. Although it is only part of our overall package of tax measures for this year which will affect the industry, it is not an unimportant one. It affects the readiness of companies to share assets in the North sea so that the new generation of smaller fields can be developed. Without detracting from that, it brings into charge for PRT certain receipts that clearly should be so treated. I have every confidence in commending the Bill to the House.
§ Question put and agreed to.
§ Bill accordingly read a Second time.
§ Bill committed to a Committee of the whole House. —[Mr. David Hunt.]
§ Considered in Committee
§ [MR. PAUL DEAN in the Chair]
§ Clauses I to 15 ordered to stand part of the Bill.
§ Schedules I and 2 agreed to.