§ Order for Second Reading read.3.59 pm
§ The Financial Secretary to the Treasury (Mr. Norman Lamont)
I beg to move, That the Bill be now read a Second time.
The Advance Petroleum Revenue Tax Bill implements the proposal announced by my right hon. Friend the Chancellor of the Exchequer in his autumn statement to accelerate, on a carefully targeted basis, the arrangements for the repayment of advance petroleum revenue tax due to oil companies.
Hon. Members will be aware of the background to this proposal. In his statement my right hon. Friend referred to the effects of the fall in the oil price on North sea activity and the consequences for the offshore supplies industry. The fall in the price of oil has had a marked impact on the economics of North sea activity. This has presented both the oil companies and the offshore supply industry with difficult transitional problems. The industry has had to reassess project plans and has begun to meet the challenge by seeking ways to improve the economics of future projects, for example, by undertaking research and development into lower cost development techniques. In the meantime, there have been calls for the Government to help the industry adjust to this sharp deterioration in its financial position.
We have received a number of representations from members of the oil and oil-related industries on the effects of the fall in the price of oil. These have generally recognised that the scope for the Government to attempt to ameliorate those effects through fiscal action is limited. The adjustments to the fiscal regime which we introduced in the Finance Act 1983 have resulted in an oil tax system for new fields which is even more price sensitive than the previous one. Moreover, the generous reliefs for exploration and appraisal provide a powerful incentive to companies to continue looking for new fields. It is also widely recognised that, to the extent that the fall in the oil price has rendered some projects uneconomic in pre-tax terms, fiscal change designed to make those projects attractive in post-tax terms would not be justified.
Many of the representations have, however, focused on one aspect where the Government consider that prompt action would be appropriate—the short-term effect of the fall in the oil price on North sea cash flow. The price fall has severely reduced oil companies' cash flow from their existing production. Many companies rely on internally generated funds to finance their exploration activity and development design costs. There is a danger, therefore, that cash constraints could put at risk expenditure on worthwhile North sea projects which could potentially be developed over the next few years. The new generation of North sea fields often poses difficult technical problems. A great deal of design and engineering work is required before they can even reach the development stage, but such work may be delayed if companies are unable to finance the necessary expenditure.
Any reduction in the pace and momentum of North sea development work because of cash constraints inevitably 638 has knock-on effects on the offshore supplies industry. We are talking, not just about profits, but about industries and jobs, particularly in Scotland but also in many parts of England.
The United Kingdom offshore supplies industry is a young industry which has only developed since the discovery of oil in the North sea. United Kingdom companies have played a major part in the development of the North sea as a major oil province, not least by their contribution to the technological advances required to exploit deep water fields. In recent years the United Kingdom supplies industry has obtained over 70 per cent. of orders for North sea related goods and services. This is an impressive achievement and, although the Government cannot, of course, hope to offset all the effects of the oil price fall, we would not wish to see these great achievements dissipated by a reduction in activity over and above what would be a logical market response to price movements. There is a danger of excessive cuts caused by cash flow difficulties.
The supplies industry comprises a variety of different sectors, and not all sectors are affected to the same degree by the oil industry's current financial difficulties. Indeed, a large amount of oil company expenditure is incurred in servicing existing fields, but it is the companies involved in the front-end activities, in the early stages of development, which will bear the brunt of any cut in oil company activity resulting from cash flow shortages.
Against that background, what we felt was needed was a measure which would operate directly on oil company cash flow, but we did not feel that it was necessary, or appropriate, to seek to bolster the cash flow of every oil company, regardless of its own resources. Our aim was to home in on those companies where the reduction in cash flow from their North sea operations could act as a real constraint on the ability to press ahead with development work. We were also very conscious of the timing element. To avoid any interruption to development activity that might be brought about by cash flow difficulties, it seemed essential that any boost to company cash flow had more or less immediate effect. With the APRT measure embodied in the Bill, we believe that we have achieved these objectives. The early repayment of APRT under its provisions will boost, on a targeted basis, oil company cash flow. It will increase by around £300 million or so the amount of cash available for investment in the North sea by oil companies benefiting from the repayments.
APRT would, of course, normally be a Finance Bill matter, but rather than wait until the next Finance Bill we have introduced this Bill at this early stage of the Session. This will enable all repayments due under the terms of the Bill to be actually in the hands of the oil companies early next year. In this way the cash will be available for their 1987 expenditure programmes.
It may be for the convenience of the House if I now explain the nature of these accelerated APRT repayments. APRT was introduced in 1982 as a means of advancing Exchequer tax take from the North sea fields which would otherwise have paid no PRT for several years because of the front-end loading of relief for development expenditure. It is paid by companies in the early part of a field's life and is then offset against PRT liabilities arising in later periods. In other words, it is in essence an advance payment of PRT. Under the provisions of the Finance Act 1983, APRT is, in any event, being phased out. The period 639 ending 31 December this year is the last for which APRT is payable and that at a much reduced rate of 5 per cent. compared to 20 per cent. originally.
The oil price fall means that there are a number of fields which, although they have already paid APRT, will not now pay PRT until much later than expected, if they pay PRT at all. APRT which cannot be absorbed by PRT liabilities will, under the present law, become repayable. Such repayments could not be made under the existing rules until 1988 at the earliest. In effect, this means that the Government have received a forced loan from companies at the stage when many face cash flow difficulties. That is the raison d'etre of this measure.
The Bill provides for the repayment early next year of APRT credits, up to a ceiling, due to oil companies participating in oilfields which have not yet reached their net profit or payback period. Broadly speaking, that is the period in which cumulative income from the field first exceeds cumulative expenditure. The Bill therefore directs repayments of APRT credits to companies with fields which have yet to generate any net cash flow which could be used to finance any further development.
The Bill is short and its intention straightforward, but it might be helpful if I explain its provisions in a little more detail. The provisions of clause 1 establish the criteria for early repayment to a company. These are twofold. To meet the first criterion, a company must have been a participator in the field in question at the time of the announcement of this measure. The second criterion refers to the payback position of the company in that field. Qualifying companies are those which have not reached payback in the field before 30 June this year.
By concentrating on the concept of the payback or net profit period, the Bill to a large extent builds on the existing PRT legislation. But the payback test was devised as a means of deciding whether or not certain PRT reliefs were due, and, for that purpose, the test is not operated until later in field life, by which time claims and assessments will usually have been finalised. For the purpose of this Bill, waiting until that stage would not be consistent with the basic aim of getting these repayments to the companies as early as possible, so it has been necessary to modify the operation of the payback test to meet the circumstances of fields in the early stages of production.
For that reason, the schedule adapts the existing payback test in two situations. Paragraph 3 covers the situation in which no tax assessments have been made. Fields in that position would fall outside the scope of the existing test, which is based on tax assessments. The Bill caters for that by enabling the test to be applied broadly by reference to assessable profits or allowable losses as shown in the companies' statements of tax payable. As hon. Members may know, companies have to make regular statements of the tax that is payable.
Paragraph 4 makes special provision for other fields which, although they would be adjudged to have reached payback if the existing test were to be applied on the basis of assessments made to date, have outstanding claims for expenditure which was incurred before 30 June 1986. Under the current rules the payback test would in effect be reapplied when that outstanding expenditure had been allowed. For the reasons that I have explained, this approach would not be appropriate for the purpose of this Bill since it would result in some of the repayments being made only after a considerable amount of time had 640 elapsed. Under the provisions of paragraph 4 of the schedule, in determining a company's eligibility for repayment, any such outstanding expenditure is taken into account at the outset.
In order to benefit from the provisions of the Bill, a company is required to make a claim for the repayment of its excess APRT for the chargeable period ending on 31 December this year. To ensure that repayment can be made as early as possible, companies are required to submit their claims on or before 28 February, that is the date by which their other returns and statements for this chargeable period are required. Special provision will be made for the Oil Taxation Office to expedite its consideration of claims. On the acceptance of its claim, a company will be repaid the amount by which its APRT credit for that period exceeds its PRT liability. Repayment is subject to a limit of £15 million per company per field.
This measure will be of proportionately more help to the small and medium-size companies. These companies tend to have fewer sources of finance than the major integrated companies which, although they have suffered a deterioration in the financial position of their upstream production activities, have benefited to some extent from an offsetting increase in their downstream, refining activities. Much of the cash will therefore go where it is likely to be of most help, which is to smaller non-integrated companies, many of which have interests in possible future developments but which have only limited access to finance. This measure will reduce the risk of those developments being delayed by cash constraints.
§ Mr. Ted Rowlands (Merthyr Tydfil and Rhymney)
The right hon. Gentleman said that the chief beneficiaries of the Bill will be the small companies. There are a couple of remarkable exceptions, essentially of British companies, which will not be beneficiaries under the Bill. Can he tell us about the capricious incidence of the proposals that he is bringing to the House?
§ Mr. Lamont
The hon. Gentleman knows that it would be quite improper if I went into the tax affairs of individual companies. He will know that Ministers do not deal with the tax affairs of individual companies. However, I can assure the hon. Gentleman that the effects of the Bill will be to give most of the help—I did not say all of the help—to medium-sized, independent companies. It is true that some of the—[Interruption.] It would be helpful if the hon. Gentleman would let me answer one question at a time. I am grateful to him for enlivening the debate, but I would prefer to deal with one issue at a time. Perhaps the hon. Gentleman will have other questions. I did not say that none of the help would go to the major companies. It would be impossible to devise a measure of that kind. I said that most of it would go to the independent medium-sized companies, but not, of course, to all companies in that category. It has been carefully targeted to have an effect that will encourage development.
§ Dr. Michael Clark (Rochford)
When my right hon. Friend said that it would be impossible to devise a scheme to help only the small oil companies and not the big ones, I am sure that he did not mean to imply that he would wish to devise such a scheme. He surely recognises that the small oil companies invest as much as they are able to in order to develop fields, and that the large oil companies invest far more. They have bigger developments, bigger fields and bigger payrolls. Therefore, they need help just 641 as much as the small companies, despite the fact that they have downstream assistance from other things that they may do.
§ Mr. Lamont
My hon. Friend makes a fair point to redress the intervention from the Opposition. The purpose of our targeting has been to give a measure of relief in a way that we think will encourage development in the near future. That is the purpose of the relief. Incidentally, we think that the main benefit has gone to medium-sized independent companies.
It is not only direct benefit to qualifying oil companies which needs to be considered. To the extent that companies use this extra cash to maintain or enhance their development programmes, benefits will flow through to the supplies industry too. In particular, expenditure on front-end activities on potential future developments will increase the chances of these projects going ahead sooner rather than later. In that way there should be a specific benefit—both in terms of extra orders and timing of such orders—to that sector of the supplies industry that is likely to be most affected by shortages of cash.
The revenue effect of advancing the repayment of APRT as provided in the Bill will be a net reduction of oil tax revenues of up to £310 million in 1986–87. The amounts repaid under the Bill would otherwise have been available to reduce any PRT liabilities arising subsequently on the same field, or become repayable to the company five years after the first payment of APRT in respect of that field was made. So the reduction in oil tax revenues this year will be fully offset by corresponding increases in oil tax revenues over the next three financial years.
The industry has welcomed the Chancellor's announcement of the measure implemented in the Bill. The repayments will, as I have described, alleviate some of the cash difficulties of the oil industry, and will provide additional funds for investment in the North sea over the coming year. With those comments, and that introduction, I commend the Bill to the House.
§ Mr. Bryan Gould (Dagenham)
This short Bill is a specific response to one aspect of a large problem. The problem, as everybody knows, is that the price of North sea oil, indeed the price of oil worldwide, has been slashed by virtually two thirds. I say that it is a large problem, although the Minister and particularly his right hon. Friend the Chancellor of the Exchequer sometimes seem to be in some doubt as to whether it is a problem. I sometimes think that for the Chancellor all economic news, provided that it arises under his jurisdiction, must be good news. We were told that the rise in the oil price was good news and would be good for the economy of this country. When the oil price fell the Chancellor, rather surprisingly, said that that, too, would be good news and that the economy would benefit.
I sometimes think that the Chancellor is in a similar position to that of a weather forecaster who always says that the weather tomorrow will be good on the simple assumption that one of these days his prediction might turn out to be true. However, the very improbability of both of the Chancellor's statements about North sea oil prices being true ought to warn us and put us on our guard about believing anything else that he says.
642 In truth, it is very hard to understand how a fall of two thirds in the world price of a major national asset can conceivably be anything but bad news for the economy of this country. It may be good news in the short term, in that it will stimulate trade on a world basis, and we can hope to benefit from that stimulus. However, as we are producers as well as consumers, there is an obvious down side to any small benefit, and as our major rivals will obtain virtually all of the benefit with no disadvantage, it is difficult to understand how our competitive and comparative position can conceivably have improved.
Any supposed advantage to our domestic economy through a fall in oil prices—for example, advantages to the cost of living and in economic activity—did not need to wait on the accident over North sea oil prices. They could easily have been achieved if they were desirable—and in many ways they were—by simple tax cuts. They could have been achieved by the kind of tax cuts to which the Chancellor has constantly referred for so many years, yet has never delivered.
The fall in oil prices is bad news for a range of different people. The fact that the Government have introduced this short Bill is evidence that they also recognise that simple truth. It is bad news for the large oil companies, as the hon. Member for Rochford (Dr. Clark) suggested in his intervention, and no one would dispute that. However, much of the doom and despondency that has been peddled as a consequence of the fall in oil prices in terms of future operations by the major oil companies in the North sea seems to have been slightly misplaced, at least in relation to future production from existing and known capacity.
It is now generally recognised that the break-even point for major companies is as low as $5 per barrel. As long as the price holds at that rate, it makes sense to produce. The tax regime that might or might not apply to those companies is hardly relevant to their considerations and calculations.
§ Dr. Michael Clark
I agree with the hon. Gentleman that there is probably a break-even level of about $5 a barrel and, therefore, the major oil companies will continue to produce even if oil prices fall to that level. However, does the hon. Gentleman agree that, at that level, or just above it, the major oil companies will not be exploring for the next decade's oil or for the heat, power and motive force that will provide for the next generation? I am sure that the hon. Gentleman would agree, and I would like his comments on that.
§ Mr. Gould
The hon. Gentleman has anticipated a point that I was about to make. However, I agree with and endorse the point that he made. The fall in oil prices is bad news, not just for oil companies, but for the Government.
The Government have worked themselves into the position whereby over the past two financial years they have benefited to the tune of £11 billion and £12 billion from the revenues from the North sea. This year, they will have half, if not less, if prices fall below that estimate. The Government have tended at times to make great play of the fact that they have nevertheless managed to keep the national accounts in order, notwithstanding this sudden reduction in this specific item of revenue.
We might be inclined to say that that is a less worthy and less remarkable achievement when we consider what the Government have done with North sea oil. They have treated it as a capital asset to be realised as quickly as 643 possible and its profits to be spent as quickly as possible. Given that that is the approach, and as the Government have discovered yet another range of capital assets that they are equally prepared to treat in that cavalier manner—the assets of the taxpayer which have been built up over many years—it is not such a miracle that the Government have hastily pushed into the breach another range of capital assets to be sold off of which British Gas is just the largest and most recent example.
The fall in oil prices bodes very badly indeed. We do not need to wait for the first evidence of that; it is felt in the balance of trade—the balance of trade to which the North sea brought a benefit of some £17 billion or £18 billion a year. That is an enormous benefit that no previous Government had ever been able to enjoy. That benefit, however, will be substantially diminished. I do not suggest that the Government have treated that with equanimity. Their calculations are that the rapid deterioration in our trade balance can be kept out of the spotlight for long enough to slip in a general election before it becomes too obvious. That is the Government's tactic for dealing with that problem.
In relation to the other point made by the hon. Member for Rochford there is no doubt that, with an oil price as low as it is—and we cannot be sure of the direction that it will take; it may remain at this level or go a little lower or higher—future exploration and development would be jeopardised for rational and commercial reasons. We are not surprised, and the Government should not he, that the North sea construction industry is badly damaged by these rather grim prospects for exploration. Howard Doris and Scott Lithgow are examples of that. Those are the problems and obvious difficulties, the short-term problems for economic activity especially in Scotland, to which my hon. Friend the Member for Glasgow, Garscadden (Mr. Dewar) will address his remarks at the end of the debate.
The measure that the Minister proposes is addressed, as he rightly and frankly said, to the interests of the small companies. He attempted to suggest that, by giving them this little helping hand, that would ease the problems of the immediate prospects for exploration and development. I rather doubt that. The case for doing that has very little to do with stimulating future exploration and development on any scale that will matter and the Minister will probably concede that that is so. The real case for doing that lies on the simple ground of equity. The Minister is simply helping out the small companies that—as he rightly says—were compelled by earlier legislation to make a forced and interest-free loan to the Government who now find themselves, by virtue of changed conditions, in difficulties with their cash flow. They quite rightly believe that they can make a case based on equity that the Government should do something about returning their money rather more quickly than had been originally planned. That is the real case for the Bill.
In principle, the Opposition do not cavil with that case. However, we will want to pay a little more attention to the way in which that is included in a rather complex mechanism embodied in the Bill. We do not disagree with the idea that the help should be targeted. There is a group of small companies that ought to be beneficiaries of this form of help.
However, my hon. Friend the Member for Merthyr Tydfil and Rhymney (Mr. Rowlands) raised an important point in his intervention in the Minister's speech. The 644 Minister was inclined to say that some of the money might go beyond that group of small British companies that have suffered particularly. However, my hon. Friend asked whether the group that will be affected by the Bill and which is to benefit through the Bill will include all those companies which truly and in fairness should qualify for that help. The Minister did not answer that question.
Some of the problems possibly arise from the operation of the pay-back requirements. I give the Minister notice now—this might be helpful as there is relatively little time before we move from Second Reading to the remaining stages—that the Opposition wish to examine that point. We believe that, by virtue of the pay-back criterion and other measures, the operation of the set of criteria is likely to be arbitrary and capricious. We are not convinced that the companies identified by the mechanism will be those that, on grounds of economic profitability, or lack of profitability, ought to be beneficiaries of the measure.
We shall raise those matters in later stages of the Bill. I revert now to the fundamental contextual point which underlies the Bill—the recognition that the fall in oil prices is bad economic news. It is not surprising that the Chancellor has at times been tempted to argue that, far from creating problems, the lower oil price is a bonus, given the mess that he made with high oil prices. High oil prices were supposed to be the economic salvation of this country. As production reached its peak and the price rose, it was expected to provide substantial revenues to the Government—not to be squandered on unemployment, as they have been, but to make room for tax cuts to stimulate the economy through lower personal taxation. Those revenues have been and have now substantially gone but the tax burden for the ordinary person has risen rather than diminished—so much for North sea oil as a means of implementing tax cuts.
We were then told that North sea oil would be a means to regenerate British industry and the economy not just through the direct economic activity arising from its production but because, as one of the very few energy rich advanced industrial countries, we should not be constrained by the high price of energy and the comparative shortage of energy reserves. North sea oil would also relieve us of the traditional balance of payments constraint which in the past, we believed, had stopped us reaching the levels of growth achieved by our competitors. North sea oil would allow us to make full use of all our domestic resources and balance our trade at the same time. That is what we were told, but we never got anywhere near that.
The Minister may be tempted to point out the marvellous surpluses that we have had in recent years as evidence that North sea oil did the trick, but a moment's reflection will tell him that that is misleading because they were nowhere near full employment economy surpluses. With full employment, the surpluses would never have arisen because North sea oil and all the benefits of the balance of trade would have been fully engaged in paying for the imports that full employment would have sucked in. We still have a balance of payments crisis looming, record borrowings and spendings from reserves, real interest rates at record levels and 4 million unemployed. North sea oil has done nothing to alter those problems.
Why did it all go wrong? The answer is as simple as the question, and it is entirely in line with the Government's other mistakes in economic policy. I believe that the 645 Government would now concede that their monetarist policies were all a terrible mistake. Indeed, I believe that the Chancellor may even now be contemplating paying no attention whatever to sterling M3, although it was to have been the great monthly guide to how economic policy should unfold. Just as he made simple, obvious and predictable mistakes in monetary policy, he made a naive and simple mistake as to how North sea oil and its benefits should be used for the economy. Put at its simplest, Ministers yielded to what might be described as a "lump of output" fallacy. They believed that there was a particular national output and that if a new source of wealth such as North sea oil was introduced it would inevitably displace some other element in national production. That was clearly nonsense.
The whole theory and practice with resources such as North sea oil in other countries has been that in most respects they are net additions to the national wealth, not only adding something themselves but enabling the rest of the economy to grow faster by releasing it from constraints. That has been true in Holland and especially in Norway, where manufacturing output has risen sharply and unemployment is below 2 per cent. Those examples immediately give the lie to the proposition apparently accepted by the Government for the past seven years—that high unemployment and dwindling manufacturing capacity were somehow inevitable simply because we had North sea oil.
It is worth considering the mechanism of that error. The Government assumed that a rise in the exchange rate was inevitable as a result of North sea oil and that a rising exchange rate, buoyed up by tight monetary conditions, would be of benefit to us. The consequence of that simple error, which very few people would defend today but which was very much in line with the international monetarist school that dominated the Treasury and much of Whitehall at the time, was that we were encouraged to take the benefit of North sea oil in greater purchasing power for our currency and to use that greater purchasing power to buy more goods—other people's goods, because our own could no longer be sold competitively. In other words, we took the benefit of North sea oil by sucking in vast quantities of imported manufactured consumer goods. We then had to close down our own capacity because we could not compete in the market. As a result of that, and stemming from the original simple mistake, unemployment rose and the cost of unemployment provided a natural but most undesirable home for North sea oil revenues.
That is how the unfortunate circle was squared. That is how North sea oil came to be used to pay for unemployment. Contrary to all that had been predicted, hoped for and expected—the belief that North sea oil would regenerate the economy and provide faster growth with more opportunities and more jobs—the Government, through sheer incompetence and the simplest of all economic mistakes, found that North sea oil generated unemployment and the revenues and benefits gained from it had to be used to pay for that.
§ Dr. Michael Clark
Having spent many years in manufacturing industry before coming to the House, I agree with much of what the hon. Gentleman says and I am saddened at the decline in our manufacturing base.
646 Does he agree, however, that the oil industry, and especially the technology developed for the North sea, has created a manufacturing sector in its own right which will stand us in very good stead in decades to come?
§ Mr. Gould
The hon. Gentleman is right in that limited respect. Although the record of British industry is not so good as we might wish in every respect, and in the early days was not nearly so good, it has nevertheless been reasonable and in that very limited sense, for a very limited time which is unfortunately drawing rapidly to a close, the economic activity generated directly by North sea activity was extremely beneficial in a limited and localised way. But that limited benefit was far outweighed by the damage to the rest of the economy. How can it be that, in a world starved of energy resources, the possession of North sea oil in the hands of this benighted Government has turned into a dagger directed against ourselves? It is a remarkable story of incompetence which has yet to be fully told, let alone fully appreciated by the British people. It stands economic logic on its head.
A Labour Government would have used those revenues and resources to re-equip British industry. If that had meant importing, we should have imported not consumer goods to be frittered away but capital equipment to re-equip British industry and components to overcome bottlenecks. We would have ensured that that money strengthened British industry rather than weakening it to the point where we now face the same old problems but with even fewer resources and less strength.
§ Mr. Charles Kennedy (Ross, Cromarty and Skye)
I agreed with the hon. Gentleman's analysis until the last 60 seconds or so, and I support his party's position on this, but does he agree that some of the endemic problems now coming through in the oil industry and oil-related industry were due to the mistakes of the Labour Government in the 1960s? In the early days, when crucial decisions had to be taken, the right hon. Member for Chesterfield (Mr. Benn) and others made wrong decisions in terms of the way in which contracts were awarded and in the handling of long-term issues affecting the strategic interests of the oil industry and British industry generally. The hon. Gentleman should not make out that all the problems stem from 1979 onwards because many of them go across party political boundaries.
§ Mr. Gould
I am grateful to the hon. Gentleman for his opening remarks when he indicated some support for my analysis. But if he accepts my analysis, it surely follows that there is everything to be said for the measures adopted by the Labour Government to bring on North sea production quickly, to make sure there was proper accountability for the public interest and to ensure that the public interest was properly rewarded for its investment. All that is unexceptionable. The mistakes were made not through producing the resources but through what was done with them. As those resources arrived only in 1979 and then proceeded to grow rapidly—it was one of those strokes of good fortune that benefited the Government by virtue of the decisions made earlier by a Labour Government—their disposition had to be the responsibility of the Conservative party as the Government of the day. That was where the mistakes were made.
Although the Bill is worthy of support in itself, it is a sad little measure because unlike no other measure so far 647 it marks a recognition, even on the part of the Government, that while North sea oil will remain an important economic factor for a long time to come—we are not entitled to be pessimistic about the oil simply disappearing—it is nevertheless now clear that, at any rate for the foreseeable future, production has peaked and we are unlikely to go back to the era of very high oil prices. As a consequence, the huge opportunity that North sea oil presented to us to break out of our economic problems has now gone. It has been lost and wasted. The Bill shows that the Government recognise that.
We are now back to the old and familiar grinding problems—this time without the wonderful prospect of North sea oil on the horizon to come to our rescue. The Government have simply wasted that opportunity through incompetence, and one of the many charges that will be brought against them—on which they will be arraigned before the electorate—will be the charge of incompetence in the handling of a precious national asset.
§ Dr. Michael Clark (Rochford)
I welcome the opportunity to speak on the Bill. As the hon. Member for Dagenham (Mr. Gould) said, it is quite short, and even though he called it a sad little measure, as if it was a new wine just brought over from France, it is a Bill that we should welcome. Bad Bills may be long or short, but I am certain that, almost by definition, the best Bills are short, on the basis—to paraphrase one of our previous leaders from a long time back—that, "Sorry we have prepared you a long Bill; we did not have time to prepare you a short one."
The one thing about which I am certain is that bad Bills fill this House as hon. Members try to correct and improve them. The fact that there are so few hon. Members present for this Bill indicates that it is very good. It must be, as hon. Members are content to allow the few of us here to speak and to get the measure through as they approve it by their absence.
The advance petroleum revenue tax is inevitably involved with cash flow. It was introduced to get the maximum amount of cash out of the oil companies early on in the development of the North sea fields. Not only is APRT adverse cash flow for the oil companies, but it is preferential cash flow for the Government, who receive the money at an early stage of oilfield development.
It is strange that APRT should ever have been introduced in the way that it was, because when a major or minor oil company wants to develop a field, that is the time at which it needs a good cash flow to be able to pay for the investment. Unfortunately with APRT, the cash flow was squeezed out of those companies just at the very time when they wanted it.
By the same token, the Government will want maximum cash flow at a time when the oilfields are beginning to dry up, but APRT has meant that the Government have received their cash flow at the beginning of the development rather than at the end. I can therefore well understand why APRT has not received much acclaim from the oil companies, and I can also understand why the Government have realised that at the end of the development they may be starved of cash themselves.
APRT is based on gross revenue which is estimated at the production stage when a field is only in the minds of the geologists and explorers and when the oil is still under the sea or underground. The basis of APRT has therefore 648 been speculative. The Government have set a level of taxation to be paid and at the same time have said to the oil companies, "Once you have paid this you may in due course offset it against the petroleum revenue tax." That means that, although it skews the cash flow of the oil companies, it is still a fair tax in the sense that it can be offset at a later date against taxes which the oil companies would have had to pay in any event.
Advance PRT is coming to an end. We are now in the last quarter of its operation. It is therefore a dying tax, and it is wholly appropriate that we should curtail it now and bring it to a sudden death rather than allow it to dwindle on for another two years as it would otherwise have done. It would have dwindled on, not in the sense that the tax remained, because it will finish at the end of this year, but in the sense that those who had paid more than they should have paid would not have received their repayment of APRT until 1988. Although the companies would have received it in due course, the longer it took, the more their cash flow would be strangled, and, particularly at a time of low oil prices, the more difficult it would be for them to invest in further fields and to keep their business running in the way that we would all wish. The oil companies have overpaid this tax over a period of years, and at a time of difficult trading for oil companies the Government are wisely and compassionately saying, "We will now pay back the tax that you have overpaid at a time when cash flow is difficult for you."
I am sure the House realises that this debate and the Bill are primarily about cash flow. In the first instance, the tax was introduced to improve the Government's cash flow at the expense of the cash flow of the oil companies. Now, in their wisdom, the Government are allowing the boot to be put on the other foot and are allowing the cash to flow back in the other direction to assist the oil companies.
I congratulate the Government and my right hon. Friend on bringing the Bill forward. It must be a difficult measure to introduce at a time when oil prices are falling and when the Government's revenue from North sea oil is less than we would like and less than the Government and my right hon. Friend would wish. The revenue from North sea oil will be down by £1 billion this year compared with the estimate made at the time of the Budget.
At a time when revenue from North sea oil is down by £1 billion, to be able to concede the more prompt payment of the APRT is a bold, generous measure on the part of the Government. It is, of course, helped by the fact that revenue from non-oil sources is up by £2 billion. Thus, the Government have balanced their books well and are able to be flexible and responsive to circumstances as they develop. There is every indication that, despite the lower revenue from North sea oil, there will be an expected surplus for this year of around £500 million. Of course, that is not money that can be given away, because expenditure is running at £500 million over and above the figure planned at the time of the Budget.
Government expenditure is increasing because my right hon. Friend the Chancellor has made it clear that, because non-oil revenue is up by £2 billion, there are now funds available for roads, education and the health services. That is to be welcomed.
Without a strong and good economy—the economy that we have at the present time—it would have been impossible for my right hon. Friend the Financial Secretary to introduce this measure this afternoon. 649 Therefore, on behalf of the oil companies, which, I am sure, are taking a great interest in the Bill, I am grateful for the measures that have been taken.
The Bill is prudent and wise and will have a good, positive effect on the oil industry. It will enable the oil companies to have more money available for investment. The Bill will prevent the smaller, speciality companies in Scotland and the north-east—which built up their businesses and provided employment on the basis of the North sea oilfields, their exploration and from which the companies have derived revenue—from being obliged to go to the wall. Many such companies are already in difficulties, and it would be difficult to start many of them again at a later date.
This measure will cost around £300 million in this financial year. I congratulate my right hon. Friend on introducing the Bill, which will help the cash flow of the companies. Indeed, it will help to provide employment opportunities in the hardest hit areas.
§ Mr. Charles Kennedy (Ross, Cromarty and Skye)
I support the measure, which is much needed and long overdue. Perhaps the Minister will recall that during the passage of the Finance Bill earlier this year I moved a specific amendment which, although not identical to the legislation introduced by the Government today, was none the less aimed in the same direction. The amendment sought to use the tax system and fiscal stimuli to encourage oil development and ameliorate some of the profound problems that we are now witnessing in the North sea oil industry and, indeed, onshore with the oil-related industries.
Although I welcome the Bill, I am concerned that perhaps it is too little too late. That sentiment may well be echoed by other Scottish Members—although I note that those Scottish Members who sing long and loud about the effects of North sea oil economics on the Scottish economy are not here this evening.
§ Mr. Ernie Ross (Dundee, West)
Who are those Members? Is it the Member for Dundee, East (Mr. Wilson)?
§ Mr. Kennedy
I refer to the hon. Members representing the Scottish Nationalist party. It is a significant omission that they are not with us tonight, but not one that I wish to dwell upon.
§ Mr. Kennedy
Well, I take my support from wherever I can get it.
I welcome the Government's move to repay APRT in 1987, which I believe will total some £310 million. However, my welcome is somewhat grudging because it is only a first and small step towards providing the necessary conditions for encouraging oil development work.
There is no doubt that the outlook for the oil industry in Scotland is extremely gloomy. A year ago it directly employed about 90,000 people, but that figure has already fallen by about 7,000. Among many others, the Royal Bank of Scotland has recently estimated that another 11,000 jobs could go in the next three years. Indeed, that appears to be a somewhat optimistic analysis when 650 compared with the analysis by the Fraser of Allander Institute or, indeed, the projections of the Scottish Development Agency.
My constituency has borne painful witness to some of the massive economic problems that have been associated with the downturn of oil-related activities. The hon. Member for Dagenham (Mr. Gould) mentioned Howard Doris, which has gone into receivership. Equally, other oil yards in the Highlands—I do not wish to dwell on this tonight, as I had the opportunity of initiating an Adjournment debate on the issue last week—are facing the prospect of rather lean order books in the months and years ahead.
The great problem in this part of Scotland is, perhaps, slightly different from that experienced by those who witnessed the recent catastrophic changes at Scott Lithgow. Those changes are devastating for the local community, for which I have much sympathy. The problem for the Highlands is that in the 1960s, under Labour and Conservative Governments, there was a prolonged effort to encourage people to move out of the central belt to repopulate the Highlands. One way of achieving that was to site major industries in the Highlands—for example, a pulp and paper mill at Fort William and an aluminium smelter at Invergordon along with all the attendant spin-offs from the oil-related industries.
What happens when things go wrong? What happens when the pulp mill closes, the smelter closes and the oil industry begins to go into a tail spin? The people of communities utterly dependent upon a certain industrial concern and its wellbeing for their wellbeing find themselves, in the words of the Prime Minister, with "no alternative". It is no good saying, "Get on your bike and go somewhere else," because there is no opportunity, least of all in the Scottish economy, to transport skills that have been built up in the Highlands and in my constituency. There is no genuine opportunity to take those skills elsewhere and try to make a go of it.
§ Mr. Kennedy
I shall give way in a moment.
The appalling social implication of industries closing and recession within the oil industry is mass unemployment. I do not use that term lightly, as the unemployment level is 40 per cent. in the major towns of Invergordon and Alness. The subsequent misery and lack of opportunity for young people in that part of the country do not encourage them to feel that they can have a job and a career or to market their skills. The result is the age-old problem of exodus and depopulation that has blighted the Highlands for so long. It is sad that in the frontiers of new technology, which the oil industry should have represented, that effect is now coming through.
§ Dr. Godman
I am deeply grateful to the hon. Gentleman for his sincere expression of sympathy with the people of Greenock and Port Glasgow at that terrible decision. May I point out that unemployment on the lower Clyde is just as miserable an experience as it is in Ullapool? Besides the commonality of that miserable experience, does the hon. Gentleman agree that the communities are joined in the traditional Scottish response to unemployment, which is migration?
§ Mr. Kennedy
I am grateful to the hon. Gentleman and I agree with his sentiment. Although in some ways the 651 social impact may be different because the two communities are different, the human effect is identical, appalling and unacceptable. I also agree that the historic consequence of pursuing the type of economic policy that the Government are pursuing is migration from Scotland. That is perhaps the saddest reflection of all.
As has been said, in welcoming the Bill we are welcoming the Government's somewhat grudging and overdue acceptance that we have got it wrong in the oil industry. Our international competitors, who must see what we have done with this one-off gift of oil reserves, must shake their heads in disbelief. As I said earlier, the Howard Doris yard at Kishorn has gone into liquidation. That is having appalling implications for unemployment and the fairly fragile economy of the Highlands.
The road infrastructure to that yard is an international joke and everything that should have been contributed to such a major industrial concern has not been contributed. The company is at the forefront of construction and engineering in the oil industry, but it has had the most massive disincentive to be competitive and to win orders and contracts. That is because it has been placed in an isolated community and has received no real Government support over the years. I am not speaking about any Government in particular. The whole institution of government has not recognised how crucial is that facility and its infrastructure. It is sad that the Government must introduce this measure largely as a result of matters outwith their control—the policies of OPEC. In some ways that is a recognition of failure and is depressing.
Although the Bill is welcome, I have mixed feelings about it. Throughout the year my colleagues and I have advocated a package of tax reforms along the lines of those which have already been submitted to the Government by various oil companies. Such a package included the immediate repayment of all APRT. It is worth putting on record that the Bill will provide for repayment, but £500 million will remain in Treasury coffers and will not he accounted for. I agree with the hon. Member for Rochford (Dr. Clark) that the package has to do with cash flow and that £500 million will have a major impact on the cash flows of a considerable number of companies.
On top of that there should be a relaxation of the PRT ring fence principle, more support through the tax system for incremental investment in existing fields, permission to offset onshore exploration and appraisal expenditures against tax liabilities elsewhere, and improved depreciation terms. Moreover, there is a possibility of establishing a modified enterprise zone status for the North sea. All those matters should be considered, and I hope that in his March Budget the Chancellor of the Exchequer will introduce developments along those lines.
The aim of the package before us tonight should be, not to line the pockets of oil companies, but, in a self-interested national context, to encourage spending on exploration and development. At current oil prices such work simply does not represent a reasonable return on investment, so this type of stimulus is sensible.
I do not want to be a Jonah, but the introduction of the measure means that the country—not any particular Government—has mishandled the opportunity presented to it by North sea oil. I agree with the analysis of the hon. Member for Dagenham that so much of this unforeseen bonanza for Britain has been frittered away on non-productive returns, such as paying people to do nothing, 652 when a little more long-term enlightened investment could have helped to cushion the economy, which is weak enough, against the downturn that we are experiencing.
In his March Budget the Chancellor of the Exchequer pledged that the Government wouldintroduce at the earliest opportunity any changes which may prove necessary to ensure that worthwhile projects are not frustrated by the fiscal regime."—[Official Report, 18 March 1986; Vol. 94, c.174.]He was correct to say that, but complacent in the time that he took.
This is a welcome measure and should command all-party support and support throughout the country. It will certainly be a ray of hope to the Scottish economy, which is suffering so badly, but it should have come much earlier. The Chancellor recognised the need for it in March and I am amazed that he took so long to act on his good rhetoric.
I am reminded of the illustration that my right hon. Friend the Member for Glasgow, Hillhead (Mr. Jenkins) gave when, in his Budget speech, the Chancellor sanguinely predicted a collapse in oil prices and the losses to the revenue associated with it, saying that if we could manage our affairs during such an unexpected catastrophic fall in 12 weeks, surely we could be relaxed over the fact that the oil would run out over 12 years. My right hon. Friend said that that was like a man who throws himself off the top of a skyscraper and halfway down, passing floor 12, says, "So far so good. No damage done." We are beginning to reach the end of that tumbling fall and we shall see great problems in many communities, especially in Scotland, as a result of the mismanagement of our most precious international asset.
I welcome the Bill, which is a sensible step. More needs to be done, and much of this should have been done a long time ago.
§ 5.8 pm
§ Dr. Norman A. Godman (Greenock and Port Glasgow)
The hon. Member for Ross, Cromarty and Skye (Mr. Kennedy) gave a grudging welcome to the Bill, and I agree that it does not go far enough to address the problems being experienced in the oil supplies industry. I cannot agree with the Minister when he talks about generous concessions constituting a powerful incentive. I should like to see the effects of that powerful incentive, especially on the fabrication yards and on the one remaining semi-submersible rig yard, that of Scott Lithgow.
I do not oppose the Bill. It is a useful measure, especially for small firms which have suffered from cash flow problems. My major concern is about the effects that it will have, if any, on the job prospects in the offshore fabrication yards in Scotland. Unless there is a dramatic increase in activity in the offshore oil and gas fields, the massive erosion of jobs in Scottish industry will continue. We shall not see any new jobs in the offshore oilfields, except in demolition work, as is clear from the terms of the Petroleum Bill which had its Second Reading a week ago and which refers to the dismantling of oil and gas structures.
The hon. Member for Ross, Cromarty and Skye rightly said that job losses in the industry were of the utmost importance to Scotland, given the continuing decline of much of our manufacturing industry. The Bill will not generate orders and jobs for the fabrication yards, and that is regrettable.
653 What is needed—I share some of the objectives outlined by the hon. Gentleman—is a judicious blend of changes in tax measures which could restore confidence, and which might even persuade companies to explore the deeper waters to the west of Scotland. Such measures might include a much more generous offsetting of the expenditure on new fields against the income from producing fields. By "new fields" I mean absolutely new fields where exploration has not yet started; for example, in the deeper waters well off the west coast of Scotland. I am not convinced that a sufficiently powerful incentive exists at present, or that the power of such incentives as exist will be enhanced by the rather short Bill before us.
In its quarterly report published on 29 May 1986 the Fraser of Allander Institute reported on its survey of the attitudes of companies employed in the industry. Regrettably, there was growing pessimism everywhere. It reported a decline in the total volume of output, and also in the number of orders and contracts. The consequences of those facts are with us now. The hon. Gentleman mentioned that the Howard Doris company is in receivership. McDermotts of Arderseir is in a terrible shape. The company now has only a few hundred employees, yet four years ago it employed between 3,000 and 4,000 people. Highland Fabricators, which recently won an order for the Ida field, is now down to 1,000 employees, from 5,000 employees three and a half years ago. The yard at Methil is halfway through an order for Shell, but that yard—like the others that I have mentioned—faces a deeply worrying future.
Last week, Scott Lithgow of Port Glasgow announced that it is to dismiss about 1,500 employees. The future is bleak and intensely dismal for those who are to lose their jobs, given that the male unemployment rate in Greenock and Port Glasgow is about 26 per cent. Those redundancies—together with job losses in ancillary industries—will take that rate to well over 30 per cent. Apart from the inner areas of London, no constituency in southern England suffers such a grievous burden. As I have said, many people employed in both large and small companies will be affected by those dismissals.
Last Thursday The Scotsman reported that Scott Lithgow'smain product, floating exploration and production platforms for the perimeter of the Atlantic continental shelf, is now unlikely to be needed in any number before the next century.That shows the dismal future of the one remaining United Kingdom yard that is capable of producing those technologically advanced vessels and structures. The correspondent in The Scotsman said that it is unlikely that there will be any more orders until the next century. As he said,That's a very long time for the remaining 700 core workers to maintain a presence on the Lower Clyde.It is extremely unlikely that those who have lost their jobs in the recent past, or who will lose their jobs in the near future, will find work in the service industries. They will not all open tea shops or become potters down on the lower Clyde. It is essential that Scotland maintains its manufacturing base. Some of those dismissed may, of course, be encouraged to migrate to the south-east of England, but for the overwhelming majority that simply is not the sort of option that they can consider. As I said 654 in an intervention earlier today, migration has been the traditional response to unemployment in Scotland. Today, that is quite unacceptable.
In its own little way, the Bill is a worthy piece of legislation, but it will not help those people at all. It will do nothing for my constituents, many of whom are highly skilled. Many are welders who have been trained to meet the exacting standards required, for example, by Norske Veritas, and for offshore oil and gas construction work.
Scott Lithgow is the one remaining company in the United Kingdom with the capability to build dynamically positioned semi-submersible exploration and development rigs. In terms of winning orders from offshore oil and gas industries elsewhere in the world, it is essential that that capability is retained, especially in the light of the demise of other first-class fabrication yards in Scotland.
Despite the Minister's words, the present tax concessions and this legislation are not a powerful incentive to exploration activity for oil companies. It is essential that that comparatively new element of Scottish manufacturing industry is encouraged to grow and is not allowed to decline. Its decline must be halted.
At present, the only new jobs likely to emerge in the offshore oil and gas industries will, as I have said, be in demolition. Some observers, including the hon. Member for Rochford (Dr. Clark), have suggested that up to 100,000 new jobs may be created in that sort of highly technical and highly skilled demolition work. However, we want more than demolition jobs in Scotland. Even if those skills are employed elsewhere in offshore industries——
§ Mr. Kennedy
I am grateful to the hon. Gentleman for giving way. Does he agree that one of the most pointed remarks consistently made about the Government's attitude to the industry, and their behaviour in eventually bringing forward legislation, is that for too long they have hidden behind the false argument that there was no substantial evidence of worthwhile North sea oil projects being frustrated by the existing fiscal regime? Those hon. Members who, like myself, support the measure but feel that more should have been done do not contest that, but say that that is not the root of the difficulty. Nonetheless, further steps should have been taken a long time ago through the fiscal system to encourage more North sea oil exploration and development work.
§ Dr. Godman
I am grateful to the hon. Gentleman for his intervention. The history of this new industry is characterised by the complacency of Ministers. It has also been damaged by the Government's failure to determine a sensible and systematic depletion policy. That has been generated by that complacency, so I agree with much of what the hon. Gentleman said.
Much more needs to be done for those constituencies, whether in the Highlands or on the lower Clyde, which have been severely harmed by the decline in the number of orders coming from the offshore industry. Much more needs to be done for my constituency by the Scottish Office. That assistance must come by way of the Scottish Development Agency and the Inverclyde initiative, which has been financed by a pittance of £6 million, given the magnitude of the economic and social problems that we are experiencing on the lower Clyde. The Scottish Office's appalling blend of indifference and optimism is harming my constituents, particularly the young.
The aim of the Bill should have been to encourage much more activity in exploration, particularly in the deeper 655 waters, but that, as I have said, will not be brought about. There is not a powerful incentive for the oil companies to go into deeper waters, so the Bill will not address the problems faced by the supplies industry and all those who remain employed in it. Much more needs to be done. We require more radical fiscal measures and their aim must be to generate activity in exploration as well as in demolition.
§ Mr. Ernie Ross (Dundee, West)
We shall not oppose the Bill, but we shall seek to draw the Minster's attention, tonight and on Report, to some of the fears and concerns of those who are employed in the industry and who, perhaps, have as large an axe to grind as the United Kingdom Off-Shore Operators Association.
The Bill saw its birth in the five demands sent by UKOOA to the Chancellor. It demanded the immediate repayment of advanced petroleum revenue tax; the removal of royalties; the extension of petroleum revenue tax treatment of exploration and appraisal costs to design and engineering expenditures; a modified enterprise zone status or the relaxation of the petroleum revenue tax ring fence for a defined proportion of new development expenditure; and support for incremental investment in existing fields.
That pressure made its way into the rig builders' yards and resulted in many hon. Members on both sides of the House who happen to have a rig building yard in their constituency receiving correspondence from the United Kingdom Module Constructors Association. It in turn put pressure on its employees, whether presently employed, laid off or likely to be laid off because of the failure of offshore oil companies to order rigs.
Therefore, we have all been expecting the Government to say something, but the Bill gives us the opportunity to raise some of the concerns of people who have worked in the North sea and who are affected by the activities of the offshore oil companies. If the demands of those companies are met by a Bill, it is only right that the demands of trade union members and workers employed offshore and onshore should also be heard. I hope that we may put those on the record so that the Minister can respond.
As a direct response to such pressure and the concerns shared by the National Union of Seamen, the trade unions involved in rig building and construction and ship yards, and those employees that have been made redundant, there was a meeting in Aberdeen on 20 October 1986 which I had the opportunity to attend with other colleagues to discuss the anxieties of those working in the industry. We brought forward some demands ourselves which are just as relevant.
If the companies are to have the advantage of the return of advanced petroleum revenue tax, it is only right that the Government should start asking some fairly searching questions of those companies to ensure that Britain and its workers receive the benefit of that.
At the moment 40 per cent. of rigs in the North sea are laid off and with a 30 per cent. reduction in the number of oil and gas fields likely to be developed between 1987 and 1996 there will be even more cuts in drilling activity. To make matters worse, the United Kingdom operators, vessels, rigs and offshore workers do not have a fair share of charters and contracts. Nearly 30 per cent. of the 98 supply vessels active in the United Kingdom sector of the North sea operate under foreign flags, with Norway having the biggest share. Yet in the Norwegian sector 99 656 per cent. of vessels are Norwegian operated and crewed. Over 70 per cent. of the 29 drilling rigs active in the United Kingdom sector are foreign registered, but only 25 per cent. in the Norwegian sector are foreign registered. Everyone in the industry recognises that there is a desperate need for the Government's direct intervention to reserve all contracts in the United Kingdom sector for United Kingdom vessels and rigs.
It is the Minister's responsibility to tell us tonight the Government's policy towards activity in the North sea at the moment. The Government's failure to ensure a fair deal for United Kingdom supply vessels and drilling rigs is only part of their lack of a coherent policy to develop our offshore oil and gas fields. As my hon. Friend the Member for Dagenham (Mr. Gould) said earlier, the Government require the high level of oil and gas production to help to pay for the massive unemployment. If oil revenues fall without any real determination by the Government to reduce unemployment, it will be even more important that whatever work there is in the North sea is retained for the workers in British yards and for the employment of British people in the North sea.
§ Dr. Godman
One of the added problems for those who are made redundant in the fabrication and rig yards is that welders, who possess a skill that is of immense value in the industry, have to be tested every six months. That is fairly easy to do while they are working, but when they are unemployed it is enormously difficult for them to reach the efficiency levels that are required for such tests.
§ Mr. Ross
My hon. Friend is right. In "Panorama" on Monday 17 November academics and people with financial interests made the same point. Professor Alexander Kemp said:The worry I think is that the longer the recession goes on that we're going to lose a lot of the expertise that has built up in the off-shore supplies industry and in the construction yards, and the fields which are being developed may have some difficulties in executing their projects because, you know, some companies are going bankrupt already.That real fear is shared by a host of people who are concerned about groups of skilled workers being broken up and attracted to contracts in the middle east and elsewhere. If we start exploring in the North sea and building in British yards again, we shall not have the expertise to take advantage of such expansion.
The Government must tell us during this short debate what they will demand of the oil companies for the return of the tax and also to show us that they have a policy for the depletion of North sea oil and gas and to conserve the resources that are there.
The United Kingdom offshore industry must face the full logic of Thatcher market forces. Exploration activity dropped by one third between April and June 1986, and 40 per cent. of supply vessels and drilling rigs are idle. More than 700 redundancies have been declared among the National Union of Seamen's offshore workers. Offshore supply boat crews had to take substantial reductions in terms and conditions of employment, including a one-year pay freeze. Therefore, they have the right to demand to be mentioned in the debate. As I said earlier, and will continue to repeat, they have a right to demand that the Minister says what benefits will accrue to the workers in the yards and the workers offshore and onshore when the petroleum revenue tax is handed back.
It is clear that oil companies want a period of stable prices. It is the Government's responsibility to ensure 657 stability in the oil price market so that the oil companies will resume exploration. Although consumers may have benefited slightly from the sharp price drop, the nation will definitely pay dearly in the long run with an increase in unemployment and a period of reduced self-sufficiency in oil.
Unless the Government intervene, 10,000 jobs will probably go out of the industry in 1986–87 alone. The Government must say what they intend to do about our failure to fly the flag in the North sea. The rapid fall in exploration and development has given even greater urgency to the need for the United Kingdom sector to be reserved for vessels and rigs registered and crewed in the United Kingdom. For several years, the National Union of Seamen, among others, has urged the Government to intervene and to take positive steps to assist United Kingdom operators. The Government have simply castigated operators for being "uncompetitive". They should compare them with operators in other countries which give favourable credit terms and tax incentives to keep down costs. Other countries have applied pressure on their oil companies to use national flag vessels. In contrast, the free trade policy of the United Kingdom merely offers opportunities to countries which bar United Kingdom operators from their areas.
During the past 10 years, vessels and rigs from countries which reserve trade for their own flag, such as the United States, West Germany, France and Panama, have operated freely in the United Kindom sector. The result is that the United Kingdom offshore sector is the most open market in Europe, and probably the world. The Government must give some direction and impose some controls if they are to protect seafarers' and rigworkers' jobs. We do not just want to see benefits for the workers who are working offshore and on the rigs. Benefits could also come to our shipyards if there was planned development and control of our production of oil and gas. Our shipyards could, and need to, benefit from any exploration and development in that area. As my hon. Friend the Member for Greenock and Port Glasgow (Dr. Godman) said, shipyards face a desperate crisis. Since 1979, 32,000 jobs have been lost and a further 3,000 will go by the end of 1986, leaving a rump of about 5,000 jobs.
The Module Constructors Association, which supported offshore oil companies' demands for a return of advanced petroleum revenue tax, estimates that 33,000 people could be employed building rigs and other modules for offshore work if the right conditions prevailed. Yet the lack of Government intervention which the association highlighted has meant that, during 1986, construction yards closed and will continue to close. Requiring supply vessels and rigs to be built in United Kingdom shipyards would provide much-needed work, prevent further closures and redundancies and establish a basis for the long-term survival of the British shipbuilding industry. The survival of the British shipbuilding industry would ensure the survival of the steel industry, the marine engineering components industry and the complex electronic products industry, all of which are required on rigs and offshore platforms. That beneficial knock-on effect would go right through the economy and help every part of the country. The argument is not concerned only with Scotland. The effects of an order for a rig or a platform are felt throughout the United Kingdom.
658 The involvement of foreign nationals in our offshore oil and gas fields must be controlled. Controls are necessary if some of the worst anti-trade union activities are to be eliminated and the full range of expertise in offshore technology is to be maintained in the United Kingdom. If the advance petroleum revenue tax is returned to those companies, the Minister must be responsible—to those employed in the industry and those who will be employed in it—for ensuring that the anti-democratic, anti-trade union policies which are operated on some of the rigs and by some of the offshore oil companies are stopped and that normal trade union rights and conditions are enjoyed by workers in the North sea oil and gas fields.
During the meeting in Aberdeen, we accepted and supported the need for the offshore oil contractors to be given some assistance by the Government, but we also made some demands. I shall leave those with the Minister to see whether he can confirm that while he is fighting for the big boys in the industry, the offshore oil operators' conglomerates, he is also looking after the workers—the people who build the rigs, the people who are employed on them and the people who give us the oil from the North sea. We want co-operation at international level to achieve stable oil prices. We want a plan for exploration and development to ensure long-term self-sufficiency in oil and reduced imports of gas. We want to reserve the United Kingdom sector for supply vessels and rigs registered and crewed in the United Kingdom. Future supply vessels and rigs operating in the United Kingdom sector should be built in United Kingdom shipyards, thereby providing employment. We want to develop expertise and ensure high standards of employment by requiring work permits for non-European Community nationals.
If the Minister answers those questions, the Bill will be welcomed in those areas of the country where the debate is being observed.
§ Mr. Andrew Rowe (Mid-Kent)
I should declare an interest. Since long before I came to the House I have had a connection with Chevron Petroleum. I was interested to learn about the provisions of the Bill because the company welcomes it enormously. The company has made what the Minister described as a "forced loan" to the Government on the Hutton field and looks forward with pleasure to getting that loan back since the change in the oil price means that it is unlikely to pay petroleum revenue tax on that field or, if it does, the payment will be postponed for a considerable time. The return of that forced loan will be very welcome.
It is fair to say that the hope that development work will be saved by the Bill is well worth expressing. Undoubtedly, that will be the case. There is no doubt that Chevron Petroleum is busily engaged in enhancing its development work in the Ninian field. The repayment of the advance petroleum revenue tax will undoubtedly assist in that. It may even assist the company to bring forward new projects, although I doubt whether that will happen immediately.
It is important to consider the oil price as something which is not just a temporary aberration. It may prove to be much closer to the realistic long-term price of oil than the very high rates that have been in place since the first OPEC hike. Recently, some Members in the House and in another place attended a presentation on oil prices. The 659 message seemed to be fairly clear that the oil price is much closer now to what has been the norm than what we have experienced during the past 10 years.
If that is the case, everyone will have to adjust to it. I was interested to hear the hon. Member for Dundee, West (Mr. Ross) imply that the Government should create conditions in which the international price of oil should not be wholly effective in Britain. We must remember that there is a glut of oil on the international market, that there is likely to be a glut for some considerable time and that, in those conditions, no Government—certainly not the Government of a country the size of Britain—could conceivably stand against the international tide.
In those circumstances, it was interesting to hear the hon. Gentleman say that one group of workers had accepted a pay freeze. Everyone must consider how he adjusts his behaviour towards this long-term problem. There is little doubt that, historically, adjusting one's expectations downwards is harder in unionised activities than it is in non-unionised activities. I welcome the assurance of the hon. Member for Dundee, West that the trade unions will engage in negotiations on the matter, but I am not altogether surprised that some oil companies have done their best to keep trade union activity to a minimum. Only in that way can they remain competitive.
Competition is the key in this area. Every company in Britain which is not British-based, and even many British national companies, are weighing up whether they can get a better deal in the North sea than they can elsewhere. The companies consider many factors, not least political stability, which Britain can offer. Let us hope that it long remains so. The competition for money is international and when even the largest of oil companies is considering whether to develop further in the North sea or to take its money somewhere else, such as Indonesia, the United Kingdom must compete.
That is why taxation is enormously important. One need only consider, at the downstream end, the price of a gallon or a litre of petrol to see the enormous proportion that is represented by tax. The position is similar at all stages in the exploration, development, production and sale of oil products. The Government must be extremely careful in handling the oil companies, which, it is clear, greatly welcome the Bill, and nothing that I say should demean that welcome. But tomorrow will be the first sitting of a Standing Committee to examine the Petroleum Bill. There is great anxiety among many oil companies that the Bill, as drafted, will cast a shadow over the balance sheets even of the largest companies. If the Government can pursue each company to recover the cost of demolishing or removing the structures in a field that has come to the end of its useful life, it will become a contingent liability on the balance sheet, which will cause several companies to look at it askance.
§ Dr. Godman
Given the hon. Gentleman's expertise in this area, can he tell me the position of American companies on the abandonment of rigs and structures? I am given to understand that the Department of the Interior insists that the seabed be restored to its original condition.
§ Mr. Rowe
I have no experience in the United States. Chevron Petroleum is anxious for the establishment of a sinking, fund to pay for the costs of demolition or removal of structures in the North sea. It believes that it would be 660 entirely appropriate—my right hon. Friend the Financial Secretary may wish to say something about this when he replies—for the Government to grant a tax concession or deferment on money put into such a fund. Indeed, Chevron suggests that the fund should be constructed by the purchase of Government bonds and that it should be built up with no liability to tax. If the fund grows too large for the demolition or removal of the structures in any field, tax should be paid on the balance.
The result would be that the Government would have the money in their hands from day one and could then defer tax until they knew the price of removal. The advantage is that it would then be possible for the operator to ensure that the money was paid into the sinking fund while the oil was flowing. That would give the company the right to insist on the fund being built up, even by the smallest participants. If not, they would not receive their share of oil royalties. That would be a vastly more satisfactory solution than the one provided in the Petroleum Bill. I was relieved to hear that my right hon. Friend the Minister of State, Department of Energy is willing to consider alternative proposals, but it is the 11th hour. I hope that the oil companies, the Department of Energy and the Treasury can get together to achieve a more satisfactory solution.
To return to my basic point, in an internationally competitive market, anything that casts a major shadow over the balance sheets of companies, large or small, is undoubtedly a disincentive to undertake further development work.
I pay great tribute to my right hon. Friend the Financial Secretary and the Treasury team for their efforts to resolve several difficult tax problems, not least the Californian tax problem, which is only half resolved. I say good luck to them and I hope that the matter can be resolved sensibly. I am nothing like as gloomy about the long-term prospects for North sea oil as are many right hon. and hon. Members. I believe that much more oil remains to be discovered. The trick is to provide a tax regime that encourages companies to look for it. In its modest way, the Bill plays a useful part in that.
§ Mr. Donald Dewar (Glasgow, Garscadden)
The hon. Member for Mid-Kent (Mr. Rowe) said that the trick is to get the tax regime right to encourage exploration and to find out whether his hunch about North sea oil reserves is justified. The Opposition are gently cynical about whether that trick has been performed on this occasion. However, that will not surprise the Financial Secretary to the Treasury.
It has been a very quiet, introspective and almost retrospective debate. There has been much contemplation and analysis of past mistakes and of the lost opportunities that litter the last decade's North sea oil policy. However, that should not hide from the House or from any other interested party the seriousness with which the Opposition view the crisis and the serious impact of the present decline in oil prices on the economy of the United Kingdom as a whole and upon Scotland in particular. I cannot endorse what I hope was the deliberately naive assumption of the hon. Member for Rochford (Dr. Clark) that the apathy towards this debate, shown by the attendance of hon. Members, even on the Government Benches, is a vote of confidence in the adequacy of the Government's reaction to the crisis, as embodied in the Bill.
661 It is a modest Bill. The revenue forgone, amounting to £310 million, is substantial by my standards, but compared with the reduced take from oil companies and petroleum revenue tax, it is a comparatively small sum. I do not agree with the hon. Member for Rochford who described the Bill as a bold and generous measure. If that is the limit of his ambition, it suggests that he moves cautiously in a closed and restricted world.
The Opposition do not object to the measure. We give it a somewhat limited welcome. However, our worry is that it will not deal with the crisis and that it will not coax the oil companies to increase production. Production will continue; the investment has been made and one needs only a very low price for oil to justify continuation of a production run. However, I doubt whether the Bill will encourage any form of exploration, or the introduction of new projects.
I do not pretend to have the personal experience of the hon. Member for Mid-Kent. He struck an optimistic note towards the end of his speech. However, when he referred to the company with which he was connected, Chevron, he said that, although it welcomed the concession and thought that it would benefit to some extent from the repayment of advance petroleum revenue tax, it was not sure that this would lead to new projects in the immediate future. That is the test that many people will want to apply to this measure. I fear that the hon. Gentleman's cautious approach, although his general attitude towards the Government's efforts was fairly loyal, may, sadly, be justified.
I am conscious that I am not one of my party's specialists in this area. I do not lay the entire blame or a significant amount of the blame for the drop in the price of oil at the Government's door. It may have been sensible to discuss more positive international measures to try to control the price of oil, but this disaster would have befallen any Government. The question is what should be done about it, how the Government should react and with what sense of urgency. It can be argued that a fall in the price of oil stimulates world trade. If there is to be an expansion of world trade we hope—although we have been unsuccessful so far—to get our share of it. Lower fuel costs also help industry. I do not belittle or deny those facts. However, the problem is that exactly the same competitive advantages are enjoyed by the industrial might of West Germany, France and Japan. I am not sure that we shall do particularly well out of it.
Everybody regards the oilfields in the North sea with considerable ambivalence. I am occasionally tempted by the case for a depletion policy. I have pointed on previous occasions to the extraordinary folly of flogging as much as we can possibly get out of the ground at the disastrous bottom end of the market. That does not make a great deal of sense. At the same time, I have urged the Government to take measures to encourage further exploration, with a view to maintaining a flat-out production policy. I accept that there are difficulties and contradictions. However the balance is struck, the present policy has undoubtedly created enormous difficulties for Scotland and for the Scottish economy, and I intend to spend a few minutes dealing with them.
The hon. Member for Ross, Cromarty and Skye (Mr. Kennedy) has a direct constituency interest in these difficulties. He referred to the recent Royal Bank of 662 Scotland projections for the likely course of events between 1986 and 1988. The Royal Bank of Scotland adopted a much more down market and depressed scenario about production levels in the North sea and about the level of oil prices that would condition production levels. It produced the now famous bracket of a possible total loss to the Scottish economy of between 22,000 and 33,000 jobs in that two-year period. A substantial multiplier was built into that bracket. However, in terms of direct job losses it referred to a minimum loss of about 12,000 jobs.
A very substantial number of job losses has already taken place. Even in Grampian, which was directly linked and strongly connected with the oil boom and where unemployment historically has been low, in Scottish terms, we are beginning to see a marked deterioration in unemployment, which is a justifiable cause for concern. According to the latest unemployment figures, unemployment in Grampian has reached 10 per cent. Over 22,000 people are standing in the dole queues, and in other different and contrasting areas of Scotland the impact has been serious.
The hon. Member for Ross, Cromarty and Skye has an unemployment rate of 21.7 per cent. in his constituency. There are a large number of travel-to-work areas—for example, Invergordon and Dingwall—where the impact of the rundown in the North sea will build a damaging new factor into an already desperate and depressing problem. Howard Doris at Kishorn is in receivership. McDermotts at Ardersier is limping along. If it had not been for the fact that they got some work from the Conoco jackets, which was the result of a misfortune at Wallsend, they would have been in a difficult position. None of us takes pleasure in that kind of knock-on effect.
The impact of the rundown in North sea oil will be severe in the rural areas, especially in the Highlands. My hon. Friend the Member for Greenock and Port Glasgow (Dr. Godman) rightly returned to a point that I know is not far from his mind: the problems facing the Scott Lithgow yard. I remember the battles of yesteryear when the yard left British Shipbuilders. However, that is all in the past. The tragic present is the loss of 1,500 jobs and the uncertain future that faces the core of 700 men left in the yard. The problem that faces the lower Clyde is just as important and just as difficult to handle as the problems in the northern part of Scotland to which I referred earlier. It is common ground that the rundown in North sea oil will have a dangerous impact and that it will probably become considerably worse, if present projections are accurate.
I recognise that there are no simple answers. My hon. Friend the Member for Dundee, West (Mr. Ross) also has North sea interests in his constituency, in Kestrel Marine and Dundee, but I think that he would accept that we cannot isolate ourselves completely from the impact of the fall in oil prices. It would be silly, and perhaps dishonest, to pretend otherwise. However, we are entitled to say that this modest measure should not be seen as the Government's last word. The Government must keep an eye on how the situation develops. We should like to see an across-the-board approach from the Government.
With drilling rigs parked in several firths, such as the Cromarty firth and the Firth of Forth, and with daily rates literally plummeting, things will not be easy. However, I hope that some thought will be given to the points raised by my hon. Friend the Member for Dundee, West. I do not 663 suggest that everything that happens in other sectors of the North sea is good while everything that we do is bad, but there is a case for looking hard, say, at the use of supply ships and at the implications for employment in our areas.
I hope that the Government are prepared to fight hard over shipbuilding, for example, where key negotiations are going on in the Common Market over the intervention fund. The Minister may not be the relevant person, but I ask him to suggest that his colleagues read the application by the Department of Trade and Industry to the European regional development fund. It includes a substantial number of important infrastructure developments that might go ahead in areas that will be particularly hard hit by the rundown or depression in the oil industry. I think, in particular, of Easter Ross and similar areas.
I shall not abuse the patience of the House or, more importantly, your patience, Mr. Deputy Speaker, by reading out quotations or by reminding the House of the many infrastructure projects that were given priority, and which all seem likely to be left on the shelf if present policies continue. Things will not be easy. The Minister noted the marked effect of the fall in the oil price on economic activity, but he then congratulated himself and his colleagues on the fiscal arrangements that he said gave a powerful incentive to exploration. That smacks of complacency, and I am not convinced that—to use the phraseology of the hon. Member for Mid-Kent—the trick has been worked.
My hon. Friend the Member for Dagenham (Mr. Gould) said that he feared that in some ways the results of this measure would be arbitrary and capricious. We may want to pursue on Thursday some of the arguments about who is excluded and included, and about exactly how these expedited repayments of interest-free loans will work out. But the most important thing is to underline that, if the Bill is valuable, it is because it is an attempt to help by targeting those areas where help is needed and where there may be some reaction.
I do not know whether the Bill will be successful, but I agree with the principle that when faced with a crisis, one does not just sit back and watch it happen, adopt a laissez-faire approach, or allow events to gain a momentum of their own. Governments have a duty to think about employment, the quality of life and the future of communities at risk. If this small but, I hope, useful adjustment to the tax and fiscal regime is successful, all well and good, but it will not be enough on its own.
I hope that the Government will adopt a much more courageous and far-reaching approach towards the economic problems in the areas hit by the present recession. Opposition Members will remember that in the late 1970s we had problems in the construction yards on the upper Clyde. The Minister will recall the problem of the Marathon yard. I was not in a position to watch the battle closely, but I could hear the noises. The outcome was that an order was placed on a speculative basis. Ultimately the rig built was sold and the yard, now UIE, is still competing and perhaps at risk, as all companies are in this industry. However, it also still employs men in an area where the unemployment problem is particularly difficult.
Thus there are examples that one could draw on from the past, and I hope that the Government are prepared to adopt a much more sensible, flexible and pragmatic approach than they have so far. The Bill may help on the margin. It is supposed to be targeted at achieving an effect.
664 If it is not successful, I hope that Ministers will return to the House, and that the same principle will be applied more widely. Otherwise, the consequences for Scotland will be very serious indeed.
§ 6.6 pm
§ Mr. Norman Lamont
With the leave of the House, I shall reply to the debate.
As the hon. Member for Glasgow, Garscadden (Mr. Dewar) said, this has been a quiet debate, although it has been marked by concern about the effects of the fall in the oil price on industry and unemployment in the Highlands and in the Clyde area. This is not the first time that I have heard the hon. Member for Greenock and Port Glasgow (Dr. Godman) describe the position in his constituency. As he will acknowledge, I am extremely familiar with it, alas, through my previous involvement with the affairs of Scott Lithgow. I know that what the hon. Gentleman says about his constituency and the employment situation there carries a lot of weight and is all too depressingly true. The Government share that concern about the economic consequences of the fall in the oil price for employment in those areas, along with its effect on the oil supplies industry and the oil companies, and that is why we have introduced the Bill. We did not first adopt a laissez-faire approach. We recognised that action was demanded.
The hon. Member for Dagenham (Mr. Gould) made a slightly predictable speech. With great respect to him, I must say that he gave us a bit of a lecture on the role of North sea oil in the economy and did not say much about the Bill. I make no great complaint about that, although one could take issue with some of his points.
The hon. Gentleman debated at some length the pros and cons of a high oil price versus a low one. He sought to draw on different remarks that my right hon. Friend the Chancellor of the Exchequer had made about the oil price at different times. He implied that my right hon. Friend had said that when the oil price was high it was good news, and that when it was low it was also good news. I am not sure that it is always such a bad thing to be of an optimistic predisposition. However, there is no great confusion about it. Different prices have different effects on various groups of people. Obviously high prices are good for Government revenue, while low prices are good for consumers and world trade, although perhaps less good from a Government's point of view.
If we had not had the very careful stewardship of our finances that we have had for the past few years, we would not have found it easy to cope with the halving of the price of oil within such a short time. The hon. Member for Dagenham seemed to dislike us making that point, but we do so strongly because it is true and quite justified. This country rode out the effects of a halving in the oil price because of the very careful policy that my right hon. Friend the Chancellor of the Exchequer had pursued over the years.
The hon. Member for Dagenham also repeated accusations that the windfall of North sea oil had been wasted. We strongly reject that accusation. Thanks to North sea oil public expenditure is higher than we could otherwise have afforded, and borrowing is lower than would otherwise have been the case. It has provided us also with the opportunity to build up a substantial portfolio of assets overseas that will be of benefit to Britain for many years to come.
665 The hon. Member for Dagenham blamed the rise in unemployment since 1979 entirely on the effect of oil on the exchange rate, thus leaving some mystery as to how unemployment had doubled in certain other European countries which do not have the benefit of being oil producers. The hon. Gentleman talked at some length about tax cuts and said that they had not been delivered and now never would be. I cannot comment on his second assertion, but, whatever the arguments on either side of the Chamber, it is clear that if we had had the public expenditure policies implemented by Opposition Members, tax rates would be much higher than they are now. There can be no argument about that.
The comments from the Opposition Benches show that there is a certain unease—Opposition Members seemed to be switching from one foot to another—over depletion policy. I think that the hon. Member for Garscadden acknowledged that unease in his reply. If the action which the hon. Member for Greenock and Port Glasgow was pressing on us had been followed and implemented, I am not sure that that would have been conducive to building up the confidence of the oil companies or conducive to a high level of exploration.
The hon. Member for Ross, Cromarty and Skye (Mr. Kennedy) said that he approached the Bill with mixed feelings. With great respect to him—I always enjoy listening to his speeches—his mixed feelings might arise from his slightly mixed up arguments. He seemed to think that by introducing the Bill the Government were confessing that they had it all wrong. I do not think that that argument can seriously be maintained. The tax regime that is appropriate at a price of $30 a barrel is different from that which should apply when the price is $14. We have a regime that is price sensitive, and through the refunding of APRT we are introducing measures that will be targeted on companies that are likely to carry forward development. These will be companies that will be able to carry out a greater amount of exploration as a result of the resources that will be transferred back to the North sea and to the oil companies as a result of this measure.
§ Mr. Dewar
The Minister is aware that there has been some scepticism among Opposition Members about the impact of this measure on exploration, the bringing on stream of new developments and the pushing into marginal areas of work in the North sea. Does the Minister expect to see an upturn in that sort of activity as a result of the Bill?
§ Mr. Lamont
I think that that would be looking into the crystal ball. The hon. Gentleman would be amazed if I attempted to answer his question and to make any firm predictions. The feature of the Bill that has been missed in the response from Opposition Members is that it is targeted on companies that are involved in fields that have not yet reached payback. By definition, that is the positioning 666 which a cash shortage is a constraint and is likely to inhibit development expenditure. That is what we mean by the Bill being targeted, and that is why we think that it will ultimately have an effect upon exploration and development. Certainly those activities will be at a higher level as a result of the Bill.
I am grateful to my hon. Friends the Members for Mid-Kent (Mr. Rowe) and for Rochford (Dr. Clarke) for talking in positive terms about the Bill. The welcome that it has received from Opposition Members has been extraordinarily grudging. The hon. Member for Ross, Cromarty and Skye said, predictably, that it was too little and too late, but I am sure that any action we took would always be described as too little. Even the hon. Member for Garscadden had to acknowledge that something that puts back into the North sea companies £310 million is a substantial measure by anyone's standards.
As I have said, the Bill is targeted very much at the fields that have not yet reached payback. We estimate that 75 per cent. of the benefit will go to the medium-sized and smaller companies, and we hope, therefore, that these companies will be able to proceed with development and more exploration.
It has been said that the benefits will not be confined to United Kingdom companies. We say that it would be wrong in principle to seek to discriminate between United Kingdom and non-United Kingdom companies. Some leading companies in the North sea have been non-United Kingdom companies. It is extremely important that we should not discriminate in the tax system between United Kingdom companies and foreign-owned companies in the North sea. The non-United Kingdom companies that have played a leading part in the development of the North sea are entitled to the same treatment in respect of APRT as United Kingdom companies that are operating in the area. I am sure that on reflection hon. Members will agree with that principle.
We look forward to hearing further in Committee what the Opposition have to say about the targeting of this measure. For the reasons that I have explained, we think that it is targeted in a way that will bring forward some development and ensure the continuation of other developments. We recognise fully what has been said by Opposition Members about their concern over what is happening in parts of Scotland or in their constituencies. We believe that this is a useful measure, and I am only sorry that Opposition Members have not given it a more generous welcome, but have been slightly grudging. We believe that the Bill will be welcomed by the industry and will be of practical use. Therefore, I commend it to the House.
§ Question put and agreed to.
§ Bill accordingly read a Second time.
§ Bill committed to a Committee of the whole House.—[Mr. Lennox-Boyd.]
§ Committee tomorrow.