EXTENSION OF SECTION 5A OIL TAXATION ACT 1975 (ALLOWANCE OF EXPLORATION AND APPRAISAL EXPENDITURE) TO EXPENDITURE INCURRED IN DEVELOPING AN OILFIELD (Hansard, 8 July 1986)

§ Mr. Charles Kennedy (Ross, Cromarty and Skye)

I beg to move, That the clause be read a Second time.

I am grateful that the new clause, which I have tabled along with my hon. Friend the Member for Caithness and Sutherland (Mr. Maclennan), has been selected and that we have the opportunity for a short debate on this important matter. I hope that the House will understand if I put the matter in context by painting the importance of the issue to my constituency, to my part of the country and to the economy as a whole.

The House will be well aware of the growing concern in the oil and oil-related industries as the result of the developments that have taken place as a result of the dramatic and remarkable fall in price on the international market. That fall in price has beneficial consequences for many aspects of the economy. Indeed, no secret has been made of that fact by Ministers, who have welcomed it. However, it has carried with it a downside, as most things do, in respect to the pace and momentum of North sea oil

My concern arises because in the Ross, Cromarty and Skye constituency there are two major fabrication yards, Howard Doris on the Kishorn site, Wester Ross, and Highlands Fabricators, which, I am glad to say, recently won the substantial Eider platform contract, leading to an audible sigh of relief throughout the economically depressed Easter Ross area. In addition, there is McDermotts, Ardersier, in the constituency of my hon. Friend the Member for Inverness, Nairn and Lochaber (Sir R. Johnston), which was unlucky in regard to the Eider award. There are many examples of the oil-related industries creating employment generally on the supply and servicing side. Therefore, the downturn in prices that has given rise to a downturn in development activity is bad news for areas dependent on the large construction contracts and servicing and supply contracts that come from the momentum of North sea development as a whole.

With OPEC in some disarray, we can hardly look to the Treasury to solve such a complicated and volatile international problem. I do not ask the Minister to try to perform miracles in promising or guaranteeing specific levels of oil price in the future and stability in the market; coming even from these Benches, I think that that would be fairly unreasonable, given the geopolitics and 257 economics of oil at present. However, the Government should give us the opportunity to hear from the Dispatch Box at this stage their views on steps with regard to the tax regime and certain aspects of it as they affect development work in the North sea.

I have had a fair amount of correspondence of late with Ministers on the matter. It is worth bearing in mind that the rewards for Britain's current attractiveness as a location for petroleum investment are high. I refer to an industry study of two years ago on the geological potential of the United Kingdom. It is estimated that beween then and the end of the century about 80 new fields could be developed, 100 production platforms built, 1,400 appraisal and development wells drilled and over 2,700 miles of offshore pipeline installed. That would be expected to call for an expenditure of up to £60 billion at 1984 prices, three quarters of which could reasonably be anticipated to be awarded directly via contracts by British companies. That is a considerable long-term potential. I think that we all agree that we want to see as much of that potential realised as possible.

The argument that is beginning to build up in oil circles and elsewhere is that the time has come to look at the existing tax structure for North sea work and see whether there is anything that the Government can do at this stage, because of the depressing effect of reduced oil prices, to encourage development work.

9.45 pm

A few weeks ago I made proposals both to the Department of Energy and to the Chief Secretary to the Treasury. The Minister with responsibility for industry at the Scottish Office commented on some of the points that I made. He endorsed the view of both the Treasury and the Department of Energy and said that there was little evidence that the tax regime was making economic projects uneconomic. That is not a clear-cut issue. Even this new clause is not the panacea to all ills, but the distinction that is being made by Ministers is missing the point to a certain extent.

It is valid to argue that a project that is economic before tax considerations are taken into account remains economic, even under the present fiscal regime. It is not the tax regime that has led to the problem. The fall in the price of oil has led to the problem. Constraints surround what the Government could do, although one could argue that they could do more. However, that is not the point that I want to make this evening. The Government could encourage the oil companies to continue development work by altering the tax regime. This was acknowledged by the Chancellor of the Exchequer in his Budget speech on 18 March. He said: Otherwise, I propose only minor technical changes to the taxation of North sea oil; but I am continuing to keep the economics of incremental investment under review, and shall not hesitate to introduce 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.] The industry welcomed that statement. Under the strict criteria of the Chancellor's argument a cogent case can be made for saying that as yet there is little evidence of worthwhile projects being frustrated purely by the fiscal regime. However, given the fall in the price of oil, the fiscal regime is one means by which some stimulus could be provided to create the momentum that is now lacking.

I acknowledge that there are difficulties. Different types of fiscal alterations could be introduced, but I do not 258 intend to rehearse them tonight; some of them are outwith the bounds of the new clause. I am more interested in the principle that is at stake, which is what action could he taken by the Government. One of the difficulties was best summed up in a recent article by Dominic Lawson, who wrote an article in the Lombard column under the appropriate title Taxing times in the North Sea. He referred to the general argument surrounding the petroleum revenue tax regime and made the very important point that if the Government introduced certain concessions the oil majors would perhaps not channel the money right back into the North sea. They are baulking at North sea developments because they are not sure that the project will give a satisfactory return irrespective of the tax regime.

Money given back by the Government is more likely to fuel the acquisition of one company's reserves by another. That outcome would not be attractive to the Government and I would share their view about that. Mr. Lawson goes on to detail some of the other difficulties that would arise if the type of concession given was the one that we now read so much about in the financial press. It is a concession promoted by the major companies and it would benefit them.

I appreciate that there is a genuine problem and I do not pretend that this new clause would in itself be able to overcome it. The Scottish Grand Committee recently debated the oil industry and in the Committee the Minister of State, Department of Energy developed the argument about which I have spoken. He said: Several companies and associations in the oil industry have put forward suggestions for change. I suggest to the Committee, however, that the tests that we apply to those suggestions have to be, first and foremost, not merely what effect a tax change has on the cash flow of a company. A company will naturally argue for changes in tax that will help cash flow".—[Official Report, Scottish Grand Committee, 24 June 1986; c. 9.] The central point is surely the purpose for which the increased cash flow is used. It should be used in a way that will not simply generate more profits for the company with no guarantee of subsequent reinvestment in the areas in which we seek investment.

One of the ideas being canvassed goes slightly beyond the scope of the new clause, but is relevant to the issue that the new clause seeks to address. It is the abolition of inter-field ring fences on development costs. The ability of the oil companies to set development costs and new projects against PRT on existing fields could reduce the net capital investment on new field development and shorten the payback period. That abolition would arise from the concession which allows exploration costs to be set against PRT.

If that kind of change is considered, I strongly urge that the principle of ring fencing should be retained for the whole of the North sea. I say that for the reasons that. I have outlined: that any returns accruing to the oil companies as a result of such a concession would have to be reinvested directly in the continuing development of the North sea as opposed to being directed to other activities. It is that type of approach to which I hope the Government will give further consideration, and it is with that type of approach and in that spirit that the new clause is moved.

259 The clause is not perfect, and since I tabled it I have been advised that if I want to make its provisions more comprehensive about the development work that could be encouraged I should add at the point which reads under section 3 of this Act the words "and section 3 of the Oil Taxation Act 1983". Therefore, I am the first to concede that the clause is not as good as it could be, and on that ground alone I suspect that the Minister will probably reject it.

The clause is put forward to voice the view that we must be getting near the stage where some kind of Government action is required to forward development work. In putting forward that case, it must be remembered that we are not talking just about profits, jobs, industries and communities such as mine. Those things are important, but we are also talking about the beginning of the disbandment, especially by many of the major companies, of the development teams, the people who are concentrated in Aderdeen and elsewhere. Those people have the ability to work as a team and to carry forward development plans and projects from concept to reality.

With the industry in some disarray and with there perhaps being some over-reaction to the present difficulties, we shall lose some valuable people as they are dispersed. A signal from the Government might do something to retain those important people, so that if the price picks up again development work can be carried out and seemingly non-viable fields can once again become viable. Such a measure might favourably affect the viability of certain projects.

The aim of the new clause is to permit expenditure on developing a field to be offset against PRT payable on another field owned by the same licensee. The clause works by expanding the relief currently available for exploration and appraisal expenditure on searching for oil and so on, as contained in section 5A of the Oil Taxation Act 1975. The relief is limited to expenditure incurred before "the critical half-year". That means that relief is limited to the period before the six months in which production from the field exceeds 1,000 metric tonnes.

Thus, the aim would be to limit the qualifying expenditure to that incurred in developing the field, as opposed to operating it. Rather as I said about the use of any extra returns that may accrue to companies, my anxiety is about development work and about maintaining its momentum.

Relief would be available only for expenditure incurred from 1 July 1986. Thus, if a field commenced production after that date, but expenditure had been incurred in the period bridging 1 July, only the expenditure from 1 July would qualify. Having admitted the difficulties, complexities and political constraints that would face any Government, especially following the difficulties in which OPEC finds itself, I hope that the Minister will be able to accept the spirit in which the new clause has been moved. I hope that he will also accept the genuine local concern about present developments in the oil industry and the effect that is already being experienced on the Scottish economy. I fear that things will get considerably worse if the current slow-down in development persists.

It is also worrying that when the Chancellor referred to this difficulty, he also told us that his Budget strategy was based on the price of oil probably levelling out this year at about $15. That figure is beginning to look rather 260 optimistic. In recent days, the price has fallen still further. But even in the unlikely event that the price returns to an average of $15 a barrel, it must be recalled that the Scottish Development Agency recently did a computer projection which showed that if that oil price was projected over a 10-year period it would lead to a cut of no less than 40 per cent. in spending by the companies. That means big trouble for some of the firms and major industries that have contributed so much in terms of advanced international technology. Moreover, the oil industry contributes to 25 per cent. of what is left of our manufacturing capacity.

Those are the reasons for this admittedly imperfect new clause. I hope that the Minister will give us the benefit of the Treasury's thoughts at this stage. I also hope that, when the Treasury continually says that it is keeping the matter under review, it is not just wringing its hands while the oil industry collapses round our ears, rather like the price of oil has done, but that it is ready to step in and to take preventive action. I hope that the Treasury is convinced that such action will be of assistance. Indeed, hon. Members on both sides of the House are becoming increasingly sure that it will be.