§ "The Secretary of State may, after consultation with the Treasury, make grants to a person or persons who have submitted a programme under section 1 and which has been approved or revised under sections 4 and 6 for the purposes of implementing the programme.'.—[Mr. Rowlands.]
§ Brought up, and read the First time.
7.10 pm§ Mr. Ted Rowlands (Merthyr Tydfil and Rhymney)I beg to move, That the clause be read a Second time.
In Committee, we were reminded of just how much money in tax revenue has been obtained from the North sea since 1979. It was a staggering £352.4 billion, obtained by way of direct taxes from North sea oil, the largest fiscal windfall in modern British history—and the Government have been the beneficiaries of it.
At the same time we have become increasingly aware that a Government in the mid-1990s will begin to face the problem of repaying a significant proportion of those revenues as part and parcel of relief against the cost of abandonment. It is a sobering thought that although Governments have enjoyed this enormous fiscal windfall, the Government of the mid-1990s will not only have less revenue from the North sea—because production will have declined by at least 1 million barrels a day and because of the probable lower average oil price—but, as the abandonment programme gets under way and the costs begin to come in, it is likely that the Government will have to pay a very large proportion, possibly up to 85 per cent., of the cost of abandonment. Therefore, we are not discussing matters of marginal significance; we are talking about very considerable items of expenditure and tax relief at a time when the revenues which created the development and which have been enjoyed by this Government will be declining both in real terms and in terms of offsetting the cost of abandonment by means of tax relief.
I make no apology, therefore, for endeavouring by means of this new clause to open up debate about the fiscal arrangements that will prevail and to put forward the suggestion that we consider a grant structure as much as a tax relief system. As the Minister will recall, we considered whether the Government, even at this stage, knowing what lies ahead, should not hypothecate in some form or other existing revenue to cover future costs. After all, the Government will urge the oil industry to prepare for this eventuality in its accounting and even to put money into trust funds of some kind in advance of abandonment programmes. The Government, however, have not done this, and I do not suppose that they will hypothecate any percentage of current oil revenues from the North sea to cover the costs that a future Government must face.
We could not, although we wanted to, put down an amendment to that effect because it was inhibited by the scope of the financial resolution, so we decided to raise the issue and open up for debate methods of meeting these enormous costs in the coming decade, costs that will fall on the Government and taxpayer more than on the industry itself.
370 The reason why we should look at a grant system instead of tax relief is that the work of Professor Kemp showed that the tax relief system could be capricious. Abandonment costs in different fields and installations could attract tax relief of varying amounts, from 35 per cent. to 85 per cent. Such a capricious and unpredictable incidence of relief could bring confusion to the development of abandonment programmes. We identified some of the problems in Committee, and we return to the argument now in a rather different form by proposing in this new clause that the Secretary of State should have power to make grants rather than give tax relief.
One of the most valuable things that the Minister can do when he replies is to clarify the tax position. It would be very useful for everyone, particularly those outside the House, to have a clear statement from the Minister about the tax position. As I understand it, there would be three forms of tax relief on abandonment: against corporation tax, in relation to petroleum revenue tax, and in relation to royalty payments. When he replies, will the Minister make it absolutely clear what these reliefs are and what the existing position is? Could the whole of any abandonment cost be offset against PRT? Over what period could these costs be set against the various taxes? From the analysis carried out by Professor Kemp and from the informal discussions that other hon. Members and I have had with people in the oil industry, we know that under existing rules a company may, over the life of a field, pay PRT at an average rate of, say, 53 per cent., but receive little or no PRT relief on abandonment because of the incidence of the oil allowances. It is particularly in relation to PRT that I hope the Minister will help the House in clarifying the position.
Given the possibility that tax relief can be capricious and unpredictable and can vary widely, we believe that there is a case for considering a grant system as a better alternative for covering the cost of abandonment. The Minister and his Department have done some work on this and the Norwegians went into this in considerable detail. I have a considered report by the Norwegian Ministry of Finance and Customs on the whole question of the law regarding allocation of costs of removal of installation and tax. After the issue had been considered at some length, the report, on page 30, concluded:
To utilise the tax system as a mechanism to allocate the removal costs between the public and the oil companies is unnecessarily complicated. Such a procedure would weaken the financial control with the removal, hereunder the cost-consciousness of the companies".It decided that it would be far better to introduce some form of grant structure than to meet the cost by way of relief from taxation already paid.The Norwegian system is that the companies would create a separate account for a removal project. The cost would then be clearly identified and the State would pay its share as the expenses were incurred during the course of the abandonment programme. The idea is to have a grant relating to the overall payment of tax made by a company on a particular field.
These are interesting and serious proposals. All that we are proposing in new clause 1 is to put into place the opportunity and power for the Secretary of State to do this. None of us knows how it will work out. We cannot be sure how large abandonment costs will be—at their gross it is estimated that they could be as high as £6 billion—but we assume that, with some form of partial 371 removal, we are talking of a total of £3 billion to £4 billion. If the State has to pay back 85 per cent. in tax relief in the mid-1990s, at a time of declining oil revenues, there is a strong case for considering the alternative method of covering the costs. That is the conclusion of the Norwegians, having studied the matter carefully. We should not close the door on that option. That is why we have proposed new clause 1.
When we have determined the legislative framework for abandonment programmes, the next and most urgent task will be to create the financial framework for those programmes. Therefore, I ask the Minister to make a clear statement on the existing tax position by indicating what reliefs are available and the period over which they can offset the cost of abandonment. Does the Minister believe, as everyone outside does, that the tax relief system has a capricious character which could lead to considerable variations in the payment of tax relief on abandonment costs? Will the Minister at least consider the option of a grant structure if the system of tax relief is complicated and in some cases inequitable?
Before the Norwegians made their law, they consulted the major oil companies operating in the Norwegian North sea. Some of those companies also operate in our North sea. The oil companies expressed a preference for a grant structure. There are divided views in the oil industry. Until they know the tax position, they cannot make a decision. All we propose in new clause 1 is to give power to the Secretary of State to establish a grant system. We are saying not that such a system should be implemented, but that it is a reasonable option. It is in that light that we put forward new clause 1.
§ The Minister of State, Department of Energy (Mr. Alick Buchanan-Smith)I am grateful to the hon. Gentleman for proposing the new clause because it raises an important issue. Although we touched on it in Committee it is helpful and relevant to return to it because it is, I understand, still under discussion in the industry as a possible means of handling the financial aspects of abandonment. As the hon. Gentleman rightly said, the matter has also been discussed in Norway, although I do not think that anything has yet been approved by the Norwegian parliament, the Storting, as the route to be followed.
As I said in Committee, the way in which the Government eventually decide to pay their share of abandonment costs still needs further consideration. That will include consideration of the possibility of the non-fiscal, grant-aided approach that the hon. Gentleman mentioned. I am aware that some people in the industry have expressed a preference for that approach, although I believe that the United Kingdom Offshore Operators' Association is still considering whether to make a formal request to the Government that this be considered.
As I told the House on Second Reading, the Bill contains provisions which give an enabling power to amend royalties procedures so that abandonment costs may be carried back and set off against royalties paid earlier. This enabling power will be used only if the Government decide that the existing fiscal system of relief for abandonment costs should be maintained, possibly with some technical amendments. Against that background, I understand why the hon. Gentleman asks whether the other route might be considered as well.
372 The Government have not come to a final view, but if we go down the grants route I do not believe that it is necessary to provide the power now, so not providing the power in no way prejudices consideration of the non-fiscal route. The House should reflect that under neither route is it envisaged that very much in the way of grant or tax and royalty relief will need to be given for a number of years, although I acknowledge that when abandonment happens considerable sums of money may be involved. It is possible that one or two abandonments will take place earlier but the great bulk of abandonment is likely to be later in the next decade, possibly towards the end of the century and later.
§ Dr. Norman A. Godman (Greenock and Port Glasgow)Can the Minister tell us where the platforms are situated which are likely to face removal earlier?
§ Mr. Buchanan-SmithIt is impossible to be specific because no company has yet come forward with proposals for abandonment. Of course, companies are not required to do so. One of the things that has marked the North sea, as we discussed in Committee, is the fact that most of the fields have so far performed better than was envisaged. That has meant that their life has been longer than expected. Speculation on when platforms are likely to be removed is like speculation on the price of oil—one is as likely to be wrong as right, so it is not speculation that I wish to undertake.
The point I was making is that this is some time away, so if a grant system were to be adopted it would be a considerable time before a significant number of payments had to be made. In those circumstances, it would be necessary to make legislative provision, which would have to be put before parliament in due course. Of course, we already have fiscal arrangements because the costs can be put against the taxes which the hon. Gentleman mentioned. The general arrangements are in place, although detailed arrangements would have to be discussed between the industry and the Inland Revenue. No doubt consultation would take place. Ultimately, it would be the responsibility of my right hon. Friend the Chancellor of the Exchequer to decide on the changes necessary to take full account of the details and the special circumstances that may arise.
We have in place tax arrangements which would allow the fiscal route to be followed. With that route, the need to repay royalties could involve adjusting royalty assessments for some years prior to abandonment. As we have those tax facilities in place, we decided that it was wise to use the opportunity of the Bill to make the enabling power applicable to such assessments from an early date as it is obviouslynot desirable retrospectively to amend the licence model clauses under which the assessments are made.
If I recollect correctly, in Committee the hon. Gentleman said that the carry-back power in the Bill might not go far enough. I said that in such cases, which would probably be isolated cases, if further carry back were necessary it could be dealt with by amendments to the individual licences. That illustrates that if we are to follow the fiscal route now in place we must legislate now. If, after further consultation with the industry, we decide to go down the route suggested in the new clause, there is not the same urgency to legislate now, although power would have to be taken at the appropriate time in order to be able to follow that route.
§ Mr. RowlandsThe right hon. Gentleman has confined his remarks to royalty payments and repayments for abandonment costs. Will he say something about PRT? Royalty payments bring in about £2 billion per year from the North sea, but PRT brings in about £6 billion, so the problems about PRT will concern us most.
§ Mr. Buchanan-SmithThe hon. Gentleman is correct. There is no doubt that the bulk of abandonment costs would be against PRT. If changes have to be made to the rules, the ability to make those changes already exists, but we do not have the necessary powers in relation to royalties. That is the reason for the Bill.
I am grateful to the hon. Gentleman for raising this important issue. We have chosen this Bill to legislate in a specific way and I suppose that that shows that to some extent this is the preferred route to allow for abandonment costs. As I said earlier, I emphasise that no final decision has been taken and the route that the hon. Gentleman suggests is still possible. It is being considered by the industry and if the industry wishes to argue a case my right hon. Friend the Chancellor of the Exchequer and I will consult with the industry. I do not think that the hon. Gentleman seeks one route or the other. He is simply saying that this is an alternative route which might be used. Nothing in the Bill would prejudice the use of that route, and it does not require legislation at a later stage. Given that clarification, I do not think that the new clause should be pressed.
§ Mr. RowlandsI am half comforted by what the Minister has said. It is at least clear that he has an open mind about the notion that we might pursue a resolution of the problem of abandonment costs by grant rather than by tax relief. He has said that he will keep the option open. I am a little less comforted by his account of the system and the tax position. We need much better and more urgent clarification of the tax position than he has given us. We also need that information earlier than the date he has suggested.
I got the impression that the right hon. Gentleman was saying that things could be sorted out in due course. The fiscal framework within which the abandonment programmes will be prepared is closely related to the important amendments to clause 2 and the matters of liability and responsibility. If the Minister feels that there is an urgent need for a legislative framework to prepare and bring forward abandonment programmes, there is an equal and similar urgency about resolving the fiscal framework within which these programmes will be prepared.
We support the idea of using joint operating agreements or similar agreements to establish proper liability and responsibility for abandonment programmes along the lines of the amendments that we will debate later. Many companies will negotiate, often with their smaller partners. In the BP Forties field there is a string of small interests on some of the licences and there could be negotiations on the joint operating agreements. Every company will say that it accepts the responsibility and the liability but the companies will want to know the fiscal position. Some of the difficulties in renegotiating and reorganising the joint operating agreements or similar agreements to establish liability and responsibility for 374 abandonment programmes, will be affected by the lack of conclusion and uncertainty and doubts about the fiscal position.
The fiscal problems will come earlier rather than later. We know that some companies and some groups will consider whether or not to establish a trust fund to cover now their portion of the future cost of abandonment. Will that trust fund money be eligible for tax relief? That issue is bound to arise fairly soon, as will the nature and character of tax relief. I am grateful that we have taken action to cover the royalty relief provisions. We accept that that is an important change and the Minister will know that we have not opposed that provision, but have sought to clarify it. He will be asked about whether it is effective and comprehensive enough.
The real doubts and difficulties will arise over PRT. I said that this is the largest source of revenue from the North sea. With APRT, it is running at over £6 billion a year. That does not include the extra slab of enforced loans. It is a substantial part of the revenue from the North sea. One wicked thought that crossed my mind and might have crossed the minds of other hon. Members is that in the mid-1990s, as PRT revenues decline, it could be cheaper for the Treasury to abolish PRT rather than accept the liability of repaying it to cover abandonment costs. PRT has a direct bearing on production and profitability. In the mid-1990s, the repayments could come close to wiping out the revenue. A Chancellor stuck for cash will be tempted to abolish PRT when it is declining, at the very time when relief for abandonment costs would be needed.
I hope we have made the case to the Minister that these issues are not for the long term. They will be relatively immediate issues for companies to think about and resolve as they prepare their abandonment programmes and renegotiate and revise their joint operating agreements or establish similar agreements for responsibility and liability for abandonment programmes. As I said, I am half comforted by the Minister's comment that he has an open mind on these matters. I urge him to take a much more urgent look at the whole situation with the Inland Revenue and his Treasury colleagues, because we will need a fiscal framework just as much as we need a legislative one. I beg to ask leave to withdraw the clause.
§ Motion and clause, by leave, withdrawn.