HC Deb 13 November 2002 vol 394 cc118-26

Motion made, and Question proposed, That this House do now adjourn—[Mr. Ainger.]

9.59 pm
Mr. Alistair Carmichael (Orkney and Shetland)

I should remind the House that my entry in the Register of Members' Interests indicates that earlier this year, I was fortunate enough to receive hospitality and transportation in respect of the offshore northern seas exhibition in Stavanger, which was sponsored by the United Kingdom Offshore Operators Association.

As luck would have it, this is a timely debate for the offshore oil and gas industry. This is a very delicately poised time for the industry, as there is, frankly, the prospect of significant decline. If that prospect is left unchecked, decline could turn into disaster. Much remains to be seen about what can be done by the industry and the Government, not least in partnership together.

The situation has already started to impact in my constituency. At the Sullom Voe terminal in Shetland, there has already been a round of redundancies, and contractors and subcontractors have also started to reduce their numbers. In a community such as Shetland, the loss of jobs from a place such as Sullom Voe has an especially severe impact. These are good, well-paid, skilled and professional jobs. The installation also has significant spin-offs for harbour provision and towage in Shetland. Once such jobs are lost, the people who held them will also tend to leave the community, so the constant drip of depopulation—the great threat that always hangs over communities such as ours—will continue.

There are not many alternatives in Shetland. The local authority, which is one of the other significant local employers, is also looking to cut numbers. After the time I spent in Brussels at the European Commission yesterday, I do not have any confidence that there will be a prospect of employment in the white fish industry for many of the people who are affected. Much of what is happening today was predicted by the industry at the time of the changes made in the Budget and was also referred to at the ONS exhibition earlier this year.

I should say that I am not seeking to visit all the ills of the industry on the Government. In particular, the Budget changes will not clearly be all bad for the industry. I share the conclusion drawn by Professor Alex Kemp of Aberdeen university, my alma mater, at the end of last week when he published his North sea study, occasional paper No. 89, "The Impact of the 2002 Tax Changes on the UK Continental Shelf". I do not know whether the Minister has had the benefit of reading that document. If not, I certainly commend it to him as an excellent piece of academic research. Professor Kemp concludes that older fields and marginal projects within mature fields will benefit, but only as a result of the royalty abolition. That is the first point that I would wish the Minister to address.

The Government are currently undertaking consultation on the abolition of royalty. It might be slightly ungenerous to say this, but although they have been meticulous in their consultation on the abolition of royalty, would that they had taken the same careful approach to the introduction of the corporate tax increase in the first place. It is one of those unfortunate things that measures that are of benefit seem to be capable of being introduced only after careful preparation, while those of detriment seem to be much more easily sprung on the industry.

Sir Robert Smith (West Aberdeenshire and Kincardine)

For the record, I also visited the offshore northern seas exhibition in Stavanger, and I declare an interest as a shareholder in Shell.

I want to reinforce the point about royalties. Many of my constituents and people in the industry have put it to me that abolishing royalties is not simply about the figure, which is not that great in terms of the tax take through the 10 per cent. charge. The crucial point is to fulfil a promise that the Chancellor made and to restore confidence to an industry that suffered the shock of the way in which the tax was originally introduced.

Mr. Carmichael

I agree with my hon. Friend. Abolishing royalty is the thread on which the Government's credibility with the industry hangs. It is important that an announcement is made early. I hope that the Minister can inform us of the consultation's progress and when we might expect a decision.

Mr. Alex Salmond (Banff and Buchan)

Does the hon. Gentleman know that the latest forecast for total exploration wells drilled this year is 12? That is half of last year's total and much less than was expected at the beginning of the year. Does that not show that any tax change that the Government want to introduce should have been accompanied by an incentive for further exploration drilling? The change means not only lost jobs now but lost development and lost tax revenues in future.

Mr. Carmichael

The hon. Gentleman makes an important point. One of my main anxieties is that the package will create imbalance in the industry on the United Kingdom continental shelf. Without money and effort being put into exploration now, there will be no mature fields to benefit in three, five or 10 years' time. I shall consider that in more detail later.

If the abolition of royalties is the silver lining, we should not forget that a dense black cloud surrounds it. The position is producing an imbalance, and there is already evidence of the deferral of investment, which the UKOOA and many Liberal Democrat Members predicted during the Budget debates. I am sure that the Economic Secretary knows that UKOOA's annual survey of 28 UK offshore oil and gas producing companies' investment and development plans was published yesterday. It was undertaken with the Department of Trade and Industry. It describes the current position as having

reached a critical point in terms of its international competitiveness, with projections of investment growth not being matched by increased production volumes. The survey says much about the current position in the industry. I want to highlight two statistics in the report. They relate to the point that the hon. Member for Banff and Buchan (Mr. Salmond) made. The report states: There are 64 fewer new field developments planned for the future compared to last year's survey findings (84 as opposed to 148 in 2001). Secondly, the report states: Total UK oil and gas production for the period…to 2010 is forecast to be an estimated 12.9 billion barrels of oil equivalent, some 370 million boe lower than predicted twelve months ago". That elegantly illustrates the point of the hon. Member for Banff and Buchan that the Department of Trade and Industry clearly recognises the need to bring new entrants to the UK continental shelf. However, that is hindered by the taxation policy that the Treasury promotes.

The great need in an industry such as offshore oil and gas is for continuity and stability. The overall picture that the UKOOA report painted is of a genuine threat to that. Extraction of oil and gas from the North sea is not quick and easy, but fraught with danger. Before coming to Parliament, I was a solicitor and I dealt with several people who had been injured in offshore accidents, as well as with families of people who had sadly been killed as a result of such accidents. The environment is highly challenging and hostile. Extraction therefore involves a steady stream of work in developing new fields. Investment now will bring benefits in three years' time or well beyond that period.

There are other anomalies that need to be addressed. One particular concern for me—I hope that the Minister may have something to say about it when he replies—is the taxation on tariff income deriving from the use of infrastructure. It is a curious position. For mature fields with pipelines coming in from Miller, for example, there is 70 per cent. taxation. For newer non-taxable fields, it is now at 40 per cent. For brand new pipelines such as those that would be bringing gas into this country from Norway, to hark back to the ONS exhibition at Stavanger, the Minister for Energy and Construction was keen to trumpet the signing of a concordat with the Norwegian Government to make this a reality—the tariff on these pipelines is to be taxed at 30 per cent.

I believe that damage has been done to the industry by the taxation increases in the Budget. When historians come to review this period, I think that they will come to the view that the real damage was done by the Government. I shall hark back to some of Professor Kemp's estimates. I believe that he estimates that the peak of the tax take will be £1 billion barely this year, and thereafter it will be on a declining tariff. Given the loss of confidence in the Government among the industry and the damage that they have done to the long-term prospects for the offshore industry on the UK continental shelf, it may ultimately be seen to have been an expensive filling of a gap in a Budget. It is all so regrettable because it is all so unnecessary. The Government's standing had been increasing since 1997. The manner in which they operated the pilot project was exemplary. All that was thrown away on one afternoon.

The industry considers that the real villain of the piece is the Treasury. That is why I framed my application for an Adjournment debate in a way that meant that we might have a Treasury Minister rather than a Minister from the Department of Trade and Industry to respond to it. I canvass the idea that there is a need for Treasury Ministers to be involved at the highest level of PILOT. I understand that currently only DTI Ministers are involved, although I understand that the sub-groups involved officials from the Treasury. If there is to be a repairing of the relations between the industry and the Government—it is crucial that there is—that would be the most obvious first step.

It is my real concern that the full effects of the changes in taxation that arise from the Budget are not yet apparent. First, I am concerned that the changes may have a bearing on the health and safety of workers in the industry. It seems almost inevitable, that from a mainland perspective, operators in the North sea are out of sight and out of mind; they are working in tighter margins, and on older fields there will be pressure to compromise on safety. We all know the dire consequences that that can have. I lived in Orkney at the time of the Piper Alpha disaster and I well remember the accommodation module being brought in to the Flotta terminal to be opened. That will remain with me for the rest of my life. We can have no compromise on safety in the North sea because it can be disastrous in human terms.

My other concern is about the working time directive, from which the offshore oil and gas industry is exempt. The unions are pressing to have it applied to the industry. I broadly favour that, because I do not see why in principle offshore workers should be treated differently from anybody else, but as long as the margins are squeezed as they are at present and as long as there is an imbalance in the industry—with the emphasis on mature fields and not on developing new ones—I can see little prospect of its happening. I am anxious to give the Minister time to answer the points that I have made, so I shall conclude my remarks.

10.16 pm
The Economic Secretary to the Treasury (John Healey)

I congratulate the hon. Member for Orkney and Shetland (Mr. Carmichael) on securing the debate and I applaud the reasoned and well argued way in which he presented his case. This short debate cannot do justice to the issues that he raises, nor the interest of other hon. Members, including the hon. Members for Banff and Buchan (Mr. Salmond) and for West Aberdeenshire and Kincardine (Sir R. Smith).

The Government are completely committed to maintaining an active oil and gas industry in the UK and to promoting the future development of the nation's oil and gas resources. The moves that we have made since 1997, including the tax changes in this year's Budget, underline that commitment. The oil and gas industry task force, established in 1998, was an early and strong commitment to the industry. Its work continues through PILOT, which we set up in January and which the hon. Member for Orkney and Shetland mentioned. I welcome his stress on the importance of that industry-Government partnership. No doubt PILOT will consider two of the issues that he mentioned, because the working time directive and health and safety concerns are meat and drink to such a forum.

The Treasury has always been, and will remain, fully engaged with PILOT's work. We will remain so because that body reflects the importance that the Government attach to the oil and gas industry within the wider economy, in terms of jobs, investment and contribution to the national income.

The hon. Gentleman outlined some of the difficulties and challenges that companies face in the North sea, including high costs and lower production levels. Those are classic characteristics of a mature industry and it is those problems that PILOT has been designed to help companies overcome. PILOT is looking to the long term, and the new tax regime—the subject of the debate—does the same. The changes are designed to provide certainty for the industry, by removing the element of fiscal risk, and to create the right investment incentives by introducing 100 per cent. first-year reliefs for virtually all North sea capital investment and by removing the old royalty system entirely.

I reject the suggestion that those changes were rushed or introduced without preparation. I remind the hon. Gentleman that the Government's first Budget, in 1997, announced the review of the North sea fiscal regime. The pre-Budget report that year stated: Following the announcement, there has been wide consultation with the oil industry about the existing fiscal regime. A 1998 Budget press release confirmed that the Government would formally consult the oil industry on specific proposals for change to the North Sea fiscal regime. The accompanying press release outlined a consultation document, with the options of extending the petroleum revenue tax or introducing the surcharge tax.

We confirmed that we would not go ahead later that year, because of the lower oil prices, but two years later, in the pre-Budget report speech, the Chancellor made this clear: It has been put to me that North sea oil companies earning higher profits from higher oil prices should be subject to special taxes, but I can tell the House that I am determined not to make short-term decisions based on short-term factors."—[Official Report, 8 November 2000; Vol. 356, c. 317.] In his 2001 Budget speech, he said: As we consider the next steps for taxation in the North sea, our approach will be guided not by short-term factors but by the need for a regime that raises a fair share of revenue and promotes long-term investment in the North sea."—[Official Report, 7 March 2001; Vol. 364, c. 299.] That is exactly what the Chancellor announced a year later in this year's Budget. Frankly, it gives the lie to the idea that, somehow, the changes to the tax regime were a surprise or that they were made without any consideration for or sufficient consultation with the industry.

I also reject the hon. Gentleman's argument that the industry cannot afford the changes and that investment will suffer, because last year, even after investing £4 billion, oil companies generated a net cash flow of £10 billion from the North sea, even after all the taxes they had paid. The pre-tax rate of return in the North sea oil industry, as the hon. Gentleman knows, is a massive 21 per cent.—double that, generally, of other industries.

Also, in post-tax terms, we see a significant difference compared with other sectors in recent years, so I reject the arguments that the changes cannot be afforded and that investment will suffer under the new regime. I have read Professor Kemp's report and the speech that he gave on Friday. I have also received a communication from him on the very issue. In a sense, the hon. Gentleman misrepresents his point about royalties, because he states very clearly that my research clearly shows that the 100 per cent. capital allowances and royalty abolition help investment in incremental projects in old fields, and 100 per cent. capital allowances help new fields of very modest profitability. Thus the changes make the tax system more progressive in relation to oil price and cost changes.

Mr. Salmond

I welcome the mention of Professor Kemp, because, as the Minister knows and as the hon. Member for Orkney and Shetland said specifically, Professor Kemp is also very concerned about the differential taxation of gas infrastructure. Has the Minister had the opportunity to consider that issue specifically, bearing in mind the under-utilisation of large existing structures, and, from a Treasury point of view, the fact that if new structures are built, perhaps unnecessarily, they will attract substantial capital allowances? For the Treasury and for the environment, would it not be a good idea to tax existing gas infrastructure fairly?

John Healey

The hon. Gentleman asks whether I have considered the issue. I have. I have also considered the work that the joint UK-Norway group has been doing on the question. I shall come to that later, because it was raised by the hon. Member for Orkney and Shetland.

The starting point for the debate—an important reference point—is the fact that the North sea is accepted as a maturing oil region. Most major North sea finds are past their peak and overall production is beginning to decline. However, the UK still offers some good opportunities, although it is widely recognised that their nature has changed. As Beverley Mentzer, chair of the United Kingdom Offshore Operators Association fiscal policy group, said in relation to yesterday's report launch: Managing a business as production declines requires different application of the skills and disciplines that have been successful during the growth of the UK continental shelf in the first half of its life". There is also general agreement that costs in the North sea are high by international standards. Average development costs are about $4 a barrel and operating costs are about the same, so that tax regime must, and now does, recognise that combination of high costs and a maturing sector.

We had two principal objectives for tax in the North sea: the regime must ensure that there are sufficient incentives to invest in a maturing industry and that the nation receives a fair share of the profits being generated by companies from a finite natural national resource. Every major oil-producing country has a special tax regime to reflect the economics of its oil industry and ensure that their country shares in its benefits.

The tax rates, moreover, had to be both credible and sustainable, and they had to remain competitive. The rates we have introduced are lower than those in all other major oil and gas producing nations—significantly lower in most cases—but we wanted to do more than keep the rates low. We also wanted a regime that recognised that the changing nature of the North sea. A tax regime should be designed to meet the challenges of the future, high costs and shrinking field sizes. Above all, it should provide the best possible help for future marginal North sea projects, to encourage both new field developments and incremental developments in the larger but older fields.

Building on the existing 100 per cent. relief for exploration, we have provided full and immediate relief for virtually all North sea capital expenditure, including the exploration drilling about which the hon. Member for Banff and Buchan (Mr. Salmond) is concerned. That is a significant move, and it has taken a while for the full impact to begin to sink in. I welcome the assertion of the hon. Member for Orkney and Shetland that the changes are "not all bad", and I regard that as a step forward.

The hon. Member for Orkney and Shetland. quoted some figures from the UKOAA survey, whose findings were published yesterday. Let me quote some more, because I think the early signs are encouraging. Although the findings were published yesterday, the survey was undertaken after the tax changes in the Budget.

Capital development spend this year is expected to meet the forecast made last year, before the Budget tax changes. More projects are under consideration in mature fields this year: the figure is up from 96 in 2001 to 144. Capital expenditure over the period to 2010 is forecast to be more than £23 billion, an increase of more than £1 billion on last year's forecast and since the Budget changes.

Mr. Carmichael

Will the Minister give way?

John Healey

I want to respond to the points made by the hon. Gentleman.

Let me turn to the question of the tax on infrastructure. I am aware of the work of the joint UK-Norway group, which has been helpful so far, and I shall encourage Treasury officials to discuss the matter further; but, like all tax issues, it is clearly a matter for the Chancellor and the Budget. We will treat any representations accordingly.

The Chancellor also committed the Government to abolishing royalty in its entirety. It is widely acknowledged to be regressive: it is ripe for the axe, and it will be axed. I welcome confirmation from the hon. Member for West Aberdeenshire and Kincardine that in his view abolition will reinforce confidence in the industry. It makes economic sense. The consultation ended last month; the date for abolition will be announced soon, when the results of that consultation have been fully analysed.

Royalty can damage new investment in older fields—the very investment in the North sea that now needs to be encouraged. That is important not just to extend the life of existing fields, but because their infrastructure will play a key role in serving other future fields and developments. Without that infrastructure, many new smaller prospects may not be developed at all.

UK tax rates remain below those of all other major oil and gas-producing nations, and immediate relief for virtually all North sea capital investment is available, so I reject the argument that the North sea oil regime is uncompetitive. The UK remains an attractive place in which to invest.

We now have a principled and sustainable fiscal regime for the North sea, which combines maximum incentives for investment with a sensible marginal rate of tax on the profits from a finite valuable national resource. It is right for the next stage of the industry's development, it provides a new fiscal stability which will continue into the next Parliament, and it underlines the UK Government's continuing strong commitment to the North sea oil and gas industry.

Question put and agreed to.

Adjourned accordingly at twenty-nine minutes past Ten o'clock.