§ 3.20 p.m.
§ The MINISTER of STATE, DEPARTMENT of ENERGY (Lord Balogh)
My Lords, I beg to move that this Bill be now read a second time. There are only a very few fleeting moments, even in lifetimes as long as mine, which stand out both intellectually and emotionally. This, if I may confess to your Lordships, is one of those few: taken together with the Petroleum Bill just published, perhaps the most important of all. No one who has sat here before my period of silence as a Minister, can possibly be unaware of my interest in this matter of North Sea gas and oil 186 and of my endeavours (so numerous owing to my luck in the draw as to induce extreme boredom all round) to call attention to the importance of perhaps the greatest discovery and consequent investment activity in a single industry since the heady days of the railway boom.
North Sea oil will not solve our problems, but if well used it can help us to diminish the sacrifice and hardship inevitably connected with the restoration of our energy and general economic independence. To be able to introduce this Bill in this House is an exciting honour for which my deepfelt thanks are due to the right honourable gentleman the Prime Minister who asked me to undertake the task of representing the Department of Energy in this House. To be able to see one's labours in an important matter being brought safely to fruition are the best wages that man can hope for.
My Lords, I shall spend little time on past history, as I have spent enough time on that already. As some may still remember, the problem of profits from oil and gas, and more especially from oil and gas from the new North Sea finds, arose in 1965–67 when some of my right honourable and noble friends, as well as the economic advisers, tried to hold prices down in respect to the Southern Basin gas fields. I have not kept a diary and thus can only say without reference to the date, that it took some labour to keep the prices paid down to reasonable levels. We did not succeed completely, though the subsequent OPEC revolution, of course, made them very cheap indeed. There must have been warning signs to prompt any Government not dogmatically obsessed to conclude that a thorough revision of licensing and taxation was overdue. Reform of the tax system was necessary because it permitted British-based companies, at the height of their prospects, to escape taxes on their profits; indeed, prior to 1965, to reclaim some taxes that had never been paid.
With the discovery of oil in the Northern North Sea in 1969, the urgency of the task further and enormously increased. Before my right honourable friends could do anything except to insist on higher public sector participation, the 1970 Election and its result intervened. 187 The friends of noble Lords opposite granted an overwhelming number of licences, practically free, and subject only to 12½ per cent. royalty, despite the realisation that the discovery of one of the world's great oil fields was about to be confirmed. The oil companies did not share in this error. They tendered some £135 million (£37 million in successful bids) for a few blocks. A vast number was given away. Yet even this signal was disregarded. I do not wish in this context to pursue the question whether this was due to Ministerial dogmatic obsession, or a breakdown of communications between Ministers and their official advisers.
Be that as it may, the noble Lord, Lord Drumalbyn, whom I am sorry is not in his place, performed splendid feats of Parliamentary stonewalling, putting me into my place in the nicest possible manner, for which I am still very grateful. He was, if possible, outdone by his noble friend Lord Limerick. The story took a complete turn when my right honourable friend the present Chancellor of the Duchy of Lancaster, took the unprecedented step of calling for an investigation of the affair by the all-Party Public Accounts Committee whose Chairman he then was. He, and my right honourable friend, the present Paymaster General, who succeeded him, with the help of my noble friend Lord Paget, showed, in a Report of the PAC now accepted as seminal and underwritten by their Tory colleagues, the anomalous situation which would arise without a thorough reform of oil taxation. Even at that stage, when important discoveries were yet to be made and prices were much lower, there was the probability that vast profits would arise which would wholly escape taxation.
The probable magnitude of the wind-fall profits since 1972 has increased considerably. This was due to the brusque price revolution as a result of OPEC, the cartel of oil producers. Moreover, and in this gathering I need not stress the importance of this factor, a large (indeed the largest) part of these profits would be sent abroad.
In the two years since the PAC reported, we had one year of Conservative government in which there was admittedly an announcement of an inten- 188 tion to act on the transfer pricing of overseas oil and to look at other matters. That was all. After little more than one year of Labour government, I am able to bring before the House a comprehensive measure covering not just that point, but dealing fully with the taxation of our own North Sea oil and gas finds. It is, moreover, a measure which takes into account—as my right honourable friend the Paymaster General has said—an unprecedented degree of consultation between the Government and the industry concerned.
This new taxation system was difficult to devise. It had to satisfy two important, but to some extent contrary, aims. First and foremost, it had to secure a fair share of the profits accruing to the oil giants directly from the exploitation of the North Sea, and to do so irrespective of the results of operations elsewhere. At the same time it had to be devised so as not to deter operations in the less favoured fields. Thus, it had to be sufficiently high to secure for the United Kingdom a substantial share of the very large windfall profits due partly to the OPEC price revolution and/or natural advantages, while being sufficiently subtle not to prevent the full exploitation of less advantageously situated finds. I think we have succeeded in both respects; the attacks and doubts about our solution come through impartially though with very different emphasis from Left and Right. This is reassuring and encouraging.
My Lords, I shall now proceed with as forthright an exposition of the main features of this altogether unprecedented system of taxation as I can manage. I shall be ready to answer questions at the end of this debate, which I am glad to say is a short one, and I beg for the usual indulgence of the House if the matter becomes rather technical. I think that there was an overwhelming call, even before the OPEC revolution, for the introduction of a special tax to deal with the probable large uncovenanted profits (called by economists "rents") which arose through the natural advantages of this vast new resource. These uncovenanted profits would be so much higher than the revenue from other industrial activity that the ordinary corporation tax would not be sufficient to deal 189 with it. Licences granted by former Governments under the 1964 Act carried a liability for royalties at 12½ per cent. As a flat rate tax on the value of the output, rather than the surplus or on profits, it was, or might have been, onerous to less successful fields, but did not deal adequately with the most prosperous.
The present Bill, and the Petroleum Bill published yesterday, when enacted will deal with all these problems. The back-bone of the new system of taxation is the Petroleum Revenue Tax (PRT). This will be the first charge on profits after royalty payments. Its principal feature is that it will be charged on the results, field by field, that an allowance is made in respect of capital expenditure on abortive exploration of 100 per cent. and on development costs of 17 per cent. or original historical cost. PRT will, more over, be chargeable against corporation tax. There are good reasons for each of these features of the new tax. The field basis of charge will ensure that the flow of tax to the Exchequer from a profitable field is not deferred simply because the company concerned is developing a second profitable field. The allowance of full capital costs plus uplift at the start will immediately have a big effect on the companies' rate of return, and will very much limit the period at risk.
By permitting the writing off of both exploration and development expenditure —the latter substantially enhanced before a penny of tax is paid—the period of risk is considerably, indeed decisively, reduced, and the internal rate of return on investment and the DCF considerably increased. The importance of this method is enhanced by the fact that the most onerous development costs (the burden of exploration is relatively small) arise in the last two years before production begins. I think we must bear these facts in mind when we hear the undoubtedly sincere cries of woe by oil magnates.
The priority of charge for PRT—given the rules for quicker collection compared with corporation tax—will again ensure a speedier flow to the Exchequer. It will also give greater weight to the tax specifically designed for the North Sea compared with the general corporation tax 190 than would be possible if it were not a prior charge. Thus changes in corporation tax, which, of course, is a tax for all kinds of business, will have a reduced effect in order to take into account the particular problems and circumstances of North Sea oil and gas. On the other hand, changes can be undertaken if the special conditions of the North Sea exploitation—say, a fall in the price of crude oil—warrant an alleviation without affecting the general considerations governing the level of corporation tax. The two are therefore separate, as they should be.
I now come to the special features of the tax concerning the less profitable, marginal fields. Each field, without discrimination, will receive an oil allowance of up to 500,000 tons of oil per half-year, free of PRT, with a maximum of 10 million tons altogether per field. This means that profits can be offset against the 10 million tons allowance until it is exhausted, however long this may take, subject only to a maximum in any half year of 500,000 tons. Secondly, there is an uplift of 75 per cent. on the actual capital expenditure for a field, mainly in order to offset the dis-allowance of interest charges for PRT which was necessary to avoid tax evasion. This should be of particular help to marginal fields where capital expenditure per unit of production is heavy. Abortive exploration expenditure will, as I have already indicated, also be allowed in toto but without uplift.
Finally, we provided a safeguard by limiting taxation on fields in cases where PRT would reduce annual profits (before corporation tax) to below 30 per cent. of the actual (historic) cost of capital investment. This limitation of taxation should provide and strengthen reassurance to oil companies that the Government, while exacting a due share of (super) profits, make due allowance for the prosperity of prospectors in difficult and risky circumstances. A 30 per cent. minimum profit on investment for corporation tax compares very well with that earned by firms in other fields of production, and this is a quasiguarantee. As my right honourable friend stated in another place, future Governments may want to look to see how this provision affects the operation even of large and prosperous fields 191 in the declining phase of production, when profits will be lower, and when all capital expenditure has long been written off and has yielded substantial profits.
The Government have made a number of other changes in the PRT rules since the introduction of the Bill. For example, relaxations were introduced in the rules for setting off losses; and provision was made for the cost of initial treatment and initial storage of oil to be allowable against production profits. All this shows the Government's willingness to take account of reasonable representations and, also, the usefulness of consultation with the industry. In deciding the rate of PRT, the Government, as I have said, had to strike a balance. The 45 per cent. rate, which must be seen in conjunction with the oil allowance, the additional uplift and the safeguard, strikes this balance on the one hand, and on the other there is the strict limitation imposed by the ring fence around the British Shelf operations for corporation tax and for the PRT by the field by field basis of assessment.
No PRT will be charged against the profits derived from sales of gas sold to the British Gas Corporation under contracts made before the end of June 1975. This is logical. Those contracts were in the main negotiated before PRT was thought of. Moreover, the skilled use of its monopsony (of monopoly buying power) by the Gas Corporation and, except perhaps in respect to the Frigg Field, where our predecessors were profligate of the public interest in their policy, the pressure of the 1964–70 Labour Government, has secured, as I mentioned in the introductory part of my speech, relatively attractive prices and therefore lower profits. It would be less than fair in the circumstances to apply to these contracts the same exceptional treatment as is justly applied to North Sea oil whose value has been increased by OPEC action. Should, however, for one reason or another, prices of gas, exempt from PRT, alter violently, the Government would have to take a second look at the problem.
I should also mention a further important proposal to prevent the neglect of what might appear marginal fields. The Petroleum Bill just published will give the Secretary of State power to refund 192 royalties in whole or in part in particular cases. This will allow us a degree of flexibility in cases where even the marginal field relaxations are insufficient to ensure that a difficult field is commercially viable. In order to make this weapon more effective refunds of royalty will be made free from PRT and corporation tax. A further major provision in the Bill, which affects North Sea oil, is the ring fence. The PAC report brought out clearly how seriously the corporation tax yield from North Sea oil might be eroded by losses and allowances from other activities under the existing rules. The ring fence, therefore, insulates North Sea profits from other losses and allowances so as to ensure that, in addition to PRT, the nation gets a proper corporation tax yield on those profits without determent. Here, too, the Government showed their willingness to listen to representations and to introduce, for example, substantial relaxation in the rules dealing with interest.
Finally, the Bill deals with the taxation of transactions in overseas oil by British companies. Under the present system, the modification of which was accepted by our predecessors, commercial profits were turned into tax losses by the so-called "posted price" system. We are dealing here with a highly concentrated and mostly fully integrated industry in which arms' length transactions are the exception rather than the rule. The provisions in the Bill will ensure that posted prices and other artificial pricing arrangements are set aside for tax purposes and that the companies pay corporation tax on their profits computed on a fair basis. The proposed establishment of the British National Oil Corporation by the Petroleum Bill will, on the basis of its increasing participation in consortia, permit the Government to improve their knowledge of actual prices, costs and surpluses.
My Lords, I commend this Bill to you as a means of securing to the nation a fair share in the rent of this magnificent gift of nature to the British nation. The importance of this gift has increased as time has passed and prices and proven reserves have continued to grow, and there is no reason for thinking that successful exploration will stagnate. On the contrary, activity at the moment is higher than ever before. Actual estimates 193 are hazardous. They depend on a large number of factors each of which is subject to uncertainty: oil prices, costs and the level of production. If, as is possible, the recoverable reserves are more, perhaps substantially more, than 3,000 million tons, and the gas equivalent to 1,000 million tons of oil, we can expect, as the Prime Minister has said, a gross value at present prices of over £100,000 million.
It is expected, subject to all these qualifications, that the overall Government take from PRT, corporation tax and royalties will amount to something over 70 per cent. (undiscounted) of the companies' net revenues, although this proportion will vary considerably from field to field, and the take from a large field after the first few years could be well above 70 per cent. and nearer 80 per cent. The total Government take between now and 1980 could be in the region of £3,000– £4,000 million, of which PRT would amount to some £900–£1,300 million. During the early 1980s the Government's take may be of the order of £2,000–£3,000 million a year, of which PRT may amount to £800–£l,200 million a year. Since PRT is a prior charge allowable against corporation tax, the yield from the latter will be lower than it would otherwise have been because PRT will be set against it. Thus with corporation tax at 52 per cent., the net additional take resulting from PRT will be just under half the actual amount of PRT. But the actual amount of PRT is of importance, because the revenue comes in earlier than corporation tax.
Together with the Petroleum Bill this measure, if enacted, will right a great anomaly in our institutional set-up for dealing with this vastly important new problem. It is in our view just and equitable in dealing with the problems and benefits of the Shelf for both the nation and the producing companies. It will, of course, be complemented by the Petroleum Bill which deals with, among other things, physical control of the industry, with the discretionary powers of the Secretary of State, and, last, but most important, by a creation of a strong organisation that should enable this nation to take a far more direct and active interest in exploiting our natural resources, of which Shelf hydrocarbons are the most important. I repeat that I do not think this fortunate blessing to this 194 nation will solve our problems, restore our international manufacturing competitiveness, enable us to live forever on exporting less and consuming more imports. It will not solve the deficiencies in our industrial investment. What it can do is powerfully to aid us in these necessary if unpleasant endeavours. My Lords, I beg to move.
§ Moved, That the Bill be now read 2a. —(Lord Balogh.)
§ 3.45 p.m.
Lord CAMPBELL of CROY
My Lords, we are grateful to the noble Lord for his explanation and description of this Bill. This is not an occasion simply for considering a Bill which is a Money Bill and which cannot be amended. It is more than that. This Bill was completely remodelled on the day that it left another place before Easter and today is the first opportunity for Parliamentary comment after the time required for examination of the changes which were then made. Most of these changes, I shall say straight away, were improvements in the directions urged by my right honourable friend Mr. Patrick Jenkin and his colleagues at the Committee stage of the Bill. Much of the credit should go to them for guiding and assisting the Government in this prodigious reconstruction of their Bill.
The changes are welcome, but it is impossible, it seems, to correct all the faults in the proposed tax system without scrapping the basis chosen, the kind of tax; namely, the petroleum revenue tax. The Government took an unfortunate decision initially and, as a result, the country is landed with an inappropriate tax structure for our offshore oil industry. That there needs to be a new structure to deal with this new resource is common to all of us—we all agree with that—but we believe that an unfortunate initial decision was taken. For example, there is one continuing flaw in this tax; that is, that it favours the large, prolific oilfields and the large companies but discourages work on marginal fields and the operations of smaller companies. Thus, the total effort to win our oil is likely to be unnecessarily restricted, as I shall show in a moment.
As the noble Lord said, the proposed tax system is completely new and unlike any other system that has existed in this 195 country. Indeed, it would be virtually impossible to apply it to an industry other than the oil industry, and perhaps there is some reassurance and consolation for the country in that. The significance of today's examination of the Bill goes further than the tax system itself, because the contents of the Bill will influence the size of the industry, the extent of exploration around our shores, and the effort and investment enlisted. These provisions, unless and until they are altered, will largely govern what will happen to our oil up to the 1990s.
Since the Bill left the other place we have been reminded of the inflammable situation in the Middle East. There has been the tragic assassination of King Faisal and the disappointing failure of Dr. Kissinger's bid for peace. It is clear that our supplies of oil from that quarter cannot be depended upon. It must be a vital national interest for us to win all the oil which can practicably be extracted from our continental shelf in the next six years; thereafter we should be self-sufficient, and optimum depletion rates can be determined. We can provide ourselves with this additional secure source of energy, and at the same time we can transform our balance of payments situation. In any case, it looks as though the Government have already mortgaged us up to the hilt on the assumption that large quantities of oil in the 1980s and 1990s will help to repay massive borrowing. In other words, they have "popped" our petroleum for years ahead.
But looking at the brighter side, while this is net a panacea—and I agree with the noble Lord on that point—offshore oil could provide the extra strength to enable us to escape from the cycle of crises which has upset our orderly economic progress since the war. This has now been made worse by the affliction of 20 per cent. annual inflation. It would be hailed as a British economic miracle if we were able to do it. Surely the opportunity should be eagerly sought, and it should be our united aim to use this new resource—available at a time when it is most needed—to the best possible effect.
At the same time, we must face the fact that it is difficult and expensive to win our offshore oil. The noble Lord referred to it as a gift of nature, but it 196 needs the world's experts for the technology, and it also needs to attract capital from abroad. In working in the North Sea, the operators are meeting the most difficult sea conditions yet encountered in the world: deeper water, very rough seas, with the oil mostly two miles below the sea bed. Anyone who thinks that we in Britain could do this on our own should ponder on the fact that man reached the moon before oil in the North Sea was even discovered. There is nothing surprising about that to those who have some knowledge of the technology involved in the operations. So we need the experts and we need money besides our own. The expertise available in the world is limited and there are other offshore areas inviting exploration and competing with us for the technological resources. So we need to win all the oil it is practicable to extract in the next six years.
Why, then, we ask, have the Government chosen a form of tax which will favour large prolific fields and large companies? I say, "favour", when compar-ing what the Government are doing in discouraging small companies and the working of marginal fields.
§ Lord BALOGH
My Lords, I should like to obtain the noble Lord's data as to how this tax favours large companies. The noble Lord has twice asserted that point.
Lord CAMPBELL of CROY
My Lords, I hope this House will bear with me because I shall speak for a few minutes. I am usually noted for speak-ing briefly, one reason being that I am not able to stand for very long, so I am always grateful to give way, as was dis-discovered in the other place. But because this is a debate in which there are few speakers, and because this is a completely new tax system which requires a great deal of research by those who wish to speak, I plan to spend a few minutes deal-ing with this subject, and I am certainly coming to a point at which I shall ask the noble Lord, Lord Balogh, some ques-tions. Arising from his intervention, I am glad that I have now registered this point. I have said it twice and I make it abso-lutely clear.
It is estimated already that at least two-thirds of all the oil in the British Con-tinental Shelf is likely to be in fields of 197 fewer than 350 million tons of reserves. Those are the fields where operators will now have to consider whether, or to what extent, it is worth while going ahead. The view is that very large fields like Brent and Forties should be all right, as should large companies which have less difficulty in raising finance than the others. The Government's scheme still suffers from their commitment to a flat rate tax, as a prior charge on income before corpora-tion tax, and applied to each oilfield in isolation, the field-by-field application to which the noble Lord referred. That is what produces the bias in favour of the large fields and the large companies.
The Government may not have intended these effects, but they were inevitable when that system was adopted. They could have avoided this by introducing instead an excess profits tax. Such a tax would take a satisfactorily large slice of any windfall profits, either from the prolific fields which are also easy to work, or arising from increases in the world price of oil. In those circumstances, the companies concerned could equitably bear a higher rate of tax, unless great losses have been incurred in other fields. Because it is not necessary—as this Bill does—to deal with each field as an isolated, separate unit. The effects of an excess profits tax could have been tempered to suit the varying circumstances of companies and fields. The aim could thus have been achieved of full exploration of our Continental Shelf and extraction of all recoverable oil according to a sensible sequence of operations. Even Norway has adopted a form of excess profits tax, not applied on a field-by-field basis, and has made more effective provision for marginal fields. And Norway does not have such an urgent need as we do to obtain as much oil as possible in the next few years. On the contrary, Norway will become self-sufficient in about a year. The Norwegian Government's policy includes a leisurely timetable and an annual ceiling which could well be reached in due course by the output from their two large fields alone—Ekofisk and Statfjord.
In Britain we appear to be landed with PRT, a much improved system as a result of the changes made last month, changes to meet realities, but not a structure capable of achieving the best results either in oil production or in revenue. There 198 is an immediate problem from the Government's proposal—that is the definition of a field. As Schedule 1 points out, it is left to the Government to decide— arbitrarily it seems—what is a field and how to delineate it. This decision will be exceedingly important because the whole basis of taxation is on individual, separate fields. What are the criteria which the Government will use to decide when a field might be two or three fields, or whether it is single? It is not always easy to identify or to decide where the line limiting a field should be.
Let us consider the effects of this tax system on the situation we find in 1975. Although gas was discovered in the early 'sixties, and has been flowing for some years, no oil has yet come from the British sector of the North Sea. In fact it is less than four years ago since the announcement of the first commercial oilfield in the North Sea following the discovery of traces of oil two years earlier. Much has happened since inside that four years. The rate of discoveries has been very high compared with previous experience in other oil provinces, largely owing to improved methods of prospecting and exploration. Naturally, concentration on the North Sea has taken place, but the exploration should extend, and is extending, beyond, to other parts of our Continental Shelf. The Bill is drafted in terms of the whole United Kingdom Continental Shelf, as it should be, and there is confidence that oil is waiting to be found in, for example, waters to the West of Scotland, the Celtic Sea and the Western Approaches off Cornwall.
In this situation there are some serious defects in the tax system proposed in this Bill. I will now mention five of those defects in response to the noble Lord's inquiry earlier. First, the provisions in Clause 8 for an oil allowance of 1 million tons a year, which he mentioned, with a total limit of 10 million tons, are so inflexible that some marginal fields will be unable to use them fully. These are the fields which need such help more than the large, prolific fields. This is how it will happen. The Bill provides for capital costs to be set against income when production at a field starts, and this includes the 75 per cent. "uplift", as it is called, supposed to cover accumulated interest on investment. In the case of a smaller marginal field, this, to start with, 199 will eliminate income. Unless this oil allowance can be cumulative and flexible, oil operators can now foresee that the allowance will be only partially available for such fields. The economic annual outputs, and the lifetime of the field, might well be unfavourable for obtaining as much of the allowance as possible. Small fields of the kind which the Government ought to be encouraging could be paying PRT without using up the full allowance. This is the extraordinary anomaly, and it is the point raised by Mr. Jack Reynolds of Conoco and widely reported in the Press last month. If the Government have an explanation of this, or are prepared to make the oil allowance cumulative and flexible, they may meet this point; but at present this is worrying for those with small marginal fields because it is a disincentive to developing those fields, or it may mean closing them down prematurely and leaving some of the oil in the seabed.
The second serious defect is that the oil allowance system in Clause 8 ignores the circumstances of different fields. For example, a large field becomes less profitable with several platforms when they are needed, instead of only one or two, because of wells being dispersed. Operators may decide to dispense with additional platforms and consequently not to extract all the recoverable oil. The country will thus lose oil which otherwise should have been won. As your Lordships will be aware, one platform is normally expected to operate and control about 20 wells; it forms the wellhead for several, the wells being drilled at different angles, but distances impose limits to this. As I mentioned, it is not clear under Schedule 1 exactly how a single oilfield will be defined. If it were a wide area, a single field may require several platform systems. That one platform structure can cost £60 million gives some dimension of the costs involved.
The third defect is that important expenditure cannot be set off against tax liability. The operating losses of one field cannot be set against the profits of another until the first field has been closed down. This may well mean that marginal fields will be closed down sooner than they need be, again leaving oil in the sea bed which we ought not to lose. The fourth defect is that no option has been 200 given to firms, particularly smaller ones, to claim deduction of loan interest instead of the capital uplift. If production is unavoidably delayed, perhaps only for a year or too, accumulated loan interest is likely to exceed the 75 per cent. uplift, and here again the Bill will make it more difficult for smaller firms, British and others, to obtain loans for the development of fields. British companies also have problems over foreign exchange losses which may occur, as there is not enough sterling available. There are also problems of variable interest rates because there is a limit to the loans which can be obtained on fixed interest.
I am giving examples of some of the main defects and I am not suggesting that these are all of them. The fifth defect is in Clause 9, the new safety net exemption from PRT if the return on investment for corporation tax is less than 30 per cent. This is, of course, welcome, but it will be useless in a few years' time unless inflation is taken into account. It has clearly been inserted to guard against a sharp drop in the world price of oil, but at present it is based on historic costs instead of being indexed.
Then there are two questions on matters which are examples of ambiguity and apparent clumsiness. First, it is not clear whether all the shore facilities related to production, storage and movement of off-shore oil are allowable as expenditure. Clause 3(4) does not make this clear, nor do the terms "initial treatment" and "storage"; and I can tell the noble Lord that the operators concerned, for example, with the terminal being constructed at Flotta in the Orkney Islands, simply do not know from this Bill whether or not all the facilities of that terminal will count as expenditure, and that can make a considerable difference to their calculations. How are they to be given accurate guidance on this?
Secondly, the Government realise that PRT in the form in which it appears here is such that it is unlikely to be accepted by the United States tax authorities as income tax for their purposes? Consequently, American companies would not obtain allowance against US taxation. Do the Government have different information on this? If not, it seems a gratuitous smack to American companies, without which we cannot carry on the 201 proper programme over the next six years or perhaps beyond. It would be like trying to run an airline without qualified pilots. Unless the Government are completely satisfied and can give a clear assurance on this, it seems a very ham-handed way of proceeding which I am certain other countries would have been careful to avoid.
These are examples of ambiguities and carelessness and I will not raise others at this point. But having set the tax rate at 45 per cent. and a tight separate system for each field, it seems that the only flexibility left for the Government is the rebate on royalties, the 12½ per cent. of the value of quantities produced. The Government have stated—it was repeated today by the noble Lord—that they are prepared to remit this for marginal fields if they are in difficulties.
But I find it difficult to believe that the noble Lord, Lord Balogh, could have agreed to this form of tax, penalising smaller fields and companies and not getting all the revenue for the country which another system could have obtained, especially after what he was saying publicly two or three years ago. I know that there are conventions that the private views of Ministers are not made public, but now that dispensations are being handed out all round—or, after last night, perhaps I should say almost all round—and collective responsibility seems to be in tatters, surely the noble Lord could take us into his confidence and need not be as orthodox as he now is. Not only is he too intelligent to accept that this is the best structure, but as an economist he must surely have argued against it. I can only say that we are sorry that apparently he lost that argument. So will he be, I believe, because in the coming years PRT will assuredly be attributed to him in the way that the late unlamented SET, selective employment tax, was identified with his noble friend Lord Kaldor.
One of the main difficulties in future will be raising capital for investment for the fields which are not large and not easy to operate. It will be not so much the oil companies who are concerned, but the banks and financial institutions which will be considering the economics of each field under the terms of this Bill. 202 Unfortunately, it will be clear to them that the return on original risk capital for most of these fields will be small, and such institutions include those investing collectively small savings and pension funds. Normally, a certain percentage is set aside for higher risks on the basis of a better return if all goes well. Now such percentages are likely to be placed elsewhere than in offshore oil because the risks are there without the prospect of a commensurate return. All concerned with our offshore oil industry must contemplate a fall in the world price of oil. The international cartel, OPEC, has been dictating increases over the past year and a half but they may consider it timely to try to bring down the world price of oil at about the time when our offshore oil is starting to be produced in quantity, and Clause 9, the safety net, may consequently be tested fairly soon.
As the noble Lord reminded us, besides the Bill which we are examining today, there was published yesterday by the Government the Petroleum and Submarine Pipelines Bill on the question of State participation and, of course, one must take that into account too. The Government will be well advised to bring State participation in slowly, first because the development costs, if they find that they are having to take them on board, will be an immense new burden for the taxpayer; and also, if they attempt to replace the offshore oil industry with bureaucracy, depriving ourselves of the accumulated knowledge and expertise of those who have been engaged in seabed drilling for up to 25 years, that will be guaranteed to slow down the oil programme. Activity in the North Sea has, regrettably, already been falling away from what it should now be. Uncertainty especially since last summer, about these proposals which we are considering today and those which were published yesterday have caused reviews, suspension of plans and some cutting back. Fewer platforms are being ordered or are in prospect. Rigs are being hawked for hire in a way which completely reverses the situation of a year ago.
On this point, I must refer to the most facile and fatuous statement of 1975 which was made on BBC television news last night by the Secretary of State for Energy. When this slowing down was 203 referred to, he sought to deny it by saying that there was a higher level of activity in the North Sea than ever before. I thought I also heard the noble Lord, Balogh, say the same thing in his speech. Of course it would be criminal if there were not so. This activity has been increasing continuously over the last five years. The first oilfield was announced fewer than four years ago. The programme embraced great increases each year during the mid'seventies. It takes over a year to build a platform and nearly another to equip it with modules at sea and to prepare it. To enable more rigs to operate, supply bases are needed—particularly that at Peterhead, with several berths. That was done at great speed, but it took the best part of two years. It was ready a year ago. All this was to enable more and more activity and this should be happening—and should be happening at a much greater pace than at present. Let us not hear that futile excuse again.
In the broadcast to which I have referred, the Secretary of State for Energy added the outrageous non sequitur that, as the Conservative Government had estimated two years ago that oil should be flowing in some quantity this year— in fact, it will now be only a trickle in 1975—the delay was somehow our fault. He conveniently forgot that it was Labour Members who were criticising our estimates then as too cautious. The great slowing-down in tempo has taken place over the past year, as anyone in touch with these events knows. I am sure that there are no Ministers in your Lord, ships' House who would like to take a lesson on how to devote sixty seconds flat of broadcasting time to the sole purpose of totally misleading the British public. But should there be other Ministers who wish to do so I can thoroughly commend to them a study of that short television appearance by the Secretary of State for Energy last night.
§ Lord DAVIES of LEEK
My Lords, I wonder whether the noble Lord would give way for one moment? I beg his pardon for interrupting quite an interesting speech, but I hope that he does not intend to make a case based on the fact that there is—and there may be some 204 truth in this—a slowing down in the activity in the North Sea. Is he not aware that this is universal in the world because of the state of flux in the world economy, and that a slowing down of oil enterprise is taking place in many areas because of the uncertainty about oil prices at the present moment?
Lord CAMPBELL of CROY
My Lords, I am certainly prepared to say that there is an element of that in it. But if the noble Lord lived in the north of Scotland among all the activity, as I do, he would be very well aware of the uncertainty among all those concerned and of the holding back of their plans over the past year.
My Lords, in this Bill and in the Bill which came out yesterday which will provide for 51 per cent. State participation, I hope that the Government will exercise self-restraint. Offshore oil is too vital an element in Britain's economic recovery for the Government to indulge in testing doctrinaire theories or new forms of taxation and nationalisation. The pipelines could well be lifelines.
I must refer to the PAC Report of March 1973, because the noble Lord, Lord Balogh, spent quite a lot of time on it. That Report pointed out that there were loopholes in our tax system. This was before any oil was anywhere near to being produced, and it suggested that there would be loopholes when oil was produced unless the system was adjusted; otherwise, it would be possible for profits to be set off against losses elsewhere in the world. My noble friend Lord Barber immediately stated in 1973 that this necessary change would be made in good time before any oil profits came to be taxed. He said that a "ring fence" would be erected. The noble Lord, Lord Balogh, surprised me today by talking about the ring fence as being restricted to the North Sea. Surely it must be a ring fence for our Continental Shelf as a whole. There is too much talk about the North Sea as if that were the only place where oil existed. We should have erected a ring fence for the Continental Shelf around the United Kingdom and I am sure that that is what the noble Lord really meant.
My noble friend Lord Barber also made it clear that a tax system—though not this particular one—would have been introduced before any oil profits arose 205 so that no oil would escape that tax. But it is not necessary to put a ring fence around each field, which is what the Government are doing in this system. The proposed system requires each field to be delineated and makes it impossible, as I mentioned earlier, to deal with losses in other areas of the Continental Shelf. Any suggestion that the Conservative Government were intending to levy royalties of only 12½ per cent.—and I believe that I detected such a suggestion at one stage of the noble Lord's speech—is entirely wrong, as can be seen from the statements which were made at the time. As a country, we need both the oil and the revenue, leaving a fair return to the operators, on fair terms as between those operators. The Government's proposals will fail to win all the oil that we should extract and will consequently also lose revenue.
The Government have their priorities wrong. They should be viewing this as a great enterprise for our country in harnessing the best expertise available in the world, and in attracting the capital which we cannot raise ourselves. I am prepared to predict that, within the next five years, the system will have to be changed or PRT and corporation tax be waived or reduced for marginal fields. The Government deserve plaudits for having accepted that their Bill needed the transformation which they carried out last month in another place. However, as a country we shall lose oil and revenue, because the Government initially chose the wrong system and, apparently, it was too late to change that.
§ 4.18 p.m.
§ Lord ROBBINS
My Lords, I shall not have the impertinence to detain your Lordships for long on a matter of such high technicality which has been argued so eloquently from both sides, but I should like to ask the noble Lord, Lord Balogh, a question. His elucidation of this difficult problem over the last few years is something for which the public should be eternally indebted to him. I take it that, in the large, the justification for this tax or for other taxes which might be contemplated in this area is that it will secure for the public an economic rent on something which is not the subject of private property, something which cannot be the subject of private property and something which it is not desir- 206 able should be the subject of private property. In those circumstances, I am still puzzled as to why the device of an overall excess profits tax was not resorted to, rather than a more complicated system. I ask my question not in any partisan sense, because I have not been following this matter in any detail, and because, as I hope your Lordships know, I always try to speak without Party affiliation. However, it has puzzled me that the simpler device was not adopted.
§ Lord BALOGH
My Lords, with permission, I will answer some of the points which have been made. In fact, of course, this tax represents an excess profits tax. With a 10 million ton oil tax exemption— the waiving of the royalties liability—this tax is, in effect, an excess profits tax; that is to say, it impinges on the large and prosperous fields very much more than on the small and less prosperous fields. For instance, the noble Lord, Lord Campbell of Croy, was completely wrong —he sometimes is—in saying that the oil allowance will work badly for small fields in proportion to income, even when there is that very unusual event of a production profile which is very skilled; and, therefore, at the beginning you cannot claim the whole, and afterwards you do not have the wherewithal to claim. But in that case such profits would have been earned in the first years. In the whole of his exposition, the noble Lord completely forgot that not a single penny of tax will be paid before all investment in amortised.
The profile of a normal oilfield is that production mounts very rapidly and then "plateaus" and slowly fades out, and in that part of the profile the profits are very high, but they are not taxed at all. The noble Lord completely misunderstood the tax system as we devised it. We devised it with the importance of the uplift in such a way that the state of "risklessness" is in use at a very early time. In that sense it is an excess profits tax. It is much more of an excess profits tax, as a matter of fact, than the Norwegians have. The Norwegians follow the habits of the noble Lord's friends of calling things by another name. The 25 per cent. excess profits tax in Norway is not on excess profits, but on profits. It is added to the 50 per cent. normal corporation tax and the 25 per cent. cannot be offset; that is 207 to say, the flexibility which is introduced into our system, by which we can vary the PRT and thereby enhance or decrease the relative importance of the corporation tax and of the PRT, is not there in Norway. Moreover, the Norwegians, unlike us, have depreciation allowances which are completely different and stretch over 15 years; that is to say, the Norwegians produce even less of the "risklessness" which the noble Lord complains we do not produce. Only after 15 years can the 150 per cent. excess be written off. If he discounts that 10 per cent.—the noble Lord is such an expert he can do that in his head—he will find that our system is better.
May I deal with the noble Lord's intervention in two parts. In the first part I should like to say a few words about his general remarks, though I shall not follow him to the moon, because I do not know quite why the moon was brought into discussion on the PRT. It shines, perhaps, on the North Sea—
Lord CAMPBELL of CROY
My Lords, both technologies happen to be based on Houston; there is a very simple common factor.
§ Lord BALOGH
My Lords, does the noble Lord say that we do not have expertise? Perhaps he has forgotten that Shell is 40 per cent. British and that BP is completely British—
Lord CAMPBELL of CROY
My Lords, I am sorry to interrupt the noble Lord again, and I am grateful to him for giving way. But I am very well aware that these companies had to get American companies to build the first platforms for them. One is being built five miles from where I live and the other 20 miles away.
§ Lord BALOGH
My Lords, that does not mean that this will be so in the longer run. The noble Lord said that these companies will sail away. The day before yesterday an announcement was made by the Danish Government about the waters near Greenland. Those waters are even more dangerous and more difficult than our waters, because they are subject to icebergs. The participation demanded is on a carried interest basis; that is to say, the companies have to bear the whole cost and the Government can then step in, merely repaying the expenses incurred. 208 There is 50 per cent. tax and 12½ to 16 per cent. royalties. All companies which are operating in the Shelf of this country have applied and obtained licences on that basis. So perhaps reading The Times would be quite a profitable exercise.
I turn now to Egypt. The noble Lord said that a very dangerous situation exists in the Middle East. I share some of his misgivings—obviously, we all share his misgivings. But the oil companies do not seem to share these misgivings, because there has been allotted in the Northern part of the Red Sea 80 per cent. participation to the Exxon company by the Egyptian State, also on a carried interest basis. There is even one of these licences on an 85 per cent. participation basis, and subject to tax. It seems to me that the noble Lord wants us to be a sort of banana republic competing on this basis, and not a very clever banana republic. If I were a member of a banana republic, then I would go out to reap the maximum profits.
I have dealt with the oil allowance and I now turn to the platform business. Whether two or three platforms are used is not in the least affected by this tax, because if a platform is erected when a field is already in production, then, obviously, no tax will be paid in respect of a second platform until it is completely written off for 75 per cent. I do not understand. I am baffled. I am always baffled when the noble Lord's right honourable friend—my predecessor-speaks about this matter. It is never considered that there is not a penny tax liability before everything is written off plus. I have to dismiss that.
My Lords, I turn to the options and loan interest. We have made very careful inquiries and there is no question that the 75 per cent. uplift covers the interest. It seems obvious that the whole rate of interest burden is concentrated on the last two years and is reduced in the first two years—maximum three years— of the production even in smaller fields. There is also the question regarding income tax in America. This is obviously a profits tax. It is on profits, with certain allowances. It is for the Americans to define their own taxation system, but in our view—and we have good legal opinion—there is no question that this is a tax apropos shore installations. I 209 advise the friends of the noble Lord to write to their tax inspector. We cannot decide this question over discussion in this House.
A terrific fuss was made by the noble Lord about how to define fields. He disregards the fact that either they are defined themselves—such as the Forties field, with very little around it—or, when there are many fields in the same direction, there has to be a unitising agreement; that is to say, various fields have to be handled as one because otherwise very serious increases in cost occur. We have unitised not merely the Brent and Ninian fields, but also fields across the median line—so why all this tremendous fuss? I wish the noble Lord would write to me and point out where he is getting his information. I am absolutely at his disposal. There is only one remark I want to make. It is that the noble Lord referred to Mr. Barber's deathbed repentance about the taxation. He never told us that there will be an excess profits tax; it was Mr. Jenkin who told us. I think, however, it was after the Government ceased to be a Government that he told us. I may be wrong. If I am, I shall apologise in writing to the noble Lord; but I think it was in a debate after the defeat of the Conservative Government that these assertions were made.
Lastly, about the assertion that there is greater activity. Obviously, it is the absolute duty and right of the Opposition to say that if they had been in power we should have had greater activity. I agree. But it may be that we should have had less activity. I do not know. What I do know is that the rate of discovery at the moment is very high, fortunately—touch wood! I hope it will remain high. I am sure that when the noble Lord and his friends here and elsewhere have a look at this Bill for the third time they will change their minds.
Lord CAMPBELL of CROY
My Lords, before the noble Lord sits down, perhaps it would be easier if I were able to reply straight away. On the oil allowance, the real problem is the inflexibility, the fact that half a million tons must be used in half a year up to a 10 years' limit. If the Government could introduce accumulation or flexibility that would solve the problem. Secondly, on the question of onshore installations, by 210 the time the companies are dealing with the tax inspectors, it is too late. This is a terminal which is being planned and built now. They must know, from the point of view of their planning, whether or not under this Bill, it is to count as expenditure. I shall take up the offer to write to the noble Lord about the other points. As regards the tax system, my point was that before we went out of Office my noble friend Lord Barber stated that there would be a tax system. Exactly at what moment he or Mr. Patrick Jenkin announced the excess profits tax was not my point. It was that there was to be a tax system in time and that we were not just going to leave it at the 12½ per cent. royalties.
§ Lord BALOGH
My Lords, the noble Lord had four years and very little was on the books by the end of it. The accumulation of the oil allowance would produce exactly the opposite results from what the noble Lord has said, because timing is all-important in this matter. If there is a large field whose production rapidly increases beyond 500,000 tons, it can write off that 500,000 tons at an earlier moment—the earlier the moment, the lower the rate of interest. As these are very high, this would certainly improve the matter for the large field and not for the small field. But let the matter rest at that. There is one point on which I am in much agreement with the noble Lord. It is that this is an exceptional bounty of nature and we must use it wisely. I am less optimistic than he was at one point when he talked about this as a lifeline. If we look at this as a lifeline we are doomed. Our lifeline is our energy, our willingness to sacrifice and our willingness to work.
Baroness WARD of NORTH TYNESIDE
My Lords, would the noble Lord be good enough to allow me, as somebody who knows absolutely nothing about the details of oil production but who has taken a great part over the years in my part of the world in industry in general—and therefore it is a little difficult when—
§ Lord STRABOLGI
My Lords, I am sorry to interrupt the noble Baroness, but may I ask whether she is asking my noble friend a question or proposing to make a speech? My noble friend has wound up and the Question is to be put. It is usual 211 in this House for Back Benchers not to speak at this point.
Baroness WARD of NORTH TYNESIDE
My Lords, I am grateful for that, but as I am a newcomer I find it a little difficult. I was about to ask, as an individual, one or two questions. Perhaps I am not allowed to ask questions. Can the noble Lord advise me whether or not I am allowed to do so?
§ Lord MACKIE of BENSHIE
My Lords, with respect, before the noble Lord finished his winding-up the noble Baroness was on her feet proposing to ask a question before the noble Lord sat down.
§ Lord STRABOLGI
My Lords, as I have said, I am sure that the House will allow the noble Baroness to ask a question, but not to make a long speech.
Baroness WARD of NORTH TYNESIDE
My Lords, the noble Baroness had no intention of making a long speech. There are one or two points that I should like the noble Lord to reply to if he would be so kind. It is difficult in my part of the world to some extent— and I really hope that I shall be able to ask some sensible questions on their behalf—
§ Lord BESWICK
My Lords, may I intervene at this point? It is the convention of your Lordships' House if a Minister has wound up that no one speaks or even asks questions. In this House and in another place we do use the device of saying, "Before the Minister sits down, would he answer a question?" I think that the noble Baroness has accepted the fact that my noble friend has wound up and sat down. In that case, the Question should be put.
Baroness WARD of NORTH TYNE-SIDE
My Lords, I am grateful for that; but I started to get up. I had no idea the noble Lord was going to sit down. He got up and said he would answer the noble Lord and then he went on—without giving me the opportunity to speak—to answer the noble Lord, Lord Campbell of Croy. So, I am sorry if I am out of order, but how was I to know the noble Lord would answer all the points made by the noble Lord, 212 Lord Campbell of Croy? In my own ordinary way—I am an ordinary person really—I attempted to ask the noble Lord one or two questions. It is quite impossible for a newcomer to this House in the matter of a few weeks to know when a noble Lord stands up what he will do. I wanted to ask about two points, if I may—
§ Lord BESWICK
My Lords, can I put this again to the noble Baroness, who I am sure has a greater grasp of Parliamentary procedure than anyone here? If the Minister has wound up at the end of a debate, then the Question is put.
§ Several Noble Lords: Order, order!
§ Several Noble Lords: Order, order!
§ On Question, Bill read 2a; Committee negatived.