PETROLEUM REVENUE TAX (Hansard, 25 February 1975)

§ The MINISTER of STATE, DEPARTMENT of ENERGY (Lord Balogh)
My Lords, with permission, I should like to repeat—with apologies for the delay for which I am not responsible—a Statement about the Petroleum Revenue Tax, which has been made some time ago in another place:
"With permission, Mr. Speaker, I should like to make a Statement about petroleum revenue tax.
"On Second Reading of the Oil Taxation Bill I indicated that any relief for marginal fields would be decided in the light of the consultations with the oil companies launched on 19th November. Following these consultations the Government have decided that safeguards for the marginal fields will be 666 of two kinds. First, there will be a discretionary provision in the Petroleum Bill to refund royalties in whole or in part. Any refund of royalties will be free of PRT and corporation tax.
"Secondly, there will be a non-discretionary provision within the tax system. In considering what form the provision should take we have paid careful attention to the various suggestions put forward by the spokesmen of the companies themselves, and our proposals follow some of those suggestions, though I do not claim that they go as far.
"The non-discretionary provision will contain two elements. First, under the present PRT provisions of the Bill an uplift of 50 per cent. on capital, expenditure is allowed in lieu of interest; we propose an additional 25 per cent., making a total uplift of 75 per cent., all of which can be claimed in the first year of tax liability. This will give the industry a further element of frontend loading, that is revenue free of PRT which will help them to recover capital early in the life of the field.
"Second, we propose an oil allowance per field of 1 million tons of oil a year, which will be free of PRT, subject to a cumulative total of 10 million tons per field. That is to say, in each chargeable period of six months, an allowance in money terms equivalent to half a million tons will be available to set against PRT liability.
"These provisions will of course benefit all fields, not merely marginal fields, in exempting a substantial tranche of their revenue from PRT, and to that extent giving them a more secure prospect of return on their investment. But, since the tonnage allowance is the same for large fields and small, it will be of proportionately greater benefit to the latter, and we have had this in mind in adapting the suggestions received from the industry.
"I believe that these provisions will help us to fix a rate of PRT with greater security that it will leave the companies an adequate rate of return. I am of course fully seized of the fact that a change in the price of oil relative to price levels generally could have a profound effect on profitability. I 667 therefore made it clear on Second Reading, and I take this opportunity to reaffirm, that the Government will stand ready to review and adjust the incidence of PRT in the event of a sustained and significant change in the price of oil in real terms.
"But I have given careful thought to the representations made that there should be some more automatic protection against a fall in the oil price and a consequential reduction in revenues. We therefore propose that there should be a safeguard provision that to the extent that in any year the PRT charge reduces the return on a field before corporation tax to less than 30 per cent. of capital expenditure measured on the basis of historic cost, that charge will be cancelled. There will be a tapering provision above 30 per cent.
"These non-discretionary provisions will be introduced at the Report stage of the Oil Taxation Bill.
"I come now to the rate of tax. I had originally envisaged that the rate of PRT would be enacted in the spring Finance Bill. However, now that the timetable allows this, I propose that it be incorporated in the Oil Taxation Bill. In considering the rate we have in mind two objectives. First, we must ensure that the Government, on behalf of the British people, secure sufficient overall revenue and sufficient benefit to the balance of payments from this raw material asset. Secondly, we must ensure for the companies an adequate return on capital and an adequate incentive for further development and exploration so as to ensure that the oil continues to flow. In the light of these considerations we propose a rate of PRT of 45 per cent."
My Lords, that is the end of the Statement.

§ Lord STRATHCONA and MOUNT ROYAL
My Lords, the House will be grateful that the noble Lord has been able to repeat the Statement which at least goes some way towards putting an end to the damaging uncertainty that has hovered over the North Sea oil companies for far too long. But I am bound to regret the manner in which this uncertainty is being ended. This is a 668 long, complicated and technical Statement and we shall have an opportunity to discuss it fully when the Oil Taxation Bill comes before this House. For the moment, it seems to me that the Government have got themselves hooked with an arrangement which simply fails to recognise the realities. PRT is essentially an inappropriate instrument, I should have thought, for dealing with the North Sea; it is far too rigid.
In attempting to adjust the tax—and all credit to them for at least having listened to what was said to them—the Government end up with some very complicated qualifications. The noble Lord referred to the discretionary provisions. I wonder whether he could tell us what this means. Is this the Revenue's discretion or the Minister's discretion; and on what kind of criteria will this discretion be exercised? Then the Statement uses the expression "front end loading" in exactly the opposite sense to that which I have understood to be the normal one. My understanding is that it was used by the oil companies in the Gulf of Mexico when talking about bonus bidding systems when you pay out losses at the beginning and have a modest rate of royalties thereafter. It seems to me that in the Statement it is exactly the opposite way round.
Then we go back to the question of who defines a field which, in view of this Statement, becomes an even more important question than it has been in the past. It remains a very difficult question. So we end up, as I understand it, with a flat rate tax on a fleld-by-field basis, which is essentially a prior charge attempting to deal with a great variety of structures in terms of size of the reservoir, capital investment and timing. The shortcomings of the tax have been pointed out, I can only say, ad nauseam in another place. We should have preferred to see the excess profits approach, to cream off the windfall profits due to the price increases. This kind of approach allows for all variables, including the price.
I doubt whether this Statement will restore the wilting confidence of the oil companies. In particular, I should like to ask the Government how, despite the provisions they have announced in it, they think that this Statement will give an incentive to the oil companies to explore for new fields as opposed to 669 developing the fields already found. I suppose that we should thank Heaven for small mercies. I do so; but in doing so, I must raise a voice in small protest that we have provisions of this magnitude suddenly being introduced into a Bill at the Report stage. Is this not an extraordinary way in which to run the Government of this country?

§ Lord GLADWYN
My Lords, we on these Benches would naturally study carefully this long and extremely complicated Statement and would not wish to express definite views on it at the present time. I should like simply to say that, along with the noble Lord who has just spoken, we trust that the measures will not in any way diminish or seriously affect the incentive on the part of the companies to extract the oil. There is one question which perhaps the noble Lord could answer. Can he say, broadly speaking, how these proposed measures compare with similar measures proposed by the Norwegian Government.

§ Lord BALOGH
My Lords, I appreciate that this is a very complicated Statement and I fully understand why the noble Lord, Lord Strathcona and Mount Royal, did not understand it at all. It would have been a superhuman effort; and unlike some noble Lords opposite, we are not all superhuman in understanding and dealing with this matter. First let me say to the noble Lord, although my English is imperfect, that I am certainly not capable of interpreting expressions used by American companies in the Mexican Gulf. "Front end loading" means that the loading will be allowed at the beginning of the life of the field. I do not think, as I say, that I can be responsible for the American expression; but I can say, so far as British practice in this field will be concerned, that as our allowances take effect at the beginning it enormously increases the profitability of the field. Anybody who has any notion about discounted income flows will readily agree to that. The noble Lord then said that this is a fixed charge.
I was not aware of the fact that income tax and surtax in this country were fixed charges before the new reforms introduced by the previous Government! There was only one income tax rate, except for a small variation at the beginning of the payment. But, of course, 670 exceptions, tax allowances, et cetera, made it very much a progressive tax. This is achieved by our proposals in this case. As a result of the investment allowances, the million ton tax free oil allowance and various other measures, we have a system which is variable but which increases very rapidly. In that sense, it is an excess profits tax.
For instance, the Norwegians and the Americans in the beginning thought of an excess profits tax, but it proved difficult to implement and extremely clumsy. The Norwegians, like ourselves, have now introduced a petroleum tax of 25 per cent. of the profits, but in their case this cannot be offset against corporation tax. If it is grossed up the Norwegian rate is slightly above 50 per cent. and ours is 45 per cent. So on the whole, if we compare only the rates—45 against 50 per cent.—ours is slightly lower than theirs.
The noble Lord, Lord Campbell of Croy, made some remarks on the Bill which has just departed from us. His words were repeated by the noble Lord, Lord Strathcona and Mount Royal, about wilting confidence— American companies are "upping and going ". At present activity in the North Sea, despite abominable weather— not previously experienced I believe since 1891—doubled last year. Even the Conservative Government did not inspire a three-day week in the oilfields last winter, only in the coal mines. So on the whole I do not see any wilting confidence.

§ Lord STRATHCONA and MOUNT ROYAL
My Lords, may I interrupt for one moment? I am not suggesting that the companies are "upping and going ". I am not suggesting that there is not an expanding programme in being. What I am suggesting, and what I am absolutely certain is the case, is that the rate of expansion has slowed down practically to a halt. This is what bothers us.

§ Lord BALOGH
My Lords, the noble Lord can make double differential equations. I congratulate him on his skill. It is obviously not true that one can expand as one has been expanding. I remember, although the simile may hurt the noble Lord's feelings, that when Stalin made two motor-cars instead of one he said that there was a 100 per cent. increase in the rate of expansion in the 671 motor-car industry in Stalinite Russia. I do not want to enter into a statistical exercise such as this.
The noble Lord complained that this important matter will be introduced in the Report stage of the Oil Taxation Bill. At the same time, he also complained that there were not enough discussions. Which does the noble Lord want? Discussions obviously take a long time. These are complicated matters with an extremely complicated system of reducing income to present values. The companies themselves were not always able to reply promptly, although they have co-operated and I must pay tribute to their co-operation. The question of the noble Lord, Lord Gladwyn, was a very proper one. I can assure him that our taxation rate is slightly lower than that in Norway. But the overall effect of various measures is difficult to ascertain because their depreciation provisions, to which I attach the greatest importance, are on the whole less favourable to the companies than are ours.