HL Deb 13 December 1983 vol 446 cc109-18

3.25 p.m.

The Parliamentary Under-Secretary of State, Department of Energy (The Earl of Avon)

My Lords, I beg to move that the House do now resolve itself into Committee on this Bill.

Moved, That the House do now resolve itself into Committee.—(The Earl of Avon.)

The Lord Chancellor

The Question is that the House do now resolve itself into Committee on the said Bill. Did the noble Lord, Lord Stoddart of Swindon rise? I am so sorry. Does the noble Lord wish to speak?

Lord Stoddart of Swindon

No.

The Lord Chancellor

It is always rather difficult. Sometimes, I get into trouble.

On Question, Motion agreed to.

House in Committee accordingly.

[The Lord ABERDARE in the Chair.]

Clause 1 [Royalty exemption for petroleum from certain new offshore fields]:

Lord Stoddart of Swindon moved Amendment No. 1:

Page 1, line 5, at beginning insert— ("Subject to subsection (1A) below").

The noble Lord said: This amendment, standing in my name and that of my noble friend Lord Bishopston can be taken, if it is for the convenience of the Committee, with Amendment No. 2:

Amendment No. 2: Page 1, line 11, at end insert— ("(1A) This Act shall apply only to a field with production below 20,000 barrels per day.").

I gave notice on Second Reading that we should seek to improve the Bill. These amendments would do so, in our view, by seeking to specify what fields would qualify for relief and thus remove the open-ended nature of the relief which will undoubtedly cost the taxpayer dear over the next few years. I also made it clear on Second Reading that, in the view of the Opposition, the complete remission of royalties was of fundamental importance and that the right to royalties was basic to the concept of ownership and control of North Sea oil.

Certainly, North Sea oil royalty has until now been considered not as a tax but as a right to operate in, or as payment for a right to operate in and extract oil from, the North Sea at a handsome profit—profit, that is, from property owned by the nation. That is a reasonable and respectable stance to take. This was confirmed by the Minister of State at the Department of Energy Mr. Buchanan-Smith, who said during the Bill's Committee stage in another place that, on the question of royalties, a fundamental approach was involved and that it was a question of judgment about which approach was right. We have it then from the Minister of State himself that a fundamental change of policy is involved in this Bill.

We, on this side, believe that whatever other approach may be right in encouraging further development of marginal and not so marginal fields in the North Sea, the one adopted by the Government of abolishing royalties is the wrong one. In fact, so far as one can gather, no other country in the world has renounced or is proposing to renounce oil royalties in their entirety. It is extraordinary that our own Government should embark upon this course at this time. In doing so, they are the odd man out in the world.

I have already mentioned that the commitment is open-ended. If the Labour Party was thinking of making an open-ended commitment to the trade unions or any other particular industry, the Government Benches, I think, would be jumping down our throats. But here we have the present Government proposing an open-ended and unlimited commitment in respect of new fields outside the southern basin. What is completely disconcerting is the inability of the Government to cost, even in approximate terms, the loss of revenue to the Exchequer involved in the total remission of oil royalties in accordance with this Bill.

The Committee is surely entitled to know what loss is involved to taxpayers, who are, after all, the owners of North Sea oil. Is it not possible for the Government to give some sort of estimate, even to the nearest thousand million pounds, of the loss of revenue from this remission of royalties? I should have thought so. I should have thought that we were entitled to that information in considering this Bill.

With the very limited resources at our disposal, the Opposition is unable to make any assessment of the full extent of the cost of remission of royalties. It is possible, however, on the basis of certain fields not yet in production, and with total recoverable reserves estimated to be 2,300 million barrels, to estimate the possible loss of revenue. On this basis (assuming a price of 30 dollars a barrel and a dollar exchange rate of $1.50 to the pound), the total loss of royalties over the lifetime of these fields would amount to some £5,750 million. That is an enormous amount of money by any standards, and I should be interested to know whether the Department of Energy would confirm that losses of this order over the next 10 or 20 years are in contemplation as a result of this Bill.

There is, of course, a further serious point which must give cause for concern. Having conceded the principle of royalties outside the southern basin, how is the Government intending to justify the continuation of royalties in respect of all future developments including those in the southern basin? Having conceded the principle in one area, how can it be justified in another? Or has the Government already decided to remit royalties in developments outside the scope of this Bill? I hope the noble Earl, when he comes to reply, will be able to give us some reassurance on that particular point.

We have heard the argument for this Bill put in this House and in another place. It is that the remission of royalties, together with other measures contained in the 1983 Finance Act and the Oil Taxation Act, are essential to the future development of the North Sea, and that exceptional concessions need to be given to encourage the multinational oil companies to develop marginal fields.

The Labour Party, no less than the Government, wishes development to continue, but we wish that developments should proceed on an orderly and planned basis, and that cognisance should be taken of future as well as present needs. Our aim has been to adopt a policy which will give the longest possible period of self-sufficiency compatible with the reasonable cash flow needs of the oil companies. That has been our stance and it will continue to be our stance; but I fear that that has not been the perceived approach of Her Majesty's Government over the past four and a half years. Their approach has involved the maximising of revenue in the short term to bolster up their misguided medium-term economic strategy at the expense of a long-term strategy for oil depletion which would provide the country with good oil supplies over a much longer period of time.

We thus have a situation where North Sea oil is being extracted at its peak potential during the period of oil glut when prices are depressed, and under further pressure from a satiated market. According to a report published yesterday by the Institute of Fiscal Studies, North Sea tax revenues will fall steeply after peaking in 1986. The drop in revenues will not be halted until the mid-1990s, even if new oil fields are discovered. This dreary forecast assumes that oil prices will remain constant; but even that is by no means certain in today's oil market conditions.

It is, of course, this scenario which provides the rationale—if one can call it that—for Government policy. They are now desperate to speed up development of marginal fields to make up for the maximisation of production over the past few years which has provided over £20,000 million of tax revenue to the Exchequer; most of which, unfortunately, has been wantonly wasted in keeping three million people on the dole.

What this Bill does is to provide a blank cheque to the oil companies; it does not form part of any coherent policy. Such a policy would have embraced a depletion policy, taxation and the encouragement of development over a properly co-ordinated time scale. That is not evidenced by this Bill; indeed, quite the reverse is evident. There has been none of the planning which we in the Labour Party advocated. Instead, there has been a series of lurches in oil taxation which has kept the oil industry frustrated and bewildered, and it was this which led the oil companies, in fact, to drag their feet over future development plans.

The oil companies themselves certainly did not demand an end to royalty payments: indeed, the amendments before the Committee this afternoon are based on suggestions made by the United Kingdom Offshore Oil Association for royalty exemption on fields producing less than 20,000 barrels a day and a sliding scale up to 60,000 barrels a day. The Commons Select Committee on Energy, in their report on oil depletion policy dated 7th May 1982, were certainly critical of the Government's policy on oil taxation in spite of the Department of Energy's defence of the then current taxation policy. But, although the Select Committee were critical of the existing tax regime and recommended significant changes, including, under certain circumstances, a system of royalty banking, they did not even consider—let alone recommend—the complete remission of oil royalties in any part of the North Sea at all.

Under all these circumstances, it is difficult to see where the Government plucked this proposal to abolish oil royalties from or, indeed, why. The fact is that the proposals go much further than anyone has so far recommended. That includes the oil companies themselves.

The Petroleum and Submarine Pipelines Act 1975 does, as noble Lords know, give the Secretary of State discretionary powers to remit oil royalties under certain circumstances. We consider the existing powers quite adequate and fair to both the taxpayer and the oil companies. Under that existing legislation it is possible to remit oil royalties: all the oil companies have to do is to make out their case for remission. The Government, however, claim that the procedures under the Petroleum and Submarine Pipelines Act is too cumbersome and bureaucratic, and for this reason the oil companies will not use it. Certainly, there have been no applications so far for remission under that Act; but the reason for the absence of applications could have little to do with bureaucracy and everything to do with the fact that the oil companies are not confident of making out a case for remission.

The beauty of the amendments which I am proposing to the Committee this afternoon is that, while they provide automaticity for relief of royalty up to 20,000 barrels a day, they also enable the Government to limit and control the extent of relief in fields larger than 20,000 barrels a day. They will, therefore, provide the Government with flexibility in dealing with North Sea exploration and development; surely at this critical period it is flexibility which the Government need and there is no flexibility contained in this Bill. Indeed, the risk is that in due time the Government will introduce the remission of oil royalties for the whole of the North Sea and that, so far as the taxpayer and the nation are concerned, would be a disastrous course indeed.

The amendments certainly define the nature of marginal fields and the Government have said a great deal about the development of them. If the Government claim that the Bill is designed to assist the development of such marginal fields, they should have no difficulty at all in accepting the amendment.

As the Bill stands, it provides royalty relief for unmarginal and even prolific oil fields as well as marginal ones, and there can be absolutely no justification for that. This is an important Bill and I believe that these amendments are very important indeed. They are important to the country; they are important to the future revenue which the Government will achieve from the North Sea. Therefore, I commend the amendments to the Committee.

The Earl of Avon

I note that the amendment proposed by the noble Lords would mean that the Bill provided for royalty exemption only up to broadly the same level of production as that for which the oil allowance is given for PRT. Indeed, I can see why it might be argued that, if fields with production below this level are the ones to be helped by the PRT oil allowance, it is only logical to apply the same limit in the case of royalty exemption. However, the matter is not so simple as that.

To begin with, there is not a precise correlation between size and profitability. To base reliefs on the level of production certainly does tend to help the less profitable field more than the more profitable field: in fact, that is why we have increased the PRT oil allowance. But it would be wrong to go too far in basing the fiscal system on the size parameter. That is why, for example, there also needs to be the safeguard provision for PRT. Other factors that can affect profitability include depth of water; geology; the need artifically to increase reservoir pressure; and timing and rate of production. If those factors all work in one direction, they can make large fields marginal or, in the other direction, small fields highly profitable. We found it impossible to devise a practicable formula that relates all factors, duly weighted, to profitability. In any case, last winter's review suggests that this is an academic question, since the fields studied were generally not only smaller than most existing fields, but also were in deeper water and were geologically more difficult.

It is really necessary to look at the effect of the fiscal regime as a whole. We felt that the proper balance of effect was only achieved by granting full exemption from royalty whatever the level of production. This is not just because there could be some larger less profitable fields with production well in excess of this level. It is also because the production profile of certain relatively small fields could well be such that in one or two years the proposed limit would be breached even though the field was only a marginal one. The economic impact of this could well be greater if the excess production were subject to royalty than if subject to PRT. This is because such peaks could well be early in field life, when royalty would normally bite and PRT would not.

In summary, the risk of depriving some small marginal fields of the full benefit of royalty exemption, together with the more general disincentive to looking for larger fields that would arise, we believe would be too high a price to pay for the possibility of securing some relatively small additional Government revenue.

The noble Lord, Lord Stoddart, mentioned the loss to the Treasury. As both my right honourable friends the Secretary of State for Energy and the Minister of State for Energy explained in another place, such a costing is not possible because no one can predict which developments would have gone ahead without this year's package of fiscal concessions, of which this Bill is but one part.

The noble Lord made a point about royalties. I should like to suggest—as I did on Second Reading—that a royalty payment is not a tax but is part of a consideration for the grant of a licence. The noble Lord asked whether the Government propose to remit royalties elsewhere on the continental shelf. We keep the profitability of the continental shelf fields under continuing review. As the noble Lord is aware, a review of the southern basin is now being conducted. If that review or, for that matter, any other review shows that fields which were viable before tax become unprofitable afterwards, we shall, of course, bring proposals before Parliament. But I assure the Committee that any such action would very much depend on the evidence.

The noble Lord also spoke about blanket relief. The noble Lord suggested that concessions to marginal fields should have been made through the use of the Secretary of State's existing powers to remit royalties. There are a number of problems here. First, a prospective developer could have no certainty that his field would receive discretionary relief until that relief was given or committed, which, or course, might not be until royalties were due. Secondly, existing powers are for refunds, not relief, and refunds are not taxable; so the marginal rate of tax would fall by 12½ per cent., not by the 1½ per cent. that we are contemplating. Thirdly, refunds require the extra work of collection and paying back.

The noble Lord mentioned the recent report of the Institute for Fiscal Studies. In its press release, it states that: The future is likely to be dominated by small, high cost fields. If they had been developed in the last 8 years, they would have faced very harsh tax burdens. The report goes on to say: There was a 2 year gap until 1982 when no new developments were announced. The biggest problem in the tax system has been Licence Royalties, which are based on revenue, not profit, and therefore ignore high costs. I am sure noble Lords will agree that the fiscal regime is already quite complex enough. Rather than further complicate it, we prefer to cut the Gordian knot by doing away with royalty, as in effect an extra tier of taxation, for all future fields. I believe that the Bill as it now stands is to be recommended, and I hope that the Committee will not agree to these amendments.

Lord Bishopston

I am sure that the Committee is disappointed with the Minister's reply. There are several aspects to which the noble Earl has referred which make one wonder to what extent the Government have really made a proper appraisal of the whole situation of the balance of taxation, royalties and so forth. During the Second Reading debate in another place on 4th July last the Secretary of State said: The measure will mean that substantial benefit from any other discoveries and developments will come to the nation as a whole…the marginal tax rate for a field paying petroleum revenue tax will be reduced from 89.5 to 88 per cent. The Secretary of State went on to say: Therefore, I hope that the House will get into perspective the dimension of the changes that will result from the Bill." [Official Report, Commons, 4/7/83; col. 22.] The Minister has just repeated to the Committee the statement made by his right honourable friend the Minister of State on the Third Reading and, indeed, at other times during the passage of the Bill in the other place. When questioned the Minister said, as indeed the noble Earl has just said, that he had no idea of the amounts involved because it would be far too difficult to calculate. It is difficult to believe that the Secretary of State for Energy and the Treasury as well—because these two departments are involved—have no idea whatever of the effect of a percentage change on revenue, or about the amount they will get and how much is needed to finance spending when required.

As my noble friend said, there could hardly be any other department of Government where the Government are saying that a concession will be given regardless of need, and, in this case of course, without any qualification or criteria. As we all know, even the most socially deserving areas of Government have been deprived of Government help. But here we have one of the most profitable areas and in that sector the Government will not be applying the legislation passed by the previous Labour Government to which he has already referred, which would give help according to need. They will, in fact, be throwing a subsidy where there is no need for it or where there could possibly be no need for it. The Committee ought to be able to assess whether the Government's policy will stimulate oil development in the North Sea—and that is, of course, the whole point of the change and the Government seek to justify it on those grounds—or whether the development will take place anyway.

The Minister has just mentioned that royalty is not a tax. That, of course, is precisely the point we are making. It is not a tax; it is a payment for something which is being given for the exploitation—and the proper exploitation—of national resources. The Government say that you can have this great concession without the payment which the nation has a right to demand.

The Minister has also rightly mentioned the legislation to which I have referred, the Petroleum and Submarine Pipe-Lines Act 1975. Under that Act a company had to establish that remission of royalties was necessary for the development of an oilfield. The Minister goes on to justify not using that legislation, which many would have thought was ideal to help those in the greatest need while not throwing away royalty concessions on those who have no need. He speaks about the collection of royalties, the paying hack and so forth. But, as my noble friend said, to date I believe we are right in saying that no big claim has been made, so it is not a matter of an enormous amount of paperwork going into the Treasury or the Department of Energy asking for help under this legislation. As there has been none to date is the Minister saying that there would be an enormous amount—and I do not want to misquote him—or that there could be a substantial amount of claim, and that this would be rather tedious, to say the least? If he thinks that that is the case, then he might give that as a justification for the measure he is proposing to the Committee.

He goes on to say that the fiscal régime is complicated enough already. One accepts that there are complicated aspects of tax collection and royalty collection, and other fiscal measures, but here the Government might go through the process, as they have with a great degree of investigation, to see whether the situation can be relieved. I should have thought that the existence of the Petroleum and Submarine Pipe-Lines Act 1975 is the kind of ideal legislation which would certainly not justify the handing over of these enormous sums of money, or possibly large sums of money—we do not know, and the Government do not know—to a sector which does not need them.

I do not know what representations have been made by the United Kingdom oil operators' association or others in this field. The Minister has not brought that in aid on this occasion, although of course it may have come up during other stages.

The Earl of Avon

I think that we talked about the United Kingdom Offshore Operators Association quite extensively at Second Reading.

Lord Bishopston

I accept that. I know that there has been mention of that. But the noble Earl has not really given any reason why the Government should give away what could be a massive sum of money. Various quotations have been made about what the effect would be. I believe on Second Reading that the Minister mentioned the decrease in payments from 89.5 per cent. to 88 per cent., and he said that he was willing to give an illustration of a field with 55 million tonnes of reserves. There was a benefit there of 3 per cent. which on a £4.5 billion or £5 billion field would be worth about £120 million of relief.

Various estimates have been given at different stages of the measure because the Government do not have any figures whatsoever, and so we do not know to what extent the industry will be affected by these concessions, or what amount of revenue is going to be lost. We have no idea about the profitability that we can expect from oilfield development in the future. There have been forecasts—and the Minister touched on this a few moments ago—about the geological difficulties of working in smaller fields, and so on.

With some of the Ministers in the Cabinet, and indeed some sitting on the Front Bench opposite, this woolliness which appears to have been the outcome of not knowing what revenue would be expected, what amount of revenue may be lost by these concessions, surely is not the way in which we expect the present Government, with their monetarist approach, to proceed. I feel that in the circumstances the Minister has not given the Committee any satisfactory answer to the amendment which your Lordships are discussing at the present time.

Lord Stoddart of Swindon

I should like to press the amendment.

3.55 p.m.

On Question, Whether the said amendment (No. 1) shall be agreed to?

Their Lordships divided: Contents, 61; Not-Contents, 134.

DIVISION NO. 1
CONTENTS
Annan, L. Cledwyn of Penrhos, L.
Ardwick, L. Collison, L.
Barnett, L. Cooper of Stockton Heath, L.
Bishopston, L. Crowther-Hunt, L.
Blyton, L. David, B.
Boston of Faversham, L. Davies of Penrhys, L.
Brockway, L. Denington, B.
Carmichael of Kelvingrove, L. Donnet of Balgay, L.
Elwyn-Jones, L. Lockwood, B.
Ewart-Biggs, B. Longford, E.
Fisher of Rednal, B. Lovell-Davis, L.
Fitt, L. Milford, L.
Gallacher, L. Mishcon, L.
Galpern, L. Molloy, L.
Glenamara, L. Nicol, B.
Gormley, L. Northfield, L.
Graham of Edmonton, L. [Teller.] Oram, L.
Paget of Northampton, L.
Hatch of Lusby, L. Ponsonby of Shulbrede, L. [Teller.]
Houghton of Sowerby, L.
Hughes, L. Prys-Davies, L.
Irving of Dartford, L. Ross of Mamock, L.
Jacques, L. Serota, B.
Jeger, B. Stallard, L.
Jenkins of Putney, L. Stewart of Alvechurch, B.
John-Mackie, L. Stoddart of Swindon, L.
Kilbracken, L. Strabolgi, L.
Kirkhill, L. Underhill, L.
Leatherland, L. Wells-Pestell, L.
Lee of Newton, L. White, B.
Listowel, E. Wootton of Abinger, B.
Llewelyn-Davies of Hastoe, B.
NOT-CONTENTS
Airey of Abingdon, B. Henley, L.
Allerton, L, Holderness, L.
Alport, L. Home of the Hirsel, L.
Ampthill, L. Hylton-Foster, B.
Auckland, L. Ilchester, E.
Avon, E. Inglewood, L.
Balfour of Inchrye, L. Ingrow, L.
Bauer, L. Kilmany, L.
Beloff, L. Kinloss, Ly.
Belstead, L. Kitchener, E.
Bessborough, E. Lane-Fox, B.
Boyd-Carpenter, L. Lloyd of Hampstead, L.
Buccleuch and Queensberry, D. Lothian, M.
Loudoun, C.
Burton, L. Lovat, L.
Caccia, L. Lucas of Chilworth, L.
Caithness, E. Luke, L.
Campbell of Alloway, L. Lyell, L.
Campbell of Croy, L. McAlpine of Moffat, L.
Carnegy of Lour, B. Mackay of Clashfern, L.
Cathcart, E. Mancroft, L.
Cockfield, L. Margadale, L.
Cottesloe, L. Marley, L.
Craigavon, V. Marshall of Leeds, L.
Cullen of Ashbourne, L. Merrivale, L.
Dacre of Glanton, L. Mersey, V.
Daventry, V. Middleton, L.
Davidson, V. Monk Bretton, L.
De Freyne, L. Morris, L.
Denham, L. [Teller.] Moyne, L.
Devonport, V. Murton of Lindisfarne, L.
Dilhorne, V. Nelson of Stafford, L.
Drumalbyn, L. Newall, L.
Eccles, V. Norfolk, D.
Effingham, E. Norwich, Bp.
Elliot of Harwood, B. Nugent of Guildford, L.
Elton, L. Onslow, E.
Erne, E. Orkney, E.
Fortescue, E. Orr-Ewing, L.
Fraser of Kilmorack, L. Pender, L.
Gainford, L. Penrhyn, L.
Gardner of Parkes, B. Peyton of Yeovil, L.
Gibson-Watt, L. Plummer of St. Marylebone. L.
Gisborough, L.
Glanusk, L. Rankeillour, L.
Glenkinglas, L. Reilly, L.
Grimston of Westbury, L. Renton, L.
Grimthorpe, L. Ridley, V.
Hailsham of Saint Marylebone, L. Rochdale, V.
Rodney, L.
Halsbury, E. Romney, E.
Hankey, L. Rugby, L.
Harvey of Prestbury, L. St. Aldwyn, E.
Hawke, L. St. Davids, V.
Hayter, L. Saint Oswald. L.
Salisbury, M. Suffield, L.
Saltoun, Ly. Swinton, E. [Teller.]
Sandys, L. Terrington, L.
Savile, L. Thomas of Swynnerton, L.
Selkirk, E. Tranmire, L.
Sempill, Ly. Trenchard, V.
Shaughnessy, L. Tweedsmuir, L.
Skelmersdale, L. Vaux of Harrowden, L.
Soames, L. Vivian, L.
Stamp, L. Waldegrave, E.
Strathcarron, L. Westbury, L.
Strathclyde, L. Wynford, L.
Strathspey, L. Young, B.

Resolved in the negative, and amendment disagreed to accordingly.

[Amendment No. 2 not moved.]

Lord Skelmersdale

I beg to move that the House do now resume for Statement.

Moved accordingly, and, on Question, Motion agreed to.

House resumed.