HL Deb 17 November 1983 vol 444 cc1428-35

7.14 p.m.

The Earl of Avon

My Lords, I beg to move that this Bill be now read a second time. It is one of the charms of this Palace that one can switch so quickly from the roads of Scotland to the rather bigger fields of the North Sea. I should like to start by welcoming the noble Lord, Lord Stoddart of Swindon, to the Front Bench opposite on what I believe is the first occasion that he will be speaking on energy matters, and I look forward to hearing from him on many future occasions.

I should like, first, to describe the background to the Bill, its purpose, and its intended effect. The House will be aware of the importance of the United Kingdom continental shelf to the national economy. In 1982, it accounted for almost 5 per cent, of the gross national product. Total proceeds from the sale of oil and gas produced on the UKCS in 1982 are estimated to have been £14.3 billion and £1 billion respectively. Oil production in 1982 topped 100 million tonnes. It is a reliable source of supply from a politically stable area. It has a major, positive impact on our balance of payments: £8½ billion worth of oil was exported in 1982. It has helped to create employment both offshore and in the supply industries. In 1982, the value of orders reported by operators for oil and gas development work on the shelf was £2.26 billion. The United Kingdom's share of this was 73 per cent. Moreover, by their successful efforts in solving the many problems of extracting oil and gas in the very arduous conditions of the North Sea, the companies have built up a highly exportable technological base.

Your Lordships will know that my right honourable friend the Secretary of State for Energy recently returned from a visit to China, where he was able to identify the enormous range of opportunities for this technology to be exploited by British companies. My department will be following up the requirements of the Chinese authorities with a view to establishing contacts between British suppliers and the Chinese purchasing agencies.

But there are high risks in undertaking exploration and development in such a hostile and challenging environment. The oil companies have to overcome great economic, technical and logistical problems. Most of the companies are international corporations with interests in other parts of the world. However strong their links with this country, we must recognise that it is entirely proper for them to seek to direct their activities to those parts of the world which offer them the best return. It is also entirely right for them to tell Her Majesty's Government if, in their assessment, the risks of further developing the United Kingdom continental shelf are beginning to outweigh the foreseeable benefits.

From the end of 1980, the companies, and the United Kingdom Offshore Operators Association, began to tell the Government that the prospects were starting to look uninviting. During the following year, they strengthened their arguments, making plain their view that, despite their wish for a stable fiscal régime, the existing régime was likely to prove too onerous to encourage them to undertake further significant exploration and development. This took into account their assessment of the fields that they had been finding. The Treasury, the Inland Revenue, and my department undertook a thorough review in the latter part of 1982, running into earlier this year.

In that review, the Government collected from the companies, in commercial confidence, details of the fields which the companies had studied and judged most likely to be developed over the next five to ten years. These fields were generally smaller—in some cases very much smaller—than, for example, the fields we know, such as Forties, Brent and Ninian.

Because the review was conducted on the basis of real fields known to the companies, we cannot say whether they are typical of the future Of the shelf in the longer term; it may be that there is another Forties-size field somewhere waiting to be found. But the consensus is that future fields will be smaller and more difficult to exploit.

We necessarily conducted the review on the basis of those fields for which sufficient detail was available to enable expected profitability and rates of return to be calculated, both under the then fiscal regime, and under possible changes. It became clear that, under the then existing régime, the companies could reasonably see at least some of the fields concerned as economically uninviting. There was a real risk, therefore, that the fields would go undeveloped, at least until there was a significant rise in the price of oil, which is an uncertain factor in itself.

It was also clear that, with a number of relatively minor changes to the fiscal régime, the whole economic prospect changed; the fields could become profitable and worthwhile to develop, thus enabling the oil and gas to be won. There would also be a Government fiscal take. It would be lower, perhaps, than on existing fields. But, as was pointed out in another place, a reasonable percentage of something is better than a high percentage of nothing.

A package of such changes was, therefore, announced in the 1983 Budget. The Finance Act 1983 carried through some of them, including the doubling of the oil allowance for relevant new fields and the right to offset exploration and appraisal costs anywhere in the United Kingdom continental shelf against the petroleum revenue tax on fields in production there. Another change then announced—the abolition of royalty on future fields—is incorporated in this Bill; and the rest of the changes, which are mainly to encourage the sharing of assets, are in the Oil Taxation Bill which comes before us next Monday. That, then, is the background.

To turn to this Bill, its particular purpose, as part of the package of changes announced in the spring, is to help give sufficient economic incentive for companies to develop and to produce oil and gas from the sorts of fields on the shelf which seem likely to predominate in the foreseeable future, while still securing a fair return for the nation. For this purpose, the effect of the Bill is to relieve from royalty payments all relevant new fields as defined in the Finance Act 1983—that is, all those fields outside the Southern Basin to which development, consent or approval was given on or after 1st April 1982.

In another place, the point was made that a royalty is a rent paid for use of a nation's property. Certainly royalty is a long-standing institution in the fiscal régime for oil. It was provided for by the Petroleum (Production) Act 1934. It is now, however, only one aspect of the fiscal régime. And the fact that it is levied on production from the beginning—that is, as soon as the companies are starting to recover their huge investments—means that it significantly slows down that recovery and so has a disproportionately greater effect on the rate of return to the companies than would the same rate of levy applied when the investment has been paid back.

In pressing for a change in the fiscal régime, the United Kingdom Offshore Operators Association adopted an approach which the Government were not able wholly to accept. First, it proposed that the study be based on some hypothetical fields which it considered representative of the future. This approach stemmed I think from the companies' wish to keep their prospects confidential from each other. Instead, the Government judged it right, as I have explained, to base the review on actual fields which the operators had been appraising, and of which they were willing to let the Government have details in confidence.

Secondly, the association asked that royalties should be refunded rather than abolished for future fields; but to have refunded royalty would have had two disadvantages for Government. It would have required extra work to take the money in and then pay it back. But far more important, the association argued that the refunds should be made free of PRT and corporation tax; in effect, the royalty would remain offset against those taxes, reducing them both. So, when royalty was remitted, the companies would have had the benefit of a full 12½ per cent, reduction in overall payments.

If however royalty on these fields is simply abolished, as proposed in the Bill, it is no longer there to be offset against PRT and corporation tax. So those taxes are paid in full. The effect in this case is to reduce a company's marginal fiscal régime payments, once allowances have been exhausted and costs deducted, by only about 1½ per cent., from roughy 89½ per cent. under the present régime to 88 per cent.if royalty is abolished. The review showed that this, combined with the doubled PRT oil allowance, was enough incentive for the fields studied. The abolition of royalty for future fields is thus both easier to administer and more in the national interest than the association's proposal.

Thirdly, the association wanted the concessions to apply to the Southern Basin as well as to the rest of the shelf. The Government have not rejected this; but they do not propose to give such a concession in this Bill. I now turn briefly to the text of the Bill. It is short and simple, and comprises two clauses:

Clause 1 provides the petroleum won and saved from a relevant new field (as defined in Section 36 of the Finance Act 1983) shall be disregarded in determining the amount of royalty payable to the Secretary of State or the quantity of petroleum to be delivered in lieu of royalty (that is, royalty in kind). It also specifies the licences to which the Bill applies; namely, seaward production licences which incorporate all or any of the model clauses mentioned in it. Finally, it ensures that should the definition of "relevant new fields" in Section 36 of the Finance Act be amended by later legislation, following any decision to extend the tax concession to, for example, future fields in the Southern Basin of the North Sea, which are excluded at the moment, such an amendment would apply for the purpose of this Bill.

In effect, the clause abolishes royalty on future oil and gas fields lying wholly offshore, wholly outside the Southern Basin of the North Sea (denned in the Finance Act Section 36 as an area to the east of the United Kingdom and between latitudes 52° and 55° north, and no part of which has before1st April 1982 been served with a development programme or received development consent or approval of a development programme.

Clause 2 gives the short title, commencement and extent of the Bill. The provisions of the Bill apply to England and Wales and to Scotland; but not to Northern Ireland, because the Petroleum (Production) Act 1934, under which licences are granted, does not itself apply to Northern Ireland.

As I have said, the Bill provides relief only for those areas defined. I have explained our position on the Southern Basin, and that if, as a result of the present review, we were to be persuaded that similar reliefs should be given for new fields in the Southern Basin it could be achieved by amending the definition of a relevant new field in Section 36 of the Finance Act.

We have also excluded existing fields, developments approved prior to 1st April 1982, and satellites within such fields. This is because the evidence produced during our studies suggested that in general terms these remain reasonably profitable under the existing arrangements.

The Government are satisfied that this Bill is an essential element in the provision of a fiscal régime under which the development of oil and gas reserves on the continental shelf can proceed with the greatest benefit to our country's economy. I therefore move that this Bill be read a second time.

Moved, That the Bill be now read a second time.—(The Earl of Avon.)

7.26 p.m.

Lord Stoddart of Swindon

My Lords, first I should like to thank the noble Earl the Minister for this kind welcome to this Front Bench in this noble House. I only wish that I could have made my Front Bench maiden speech on a non-controversial basis, but I am afraid that this Bill is one that positively invites controversy, and is therefore a measure which my noble friends and I find quite disagreeable.

The Bill, though short on words, and containing only two clauses, is far from being a small, modest measure. Indeed, in our view the Bill strikes at the fundamental principle of ownership and the control of one of this nation's most potent and precious assets. For that reason alone, the Labour Party is totally opposed to this measure.

It has long been held that the right to royalites establishes without any shadow of doubt where the right of ownership belongs. For so long as royalties are payable, there can be no doubt in the mind of any one that ownership of the precious assets of the North Sea lies with the British people and nowhere else. This Bill is bound to raise questions in the minds of some as to whether North Sea oil belongs to the British people, or to the multinational oil companies.

With this Bill, the Government are saying in effect that in future, the British people must forgo their right of royalites in respect of the exploitation of the oil resources of the North Sea. This is a major departure from the approach hitherto adopted, of obtaining a proper return for the nation from North Sea oil; an approach which has been adopted by all Governments up to the present time. Furthermore, it upsets the balance between a fair return for the nation and the proper encouragement of future exploration and development.

As we have heard tonight, it is the Government's contention that through this Bill, and by the abandonment of the right to royalties from fields outside the Southern Basin, additional encouragement will be given to oil companies to embark upon earlier development of marginal oil fields with greater alacrity than they have shown hitherto. However, it is my submission that it is not necessary, and it is indeed undesirable, that complete remission of royalties should be applied even when such remission cannot be remotely justified.

We are entitled to ask why it is necessary to remit royalties on larger oil fields when the problem exists only as it affects small oil fields. Why remit royalties on fields producing, say, 60,000 barrels a day, when it may be necessary to remit only on fields producing 20,000 barrels of oil a day? As the noble Earl the Minister knows, the power to remit royalties already exists unde the Petroleum and Submarine Pipe Lines Act 1975. All an oil company has to do is to prove that remission of royalties is necessary if the field is to be developed.

Frankly, I was not convinced by the noble Lord's argument that it would be administratively difficult for this to be achieved by his department, or for that matter by the Treasury, or any other department. The very fact that that Act was passed by a Labour Government is proof enough that the LabourParty understands the problem over the development of marginal fields and was prepared to be flexible when in office.

That, however, is quite a different matter from writing out a blank cheque for the remission of royalties, irrespective of the scale of marginality of any particular oilfield. If the Bill was really concerned with better management of North Sea oil supplies, there might be just something to be said for it, but in my view it is not. It has been brought forward because of the Government's profligate use of North Sea oil revenues to prop up its damaging medium-term financial strategy. In consequence, a sensible long-term depletion policy which would conserve our oil supplies and obtain for Britain the most beneficial period of self-sufficiency has been sacrificed to the desperate need of the Government to maximise revenue in the short term to make up for the enormous loss of industrial output since 1979, to pay for the flood of imported manufactures and to finance the 3 million people put on the dole by the Government's crazy and outdated economic policy. Indeed, it seems to the Labour Party that the Government are embarked upon a veritable Rake's Progress with this country's assets and resources. In the same way as profitable and valuable publicly owned industries which are excellent long-term investments are being sold off to finance current expenditure, so, too, is the great but finite asset of North Sea oil being wasted in propping up a discredited economic policy which has severely eroded this country's industrial base over the past 4½ years, and indeed is continuing to do so.

At the present rate of extraction it is estimated that oil supplies from the North Sea will peak in 1985–86, and from then on it will be downhill all the way. Had we conserved our oil supplies instead of exporting a large percentage of them, particularly at a time of oil glut, we could have maintained a plateau of self-sufficiency well into the next decade; marginal fields could have been developed at a much more leisurely pace, and this Bill would never have seen the light of day.

But we are also concerned that in promoting this Bill the Government have made no attempt to assess the cost to the Exchequer in lost revenue. During the long debate on this Bill in another place continual efforts were made to obtain from the Secretary of State information as to the cost in lost revenue, but to no avail. The Secretary of State was either coy about giving the information because he feared the adverse impact on public opinion, or he simply did not know the extent of revenue which would be lost. Either way it is totally reprehensible that on a Bill of this kind Parliament is denied information as to the revenue consequences of the measure, particularly since such information is vital if a proper and considered judgment is to be made as to the desirability or otherwise of consenting to the measure.

The Secretary of State said that the change in the Government's take from future fields will be the difference between 88 percent. and 89.5 percent., and the noble Earl the Minister repeated that tonight. Indeed, the Secretary of State appeared to believe that that difference of 15 per cent. was marginal and not significant. However, that apparently small percentage difference when translated into money terms could well amount to hundreds, perhaps thousands, of millions of pounds lost to the Treasury and indeed to the British people. He estimated that this percentage difference of total Government take arising from loss of royalties would transfer some 3 per cent. of total net revenue to the oil companies if applied to a medium-sized field with reserves of 55 million tonnes, a life of 12 years, and a total net revenue of just under £6 billion, at 1980 prices. In money terms I calculate that the loss to the Treasury will be nearly £180 million, and that is for just one field.

By no stretch of the imagination can such an amount, £180 million, be considered insignificant. Some services are being cut to save much less than £ 180 million. It is hard to understand why the Government are so relaxed about the potentially huge losses of revenue as a result of this Bill. I would ask the noble Earl the Minister for an estimate, if only approximate, of the likely loss to the Exchequer and the British people as a result of loss of royalties, and I hope he will be able to produce such an estimate tonight, an estimate which the Secretary of State was unable or unwilling to give in another place.

I believe we should consider whether by passing this Bill we are assisting this Government in avoiding the urgent necessity to reappraise current and future levels of oil production in the North Sea and to adopt a depletion policy which is sensible both in the short run and in the long run. If we decide that we are so assisting the Government to evade their proper responsibilities, we should consider carefully whether this Bill should pass through this House unamended. Much as I personally dislike this Bill and would like it to proceed no further, I am cognizant of the fact that it was given a Second Reading in the other place by a very substantial margin indeed. I cannot, therefore, recommend my noble friends and noble Lords to vote against this Bill at the conclusion of this debate. However, we shall table amendments for Committee which will seek to improve the Bill and limit the damage which it will undoubtedly cause.

7.37 p.m.

The Earl of Avon

My Lords, I much enjoyed the noble Lord's maiden speech from the Box, and he will not be surprised if I say that I did not quite agree with everything he said. The noble Lord made a point specifically on the term royalties, and the fact that this was the right of a country. I would like to suggest that royalty is not a tax, but is part of the consideration for the grant of a licence. The liability to pay royalty arises under the clauses called "model clauses" set out in such specific sets of regulations made under the 1934 Act and incorporated in licences granted under that Act. The current regulations are, of course, the Petroleum Production Regulations 1982, which include the model clauses. I would suggest to the noble Lord that nowadays the term royalty, as I tried to explain earlier, is much more absorbed into the general taxes than being a term which might make people feel that they were losing something.

The noble Lord made quite a lot about a fair return and asked about the margin of 1½ per cent., and he asked whether we have a depletion policy or a policy at all. I would suggest to the noble Lord that after a very careful look at this particular problem we decided that exploration would not continue in the North Sea without some help of a fiscal nature. After a very delicate balance we came to the conclusion that the easiest and simplest way was to produce a Petroleum Royalties (Relief) Bill. This means that we are not looking at the moment towards limiting depletion. I would like to say at once that that is not being considered by the Government. On the contrary, we are looking forward to renewed activity in the North Sea and a continuing amount of revenue coming from the North Sea.

At one stage the noble Lord said that we should not have exported the oil, and I presume he means that we should have kept it so that we could go on using it for ourselves. But in the spirit which he mentioned I should like to ask: how could the Government have paid even the interest on the debts we inherited from the previous Administration in 1979 had we not had the revenue from the oil fields? If the Labour Government had not borrowed against —

Lord Stoddart of Swindon

My Lords, I am grateful to the noble Earl for giving way. I trust he will accept, in talking about the debts which he says were left to his Government by the Labour Government, that in fact the whole of the capital development costs of the North Sea were paid during the Labour Government's term of office and that the Conservative Government have derived, since they came to office, some £20,000 million of revenue from the investment which was made by a Labour Government?

The Earl of Avon

My Lords, the investment was made on borrowed money and it was on borrowed money that we had to pay interest.

The noble Lord also asked a much more tricky question about the loss of revenue and how we work out what the 1½ per cent. would either gain or lose. The difficulty here is that one must balance whether one believes that there would be no more exploration, in which case the revenue would obviously go down because we would not be getting it in, or whether one believes that what we are suggesting will produce new oil fields and, therefore, increased revenue. That is what makes this a crystal-gazing operation. The noble Lord said that we would lose £180 million in revenue. I say to the noble Lord that we must see what actually happens, which I believe will prove him wrong. The proof of this particular pudding is whether what we have suggested will extend exploration to the degree we believe it will. That I think is why in the other House they had such difficulty in giving a figure.

We shall have more talk on this in Committee. The noble Lord, Lord Stoddart, and I could go on for a long time but I think that from the size of the House at the moment noble Lords would prefer we did not. Therefore, I suggest that the Bill be read a second time.

On Question, Bill read a second time, and committed to a Committee of the Whole House.

House adjourned at eighteen minutes before eight o'clock.