Oil Taxation Bill (Hansard, 21 November 1983)

§ The Parliamentary Under-Secretary of State, Department of Health and Social Security (Lord Glenarthur)
My Lords, I beg to move that this Bill be now read a second time. In his Budget this spring, my right honourable friend the then Chancellor of the Exchequer introduced a number of measures relating to the way oil producing companies are taxed. Most of these measures were enacted in the first of this year's Finance Acts. Another main element of the package, the abolition of royalties for certain fields, is contained in the Petroleum Royalties (Relief) Bill, to which your Lordships gave a Second Reading last Thursday. The Oil Taxation Bill now before your Lordships completes this package of measures on the oil industry.
This year's Budget package was designed to provide incentives to develop future free-standing fields, and to encourage further exploration and appraisal. I am happy to say that the industry has welcomed these measures. More than that, there has been clear evidence that companies are reconsidering projects which they had previously put aside as uneconomic. I know that my right honourable friend the Secretary of State for Energy has been much encouraged by the number of development applications approved or under consideration. In our view, if the tax system properly takes account of changing oil field economics, private enterprise may be relied on to see to it that oil and gas resources are developed.
I now turn to the Bill before your Lordships. As I have said, this completes the package of oil industry measures which we have introduced this year. It relaxes the rules for petroleum revenue tax relief for 10 expenditure on assets with shared use, such as pipelines. Partly as a corollary to giving full relief, it also charges related receipts, such as pipeline tariffs, to PRT. Before I say more about what it does, I should like to remind your Lordships of why changes in this area were necessary.
I say "remind" for I am sure that your Lordships will recall that as long ago as May 1982 we issued a consultative document on this subject. It described in detail how the scene in the North Sea was changing, and why it was necessary to reconsider the way in which PRT relief is given for expenditure on long-term assets. The issue of the document made possible a process of consultation which, while inevitably quite lengthy, has been wholly beneficial. In the Bill before your Lordships we are implementing the proposals in the consultative document in the light of the discussions that we have had with the industry, and we have filled them out in great detail to cater for the many permutations of circumstances which exist in the North Sea.
Projects for the development of oil and gas fields in the North Sea involve very large front-end outlays before any significant income arises. Each of the earlier field developments had generally involved a more or less complete dedicated production system. Alternatively, these facilities had been shared between, say, two fields from the outset. That pattern of development was reflected quite directly in the existing PRT structure. PRT is charged separately on each field, and it allows for each field full front-end loaded relief for the assets dedicated wholly to that field.
The indications were, however, that this pattern of development would change significantly over the next few years. There were two reasons for expecting this. First, there is by now a substantial "infrastructure" of assets of the kind that I have described already in place in the North Sea and on land; that is to say, platforms, pipelines, and shore facilities. These facilities were built to a size to serve relatively large first-generation United Kingdom fields. But the profile of field production is characteristically such that many of these assets are already, or will soon be, under-used in the service of the fields for which they were first built. They will have spare capacity to take on oil and gas from other fields.
Secondly, it is generally expected that the next generation of North Sea fields will be smaller than the first generation. Also, they will often be found reasonably close to the "infrastructure" of assets already in place. Some of these new fields may be more productive in resource terms if they use existing assets, rather than use purpose-built facilities of their own; others may indeed be quite uneconomic to develop unless they can do so.
We needed also to consider the case even where no existing assets are available to be shared in the way that I have described. Here, new assets will be needed, but it may well be advantageous to develop these new assets in a way which maximises the potential for them to be shared with other fields later in the life of the assets. It was generally acknowledged that these trends in development were clear, and it was becoming increasingly important that the tax system should support the trends rather than discourage them or stand in their way.
11 But the latter is precisely what the existing rules for giving relief for expenditure on the assets involved do, where there is any question of their being shared with a third party's field. Relief is given under one or other of two rules. As the law stands, if the proportion of use by a third party can be estimated, relief for the necessarily costly expenditure on long-term assets is restricted by that proportion. If full relief has already been given before any question of use by a third party arises, then some of it is clawed back. But it may well not be possible to estimate the extent to which third parties will use an asset. Where that is the case, under existing law the expenditure has to be spread over the life of the asset and a proportion allowed period by period. A switch to this basis could cost the industry some hundreds of millions of pounds on existing assets alone, only part of which would be restored later, and then possibly over a long period of years. And where any new development had to be put onto this method from the start it could well be discouraged. That is why we have had to introduce the Bill before your Lordships. In most cases the provisions in this Bill will remove both the existing rules so that third party use is no longer a ground for restricting relief; full relief will he available from the start. In ordinary circumstances, there will be no possibility of its being lost.
The consultative document also proposed to charge incidental receipts, such as tariff income or sales proceeds, where they are attributable to the assets which are being given this more favourable relief treatment. The Bill also achieves this. Now that we are giving full relief for an asset irrespective of whether it is used by a third party, it is reasonable to take receipts into account. In any case it is also anomalous that tariffs received by the owner of an asset for the use of his pipeline are not liable to PRT in his hands, although they are allowable PRT expense for the field which pays for them.
But, although it is right that they should be charged, we have had regard to the possibility, which was raised with us by the oil industry, that the new charge would drive up tariffs to an extent which would make certain small fields that would be asked to pay them uneconomic to work. It would be quite wrong to proceed on the assumption that the level of tariffs is set only by the tax system. Commercial factors—for example. what the market will bear—are very important. But tax plays a part, and its was partly for this reason that, following the consultation process that I have described, in addition to the increased relief for the relevant expenditure on the tariffed assets, the Government proposed a tariff receipts allowance, and set it at a generous level.
Perhaps I should draw your attention to one matter which was announced in the May 1982 consultative document, but which was not included in the spring Finance Bill. This is the extension of the charge on receipts to those relating to fixed assets in our territory, or on our sector of the continental shelf, which are owned by licensees of overseas oil fields. We did in fact give notice of our intentions in this respect last April in a parliamentary Answer by my honourable friend the then Minister of State to the Treasury. Foreign oil-producers are on a similar footing to our own oil-producers, and it is clearly right that any receipts 12 generated by the United Kingdom use accruing to assets in United Kingdom waters should come within the same taxing scope for petroleum revenue tax as applies to our own producers, as indeed they already do for corporation tax. There have been discussions at official level with the country which could be affected in the near future—that is, Norway—to ensure that any double taxation is relieved.
This is a long Bill, and its provisions are long and complex. That is because the situations for which they have to provide are many and complex. But I have explained to your Lordships why the Bill is needed and what are its main purposes and effects. These are relatively straightforward and I think not in any way controversial. I commend the Bill to your Lordships with confidence. My Lords, I beg to move.

§ Lord Stoddart of Swindon
My Lords, I feel sure that the House will wish to thank the Minister for the lucid manner in which he has described a very complicated Bill, and for the fact that he has done so in a very short time. Since North Sea oil is so crucial to this country's economy at present and will remain so for a long period ahead, it is always tempting, when the slightest opportunity arises, to discuss the subject on the widest possible basis—for example, to discuss depletion policy, the use to which oil revenues are put. the effect on our total economy and the planning for the time when North Sea oil runs out. These are all interesting and important subjects which ought to exercise the minds of your Lordships. I shall, however, resist the temptation today because it would take a long time. I feel sure that there will be another opportunity to discuss these matters.
The Bill, although very important, deals with a comparatively narrow area of oil taxation. The changes do not conflict with any fundamental principles, as was the case, for example, in the Petroleum Royalties (Relief) Bill, which obtained a Second Reading in your Lordships' House last Thursday. Over the past four years, there have been a large number of changes in the oil tax regime. Indeed, these changes have caused much frustration to the oil companies, who have felt that their need to undertake long-term planning has been sacrificed to the Government's desire to maximise their own revenue in the short term. However, the measures enacted in this year's Finance Bill together with the measures contained in this Bill are much more acceptable and bring hope of a more stable tax regime for the future. That will certainly be welcome to me, to the Opposition, and, indeed, to the oil companies.
The Bill, as I say, is a complex measure and the provisions within it are highly technical. However, the proposals are sensible and recognise the changing circumstances in regard to the future of North Sea oil development. It is highly likely that new developments will be smaller than existing ones and the need to cut costs will be a paramount consideration. It is essential that the Government remove any barriers in the way of the oil companies making the best possible use of 13 existing and future assets, for, by so doing, they will encourage the development of the smaller fields.
The provision in the Bill for relief on shared and mobile assets will assist, particularly as proper safeguards are provided. The provisions are certainly acceptable and the Opposition will put no impediment in the way of the Bill, which should be passed with the minimum of delay.

§ Lord Glenarthur
My Lords, all I will say is that I am grateful to the noble Lord for his general welcome to the Bill.