§ 3.14 p.m.
§ Lord Beaverbrook
My Lords, I beg to move that this Bill be now read a second time.
The Advance Petroleum Revenue Tax Bill implements the proposal announced by the Chancellor of the Exchequer in his Autumn Statement to accelerate, on a carefully targeted basis, the arrangements for the repayment of advance petroleum revenue tax due to oil companies.
Your Lordships will no doubt be familiar with the background to this Bill and will thus appreciate its importance both to North Sea activity itself and to the offshore supplies industry which has grown up to support that activity. The fall in world oil prices has had a serious impact on the economics of North Sea development, resulting in cutbacks in activity and orders. Companies involved in North Sea activity have had to reassess their project plans to take these low oil prices into account, but some of them still face the more immediate problems caused by a shortage of the cash available to press ahead with new and existing developments.
The Government received numerous representations from the industry on the effects of the fall in the oil price. While these have generally recognised that the present fiscal regime is reasonably price sensitive, it was still felt that the Government ought to do something to help the companies adjust to the sharp deterioration in their finances and thereby ease the problems currently facing the offshore supplies industry.
This Bill then is aimed primarily at alleviating companies' immediate cash flow problems. It concentrates its effects on those companies where the reduction in cash flow from their North Sea operations could act as a real constraint on their ability to press ahead with development work. It also recognises the importance of providing finance for the companies as soon as possible in order to avoid any interruption to development activity that might otherwise be brought about by cash flow difficulties.
Although the APRT Bill is designed to boost company cash flow, the precise targeting of its effects had to be considered very carefully, as the Government did not think that it was justifiable to boost the cash flow of every company, regardless of that company's own resources. They concluded that the measure would be best targeted if it applied to those companies in fields which had not reached their payback period by 30th June 1986. As payback refers to the time at which cumulative income first exceeds cumulative expenditure, the Bill will limit repayments to companies in fields that have not yet begun to produce a positive cash flow.
During the Bill's progress to date, the appropriateness of this payback criterion has been discussed by the Government and the industry. As my right honourable friend the Financial Secretary to the 109 Treasury explained in another place, this particular qualification was considered to be the one that would best target the measure on those developments and companies most in need of help.
Repayments under this criterion will be subject to a limit of £15 million per company per field and, in all, the APRT Bill will increase by around £300 million the amount of cash available for investment in the North Sea by the beneficiaries of this measure.
The result of the careful targeting of the APRT repayments will be to give proportionately more help to the small and medium-sized companies, which tend to have fewer sources of finance than the integrated majors. These smaller, non-integrated companies may have interests in possible future developments but only limited access to finance. The APRT repayments will reduce the risk of those developments being delayed by cash constraints.
As my right honourable friend said in another place, the Bill is all about development. It is particularly important that the companies involved in key developments are not prevented from going ahead by cash flow shortages. Accordingly, the Bill concentrates its effects on those companies which might be subject to cash constraints and which might as a result have particular difficulty in continuing to finance their activity on various North Sea developments.
Under the provisions of the APRT Bill, 75 per cent.—that is, £230 million—of the total repayments will go to independent, medium-sized and smaller companies. In terms of developments, targeting the measure in this way should result in significant benefits for those companies at present involved in key developments. These developments, as well as being important to the prospects of the North Sea generally, are all planned to commence shortly. They thus have the potential to generate substantial orders for the offshore supplies industry over the next few years. We estimate that some 70 per cent. of the total benefits under this Bill will accrue to companies involved in such key developments.
The implications for the offshore supplies industry were a major concern for the Government when considering the details of this Bill. We are only too conscious that many jobs are at risk and, although the Government do not wish to impose any restrictions on the industry as to where it chooses to spend the money, by targeting the APRT repayments, as this Bill does, it seems likely that this area will benefit. Many of the companies qualifying for early APRT repayments are heavily involved in key developments in the North Sea.
APRT would, as your Lordships will know, normally be a Finance Bill matter, but one of the main aims of this measure is to improve the immediate cash flow position of those companies that are facing particular difficulties with the financing of developments at this time. By introducing the APRT Bill at this early stage of the Session, all the repayments will be in the hands of the oil companies early next year and will thus be available for their 1987 expenditure programmes.
As to the cost of this measure, oil tax revenues will suffer a net reduction of up to £310 million in 1986–87, but this will be fully recouped by 110 corresponding increases in oil tax revenues over the following three financial years. The industry has welcomed the Chancellor's announcement of the measure implemented in the Bill, recognising that it will alleviate some of its cash flow difficulties and provide additional funds for investment in the North Sea over the coming year. This Bill was well received in another place. I have no hesitation in commending it to your Lordships. I beg to move.
§ Moved, That the Bill be now read a second time.—(Lord Beaverbrook.)
§ 3.20 p.m.
Lord Bruce of Donington
My Lords, we are grateful to the noble Lord for having introduced the Second Reading of this Bill in the House this afternoon. As the noble Lord has indicated, this is a money Bill and therefore the amount of influence that your Lordships' House can exercise upon it is very limited indeed. One of the first things that Her Majesty's Government did on assuming office in 1979 was to abolish the British National Oil Corporation, thereby depriving themselves and therefore the nation of any influence at all over the rate of depletion of the fields themselves or of any price-determining policy. Specifically within their own terms of reference, and indeed as part of their own dogma, they have left it to the free market forces; and great progress was made in that connection.
Then in 1982, as a result of their previous legislation, they found that, owing to the very large capital allowances that were available against petroleum revenue tax in the early stage of development of particular fields, they were getting rather less revenue than the Chancellor of the Exchequer anticipated. In those balmy days of 1982 the Chancellor of the Exchequer apparently had cash flow problems. So do we all. So in Section 139 of the Finance Act 1982 advance petroleum revenue tax was brought in in order to put a claw into the revenue, with the stipulation that at the end of the operation such advance petroleum tax that was paid under the 1982 Act could be set against the liability for petroleum revenue tax.
It was not referred to in those terms in the balmy days of 1982. The Chancellor of the Exchequer at that time was welcoming it as an additional source of revenue to assist the worthy works, so he said, upon which he had at that time embarked. But, alas! in spite of all the wisdom at the disposal of the energy department of the Government and despite the wisdom of the Cabinet as a whole, lo and behold! as many of us predicted, with an unrestricted depletion policy and with absolutely no voice at all in the determination of the price of oil—for we are operating under the free market economy—the price of oil dropped. And it has dropped very considerably indeed, much more than the Chancellor of the Exchequer envisaged in 1982 or 1983.
So income began to dry up. Of course, that did not prevent the Chancellor of the Exchequer from making a very great virtue out of it. Your Lordships will recall those very happy phrases in his Budget speech earlier this year in which the decline in the price of oil was reckoned to be a positive benefit to the economy.
111 Mind you, it took a long time for it to go into petrol prices, as your Lordships well know. Indeed, many protests were raised on all sides of the House.
So here we are in a position where the oil companies concerned, which have suffered this decline in the price of oil, have made representations to Her Majesty's Government saying—although they would not put it in these terms—"Thank you for your free market in oil, thank you for the restoration of free competition and free enterprise and everything else; but, alas, in accordance with the laws of supply and demand, the prices have now gone down". No, they went to the Chancellor of the Exchequer with a genuine misfortune. They said, "We have a problem with our cash flow".
One of the reasons so often put forward by Her Majesty's Government as to the virtues of free enterprise is that it leaves industries free of all government interference; they no longer have to bother about government at all. For example, if they find themselves in financial difficulties no longer are the purse strings of the Government available to be loosened in order that they can relieve their cash flows. Not at all. The right honourable lady the Prime Minister has set her face against such things. If a company gets into difficulties through cash flow, through profitability, then the weakest to the wall and Devil take the hindmost.
However, not so with the petroleum industry. One would have thought, with the brains, the management expertise, the connections in the City—which are very well known and which I will tabulate for the Government if they wish—that the companies could have gone to the City of London or to the financial institutions and said, "We require help. We have had a decline in the price of oil. True enough, the Bank of England in its latest report forecasts that the price may rise from 18 to 20"—a fact of which a number of undisclosed people apparently took advantage and made a quick profit in gilts; but that is another story. No, what they did was this. They did not go to obtain temporary finance, which is the facility the Prime Minister always offers private industry when it gets into trouble. They come back to the Government, and of course the Government acquiesce.
In fact, in language which they did not use at the time of the passing of the 1982 Act and indeed the 1983 Act, the Government now say, "Well, of course, originally it was only a forced loan, anyway. All that we are doing is repaying some of the forced loan that we inflicted upon them in 1982". They did not sing that little song in 1982. But they have come to the rescue of the oil companies.
I do not want to cavil about this point, and I might say straight away that had a government of which I was a member been in this position we probably would have done the same because we believe that private enterprise firms can fall into adverse circumstances and, always provided that they have exhausted the means of credit available to them through the institutions, we do not treat them as lame ducks. Therefore, it is quite feasible in these circumstances that these forced loans should now be repaid. And it is important that the country as a whole knows perfectly well that 112 the whole purpose of Section 139 of the 1982 Finance Act was exactly to hasten the payment of petroleum revenue tax in order to benefit the Exchequer.
So we support it. But, of course, there are other matters. One does not know how far the Government are going to be able to resist the pressures that will now be placed upon them. The oil companies themselves are not merely requesting—as they have in this case successfully—the repayment of the forced loans that were extracted from them in 1982 and modified in 1983. They are also asking for the removal of royalties. They are also asking for the extension of petroleum tax treatment to exploration and appraisal costs and design and engineering expenditures. They are also asking for a modified enterprise-zone status or a relaxation of the PRT ringfence for a defined proportion of new development expenditure. These are demands that have not yet surfaced in another place but doubtless will do so in due course. They are also asking for support for incremental investment in existing fields. So the Government, while acknowledging our general support on ideological grounds for the steps that they propose to take, can also, I hope, inform the House how they propose to deal with these extra demands. Or are we going to have another session at a later stage informing us of the further concessions that are going to be made to the oil companies?
The idea is, of course, a very simple one: that they must be given an incentive. Somehow there is a supposition on the part of the Government that if you are going to get the best out of private enterprise, without even troubling them to go to the normal sources of loans to ease their cash flows, you have to give them an incentive. That is not the attitude they take in other parts of the economy. Many of your Lordships will have suffered from cash flow problems. Speaking personally, I have suffered like that from time to time and maybe I am joined by others of your Lordships. But let us consider the cash flow difficulties of the unemployed owner of a house who has mortgage repayments and mortgage interest payments to make. There is no question of giving him an incentive. What the Government have done in connection with the unemployed householder who has suffered a serious cash flow difficulty in order to pay his mortgage interest is to say that they will no longer bear one-half of the cost for four months. What humbug this is! When a cash flow difficulty arises among those who habitually support the Conservative Party by their subscriptions, we have one kind of treatment: they must be given an incentive. When cash flow difficulties are experienced by the unemployed, they are bashed over the head. This strikes me as humbug. However, we are in amiable circumstances. This is a money Bill; we support its purpose. We have given our comments and, so far as that is concerned, we have no objection to the Bill receiving a Second Reading.
§ 3.33 p.m.
§ Lord Gray of Contin
My Lords, I should like to join with those who have already extended a welcome, albeit a qualified welcome in my own case, to this Bill. I disagree almost entirely with the previous speaker, the noble Lord, Lord Bruce of Donington, who has made certain insinuations about the oil industry and 113 who has suggested that it is going through a "lame duck" period. I can assure him that my experience of dealing with the oil industry while I was Minister of State for Energy indicated that it was far from being a lame duck industry. Indeed, in 1982 and 1983 the measures which the Government took in regard to the advance payment of revenue tax were fully justified because, at that time, the oil industry was on a "high". In 1982–83, I would remind the noble Lord, Lord Bruce of Donington, we were talking about oil prices in the region of 38 dollars a barrel. There was every justification for the Chancellor of the Exchequer taking the action that he did.
Since then, the oil industry has gone through a traumatic period, certainly of two years and perhaps a little longer, when oil prices have fallen very substantially. Not only has this affected the oil industry itself, but it has also dramatically affected those who supply the oil industry and those involved in the fabrication industry.
I shall say a little more about those industries in a few moments. First, the fact that the Chancellor of the Exchequer has decided to repay £300 million of advance petroleum revenue tax in 1987 is to be welcomed. I hope that my noble friend on the Front Bench who is dealing with this matter today will suggest to my right honourable friend the Chancellor of the Exchequer not only that he repays the £300 million of advance petroleum revenue tax in 1987 but also that he brings forward the further £500 million which remains outstanding and which would be paid in 1988 in order to assist the companies who will benefit. Accordingly, if the companies benefit, those who supply them will benefit, and some of the jobs which have been lost, mostly located in parts of the country where they are particularly difficult to replace, will, in fact, be replaced.
The nature of the fabrication industry, in particular, is such that it requires an area of flat land and an area of deep water, normally to be found in rural areas. They have principally been found in Scotland, and especially in the north and the north-east. Those were very welcome projects when developed because they provided considerable employment of a type which was readily acceptable in rural areas. In other words, there was no pollution problem attached to those developments, and they received, often with accelerated planning procedures, a ready acceptance by the communities in which they were located. One can imagine, therefore, the distress faced by many communities as a result of the reduction in orders and the postponement of exploration and development plans by many of the oil companies.
My right honourable friend the Chancellor of the Exchequer is extremely sensitive to the problems of the oil industry. I remember only too well, before the 1983 Budget, accompanying him when we discussed the whole question of the oil industry with the then Chancellor of the Exchequer, Sir Geoffrey Howe. There was nobody more effective than the present Chancellor when he was arguing with his predecessor about the necessity for making certain concessions to the oil industry. I would like my noble friend to remind my right honourable friend that any further concessions which he can make at the present moment to the oil industry in order to assist with cash flow 114 problems and thus ensure that some of the jobs which have been lost are replaced will be doubly welcomed.
I want to say just a word or two about the suggestions made by the noble Lord, Lord Bruce of Donington, about other ways in which the oil industry could be helped. It is quite obvious that the noble Lord has received a letter similar to that which I received—I understand my noble friend behind me to say that he also received a letter—from the United Kingdom Offshore Operators Association. I would remind the noble Lord, Lord Bruce of Donington, that these are not new ideas. These ideas were all presented to the Department of Energy back in August, and I understand that my right honourable and honourable friends in the Department of Energy are at present considering these matters. I can only suggest to my noble friend that he expresses to them the anxiety of many of us who were, and are, involved in the welfare of those who live in areas which have suffered as a result of the depression within the oil industry.
No, I do not take the line of the noble Lord, Lord Bruce of Donington. I welcome this as a very sincere and genuine effort on the part of the Government to make a contribution towards the problems of the oil industry. I commend the Bill to your Lordships' House but I make the plea to my noble friend that it simply does not go far enough. I hope he will pass on my views to my right honourable friend the Chancellor of the Exchequer.