North Sea Oil and Gas: Tax Policy (Hansard, 29 April 1993)

§ The Parliamentary Under-Secretary of State, Department of Trade and Industry (Baroness Denton of Wakefield)
My Lords, it remains the Government's policy to encourage cost effective and well-directed exploration for oil and gas in the North Sea, with proper regard for safety and the protection of the environment.

§ Lord Ezra
My Lords, is the noble Baroness aware that the proposed changes to the petroleum revenue tax have caused a great deal of anxiety within the industry? It is felt that they destabilise a tax regime which has been steady for the past 10 years and, in particular, is likely to reduce the impetus towards exploration. Is she aware also that, taking the 131 exploration and appraisal wells drilled last year, it is 435 felt that that rate might fall to little more than half next year and that something like 10,000 jobs or more could be at risk? Does not the noble Baroness consider that, in putting forward that proposal, the Treasury is perhaps pursuing a policy of short-term gain at the expense of long-term economic benefit?

§ Baroness Denton of Wakefield
My Lords, I can answer that in no better way than by quoting what my honourable friend the Financial Secretary to the Treasury said in another place. He said that it is a measure designed to ensure that we recover the maximum economic reserves from the North Sea. Forecasts suggest that production will continue to rise and reach record levels over the next three to four years. The tax changes will not affect that. As regards the number of jobs, the figure of 10,000 is alarmist and we expect to see little overall change in the North Sea.

§ Lord Gainford
My Lords, in addition to the information that my noble friend the Minister has just given, can she also give the House an assurance that investment will still continue in that area?

§ Baroness Denton of Wakefield
My Lords, I am pleased to tell my noble friend that we have every expectation that investment will continue. I can also say that the levels of capital investment have now risen to their highest level since the late 1970s. It is a prosperous and successful industry.

§ Lord Stoddart of Swindon
My Lords, does not the three to four-year term just mentioned by the Minister confirm what the noble Lord, Lord Ezra, said; namely, that this is short termism? Further, can the noble Baroness say whether she has had representations, especially from the smaller oil exploratory companies? If so, can she say what consultation the Government had with them as opposed to the consultations they had with large oil companies before the tax was introduced?

§ Baroness Denton of Wakefield
My Lords, the noble Lord, Lord Stoward—

Noble Lords
Lord Stoddart!

§ Baroness Denton of Wakefield
My Lords, I apologise; I mean the noble Lord, Lord Stoddart. As the noble Lord has told me on frequent occasions that he is a reasonable man I hope that he will forgive me.
However, the noble Lord well knows that it is not policy to consult before the Budget. Treasury and DTI Ministers are meeting and listening to all representations from the industry. On the question of small companies, in any substantial change there must be winners and losers; but no single class of company is likely to be more or less favourably treated. Companies that purchase interest in assets to provide shelter and not on the basis of sound commercial decision-making may be worse off. I and my colleagues believe that industry is best based on commercial decisions and not on financial tax decisions.

§ Lord Peyton of Yeovil
My Lords, can my noble friend suggest with the utmost gentleness to the 436 Treasury the possibility that those concerned may have got it wrong, that they would be well advised now to seek the views of the industry, which perhaps understands the problem better than they do, and that they should also consider whether in this case they have resorted to a short-term expedient and caused long-term injury?

§ Baroness Denton of Wakefield
My Lords, I am sure that the Treasury has noted with interest the remarks of my noble friend Lord Peyton on many occasions and will do so now. However, under the reform, the Treasury has not only enabled companies to keep much more of the rewards of their enterprise but also—and rightly—to carry more of the risks and costs involved and not leave those to be carried by the taxpayer.

§ Lord Donoughue
My Lords, I think that noble Lords on all sides of the House should be alerted to the fact that the Government may be bringing to the British North Sea exploration industry the same striking qualities of political delicacy and economic subtlety with which they recently blessed the British coal industry. Does the Minister accept that most experts in the industry forecast that that will have a devastating effect with a reduction in drillings of 70 per cent. and an unemployment figure, contrary to the Treasury's forecast, of up to 20,000?
Does the Minister also agree that the main damage will be to the development of smaller fields at the margins of the North Sea which constitute what would be the future development of what is now a mature oil province? I put the question again: is that not one more example of short termism with the Treasury sacrificing employment and future energy supplies for the sake of immediate revenues to pay for the economic failures of the Chancellor of the Exchequer?

§ Baroness Denton of Wakefield
My Lords, I must disagree with the noble Lord, Lord Donoughue. The old regime of high tax rates discouraged investment to enhance oil recovery from existing fields which is incremental investment and gave little incentive to control costs, because costs could often attract high tax relief. Therefore, companies only carried a small proportion of the costs. We are now looking at a regime which will give a long-term and stable environment for investment planning. I should also point out to the noble Lord that the reform is acknowledged by the United Kingdom Off-shore Operators Association as being positive for incremental investment and the development of new fields already found.

§ Lord Donoughue
My Lords—

Noble Lords
This side!

§ Lord Donoughue
My Lords, I do not wish to delay the House. I know that the 1,000 Guineas starts in a few minutes and that we all want to be away.
However, will the Minister agree that almost any company operating in the North Sea will improve its revenues immediately by stopping exploration in the area? Is that what the Government want?

§ Baroness Denton of Wakefield
My Lords, I continue to disagree with the noble Lord, Lord Donoughue. The North Sea has proved to be a very successful offshore exploration area and we believe utterly that it will continue to do so.

§ Lord Boardman
My Lords, does my noble friend agree that the petroleum revenue tax was designed—I had some part in designing it —to ensure that development was carried out in the North Sea and to ensure that exploration could continue in a way that might not otherwise have been economic? Can she give us an assurance—I believe she is doing so—that the changes which are being made in that tax will not affect the long-term development of the North Sea and the prosperity which that sector of our economy brings to this country?

§ Baroness Denton of Wakefield
My Lords, my noble friend Lord Boardman points out that situations change. At the time he referred to it was important to encourage development in the North Sea. We believe the proposed changes will allow us to maximise the opportunities there.

Lord Campbell of Croy
My Lords, while the proposed changes may prolong production of oil from existing fields, is consideration being given to exploration programmes already approved and based on the present tax regime? Will adjustments be made or will companies be released from obligations where the financial conditions are changed unfavourably? I again declare an interest in a major oil company.

§ Baroness Denton of Wakefield
My Lords, I am pleased to tell my noble friend Lord Campbell of Croy that the indication from the industry is that it wishes to continue with the agreements it has made with us. Final discussions will take place during the Committee stage of the Finance Bill.