Offshore Oil Exploration: Tax Policy (Hansard, 28 July 1993)

The Minister of State, Department of Transport (The Earl of Caithness)
My Lords, no.

§ The Earl of Shrewsbury
My Lords, I thank the Minister for that lengthy and informative reply. Is he aware that oil and gas companies having to write off the cost of exploration and appraisal drilling will cause considerable hardship to the industries which supply equipment to those companies, with a knock-on effect of job losses?

The Earl of Caithness
My Lords, we were aware of considerable concern among some parts of the oil industry. But, as my noble friend will know, there was a successful outcome to the fourteenth licensing round which took place after the Budget. Therefore many of his concerns are perhaps misplaced.

§ Lord Harmar-Nicholls
My Lords, is my noble friend aware that his peremptory reply to my noble friend will not be all that acceptable throughout the country? Bearing in mind the terrific contribution that offshore oil has made during the past 20 years, does he agree that it would seem common sense to prolong it into the future for so long as we can do so?

The Earl of Caithness
My Lords, I am sure that my noble friend agrees that those connected with the industry would like a firm and definite government position. That is what I set out in my Answer to my noble friend.

§ Lord Molloy
My Lords, bearing in mind the vital importance of the industry, if it should be necessary at any time in the near or not too distant future for the Government to review the situation in order to provide some assistance, can the noble Earl give an assurance that such action would then be taken?

The Earl of Caithness
My Lords, the noble Lord seems to forget that our proposals are of considerable benefit to the oil industry. The rate for existing fields is reduced from 75 per cent. to 50 per cent. from 1st July 1993. Although PRT is abolished for new fields, for existing fields there is quite considerable benefit. It is in existing fields that 90 per cent. of the jobs are to be found. A benefit of the reforms is that the maximum will be derived from existing fields.

Lord Campbell of Croy
My Lords, is it the Government's intention that exploration programmes should be substantially reduced? That is what is now happening. Is my noble friend aware that in recent days, flying to and from my home and looking down from the air, I have counted 11 mobile drilling rigs lying idle and anchored in the Cromarty Firth?

The Earl of Caithness
My Lords, I can reassure my noble friend that it is certainly not the Government's wish to reduce exploration. He will know from living in a part of the world where there has been considerable exploration that 1990 was the peak year. There were 152 wells. In 1991 there were 106 wells and in 1992 the figure was 72. So we have been on a declining trend anyway. Again, I bring to his attention the successful outcome of the fourteenth licensing round.

§ Lord Boardman
My Lords, does the Minister agree that the problem is that the oil exploration companies entered into drilling commitments under one tax regime and are now required to comply with the same licence requirements under a very different and less favourable tax regime? Does he further agree that the transition provisions should take account of that?

The Earl of Caithness
My Lords, we looked very carefully at the position put by my noble friend. I am sure he will realise that some decisions that should have been purely commercial decisions for oil companies were in fact taken on the basis of being able to utilise the tax structure, which is not the best way for the private sector to operate.

§ Lord Ezra
My Lords, does the noble Earl recall that I raised this matter yesterday in our debate on the Finance Bill? Does he agree that his response then was rather more sympathetic than his response this morning; namely, that the Government would keep the situation under review and, if there were a marked falling off in exploration activity, would consider what might he done about it? Will he confirm that that is the position?

The Earl of Caithness
My Lords, the two situations of what I said yesterday and what I said today are by no means incompatible. My right honourable friend the Chancellor of the Exchequer keeps everything under review but we have no plans to extend the tax relief.

§ Lord Richard
My Lords, does the Minister agree, first, that exploration in the North Sea is diminishing; secondly, that that is a direct result of the changes in taxation; and thirdly, that the Government have steadfastly refused even to phase in those tax changes? Is not that obduracy of a high order?

The Earl of Caithness
My Lords, the answer to the first question of the noble Lord the Leader of the Opposition is yes. The answer to his second question is no, for the very reason that I gave to my noble friend Lord Campbell of Croy. The exploration was already tailing off from the high peak in 1990.

§ Lord Mackie of Benshie
My Lords, is the Minister aware that many exploration companies—people on 1249 whom the future of the industry relies—are now looking abroad to areas with more sympathetic tax concessions and are taking their work elsewhere?

The Earl of Caithness
My Lords, it is true that some oil companies are now having to make decisions on a purely commercial basis rather than looking for tax subsidies.

§ Lord Cledwyn of Penrhos
My Lords, the noble Earl referred to the tailing off of exploration work in the North Sea. Can he tell us about the position in the Celtic Sea, where serious exploration work has not yet started? Is there any possibility that that work will now be extended? If so, what would the taxation position be there?

The Earl of Caithness
My Lords, for the sake of clarification, I say to the noble Lord that the figures that I gave were for exploration drilling. They were not just confined to the North Sea; they were for the whole of United Kingdom waters.

§ Lord Skelmersdale
My Lords, the original announcement in my right honourable friend's Budget speech was a balanced package. As I understand it, at that time petroleum revenue tax was to have been removed from all new fields. Is that still the case, and does it not put another perspective on the matter?

The Earl of Caithness
My Lords, my noble friend is right. There is to be no PRT for new fields, and there is a diminution for existing fields.