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Malcolm Bruce: Is not the problem the fact that, in every other sector of the economy, the Chancellor has been telling us how important it is to provide a good business tax regime and why he has cut corporation tax? If that is the right way to promote investment in the economy, why is one sector singled out and told that it is to be boosted by being taxed harder than any other? The logic is contradictory, to say the least.

Sir Robert Smith: That is a worrying sign for other businesses, and there is a knock-on effect for other business decisions. If this is the way that the Government treat the successful oil industry, how will they treat the others?

Mr. Robert Key (Salisbury): Is the hon. Gentleman aware that yesterday, a Standing Committee on statutory instruments passed the Offshore Chemicals Regulations 2002, which will add a burden of a further £1 million a year for the oil industry simply to apply for permits under the new regulations?

Sir Robert Smith: I thank the hon. Gentleman for bringing that to the attention of the House. It is not only such burdens of regulation, but the relationship with the regulator, the access charges into the network and other charges that make the UK an expensive place to operate. There is also the worry about gas balance, and so on. It is a dangerous time for the Treasury to change the tax system, when other regulatory impacts put additional concerns on to the industry.

It is important to emphasise the long-term nature of the industry. Yes, in one year there may be a higher rate of return, but in another year it may make a loss. The price of oil goes up and down. In the early 1980s, the price of oil was about $70 a barrel at present-day values. It is way down on that now, in real terms, and it could go down again. It is up to the Government in Saudi Arabia what price the world pays for oil.

Mr. Tom Harris: The hon. Gentleman is surely off on a tangent. The tax is profit-related, so if profits go down, the tax goes down. That answers exactly the point that he is making.

Sir Robert Smith: But the tax still takes more money out than before it was put on, so it makes the UK less

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attractive to investors. At least there is agreement on both sides of the House that taking more money out of the industry means that that makes it less attractive.

I am explaining to those who pick out of thin air one statistic to justify the tax, that the industry looks at the return on its investment over the lifetime of the field. The bad years are paid for by the good years. If the tax comes on by surprise in the good years, investors will not take the risk of doing anything for the bad years. That damages the long-term profitability and attractiveness of the North sea and the rate of return for future generations. It fails to get every last drop of gas and oil out of the North sea, which would maximise our security of supply, the Treasury's take in the long term, and the benefits for future generations from an asset on our own doorstep.

Ruth Kelly: I have detected scepticism in some parts of the Committee, on the Opposition Benches and the Lib Dem Benches, from the Scottish National party spokesman and even on my own side, about the change in the tax regime for North sea oil. I have also heard genuine concerns about the effect on jobs and investment in the North sea. I shall deal with those concerns head on and in some detail.

The reform before us is a good reform. It is a principled reform. It is a reform for the long term which promotes investment in marginal fields and, in doing so, raises substantial revenue for the Exchequer—revenue that will help put the NHS back on a sustainable long-term financial footing, as a service that will remain free at the point of need. The Opposition refuse to commit themselves to our tax proposals and to a comprehensive national health service that is free at the point of use. In doing so, they are breaking a consensus that has existed for the past 50 years. I note that they are arguing that we should delay the introduction of the 10 per cent. supplementary charge on profits, but not implementation of the other important and very generous part of the package: full and immediate relief for North sea capital spending as it is incurred and the abolition of royalties, subject to consultation on timing.

Mr. Tom Harris: My hon. Friend will be aware that the Liberals tabled an amendment—it was discussed yesterday—that would have increased income tax rates from 22 per cent. to 23 per cent, but are asking today for a reduction in tax on big business. Three years ago, the Scottish National party was also calling for a 1p tax increase, but today it is calling for a cut in tax on big business. Will she comment on what that suggests about the priorities of those two parties?

The Temporary Chairman (Mr. Roger Gale): Order. I would prefer it if the Minister were not tempted down that road.

Ruth Kelly: Thank you, Mr. Gale. I shall not pursue the issue, but my hon. Friend makes a pertinent point: the Opposition want to cut taxes and slash investment, while we are committed to putting the needs of our people first.

The oil and gas industry has suggested that the measures will have a damaging impact on investment. Perhaps that is not so surprising—no industry likes paying more tax—but it is clear that oil companies are generating

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excess profits, and ours is the only major oil-exporting economy that does not have a special regime to reflect that.

Mr. Jack: Will the Economic Secretary please define what she means by excess profit?

Ruth Kelly: I am very pleased that the right hon. Gentleman brings me to the point of defining an excess profit. Since the tax changes made by the Conservative Government in 1993 and the abolition of petroleum revenue tax, the rate of return in the oil industry has risen from 10.5 per cent. to 34 per cent. last year. By comparison, other non-financial industries made an average rate of return of 11 per cent. last year. That difference is not due only to temporarily high oil prices. In fact, the North sea's rate of return was higher than that of other industries in every one of the past nine years. That was the case even in 1998, when oil prices fell sharply.

Back in 1993, we warned of a genuine risk that the oil taxation regime would fail in its objectives if North sea production held up better than was expected or oil prices rose. Our warnings have been borne out. We have been closely monitoring the position since 1998. It is abundantly clear that the regime is not securing a fair deal for the nation from this national resource, and the changes introduced in the Bill will remedy that for the future. At the same time, we fully recognise that the UK tax regime needs to be competitive. We have listened to industry, and the package that we are introducing, including the generous 100 per cent. relief for capital expenditure, focuses on investment. Companies that invest in the North sea will receive full and immediate relief against any tax liability, while those which do not do so will rightly pay a higher share of corporation tax, together with a supplementary charge.

In future, therefore, the Government will take a much greater share of the risk of investing in the future of the North sea. It is right that, as a consequence, the nation should also take a higher share of the profits of that investment.

Mr. Salmond: Would I be right in thinking that, under the tax changes, somebody using an existing and long-standing gas infrastructure such as the FLAGS—far-north liquids and associated gas system—line to St. Fergus will be charged tax at 70 per cent. of tariff income, somebody building a new pipeline to Bacton will be taxed at 40 per cent. in corporation tax plus the additional 10 per cent., but somebody taking a gas line from the same fields to Zeebrugge and transporting through the interconnector to Bacton will be taxed at 30 per cent.? Why is the Economic Secretary trying to encourage people with regard to Zeebrugge and Bacton, but not St. Fergus?

Ruth Kelly: I shall deal in detail with our analysis of the situation in due course. The typical Government tax take as a proportion of pre-tax net present value for fields that have been developed after 1993 is currently only 35 per cent., but will rise to 40 per cent. after the changes have been made. That is much lower than in most other countries, and the UK tax regime will therefore remain highly competitive. I shall turn to the detail of our analysis

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in due course, as I promised. On that basis, and on that of the industry's own figures, the UK regime is more favourable than that of Canada or the Gulf of Mexico.

5.45 pm

The oil industry sometimes emphasises the attractiveness of other international locations for investments, and it is absolutely right that it should try to convince the Government of the merits of as low as possible a taxation regime in this country. However, in a recent article in the Financial Times, Lee Raymond, chairman and chief executive of Exxon Mobil, said:

He was talking about Mexico. The tax regime is one, but only one, factor in decision making. Other important elements are political stability, proximity to markets and the Government's overall approach.

The hon. Member for Banff and Buchan (Mr. Salmond), among others, questioned how the changes can raise significant sums from the oil industry, yet have no impact on investment and jobs. I intend to deal with that point in some detail. The changes have been carefully designed. They have two elements—the supplementary charge and the 100 per cent. investment allowance. The investment allowance means, even with the supplementary charge, that companies investing in new projects will have higher post-tax rates of return than under previous rules. In net present value terms, the benefit of the 100 per cent. allowance outweighs the additional tax for marginal projects. It is the effect on marginal projects that determines the effect on investment, and they will be encouraged by the change. Of course, the increased tax reduces the net present value of more profitable fields, as it should, but those are the fields that are likely to go ahead in any case. Overall, the impact on investment and jobs should be positive rather than, as the hon. Member for Banff and Buchan suggested, negative.

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