North Sea Oil and Gas Industry

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Mr. John McFall (Dumbarton): May I inform the Minister that the Budget was tremendously well received in Scotland? Last Saturday, I was walking down my high street and I was stopped at least a dozen times to be congratulated on the Budget, and on the extra money for health in particular. People see that it is good for employers and good for employees, and if it is good for both, it is good for business.

The Confederation of British Industry informs us that £10 billion was lost in 1999 as a result of workplace absences, so the more money that goes into health, the healthier the work force. I congratulate the Minister and the Chancellor on the Budget on behalf of my constituents. The whisky industry is delighted with the five-year freeze on duties. Will the Minister engage with us in a long-term strategy on whisky to remove the present discrimination against it over the next 15 or 20 years?

Mr. Boateng: I am grateful to my hon. Friend for his comments on the Budget and its reception in Scotland. We are engaged in a continuing dialogue with the Scottish whisky industry. I cannot anticipate or pre-empt future Budgets, but both the Treasury and the Secretary of State for Trade and Industry are committed to ensuring that the Scottish whisky industry retains its international reputation for pre-eminence in the field of alcoholic beverages. We are always anxious to work with the industry, the Scottish Executive and Ministers from across the Government to secure that reputation.

Mr. Peter Duncan (Galloway and Upper Nithsdale): I thank the Minister for his statement. He was somewhat selective with the statistics that he quoted in his early remarks. Growth in Scottish gross domestic product has not exceeded UK-average growth since the third quarter of 1998. The Scottish economy is falling behind the rest of the UK, not propelling it forward.

The Minister also mentioned business development and drew our attention to small business start-ups. In Scotland, business start-ups have fallen significantly under Labour. In 1997, there were 24,771 new business start-ups; now there are just more than 17,000. Again, the situation is getting worse. He will be aware that the Scottish economy depends on small businesses, particularly those that are unincorporated because more than 70 per cent. of our small firms are not incorporated. Exactly what measures in the Budget are designed specifically to assist that critical sector of the Scottish economy?

Mr. Boateng: I am bound to say that as the representative of a party that laid waste to the Scottish economy over many years, the hon. Gentleman has a brass neck. [Hon. Members: ''Answer the question.''] I shall. He should recall that employment in Scotland has grown by 80,000 since May 1997. Over the same period, youth unemployment has fallen by three quarters and long-term unemployment has been cut by more than two thirds. Real achievements and real jobs have been created in hon. Members' constituencies. That is

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something for which the people and businesses in Scotland that created those employment opportunities deserve real credit.

On growth, the hon. Gentleman should reflect on how the global downturn has affected economies across Europe and further afield. If one compares Scotland with Japan, Scotland's rate of growth stands up to close examination. Not so long ago, suggesting that the Scottish economy would outperform Japan's would have attracted derision. The economic fundamentals in Scotland are sound, the basis for growth is there and economic performance stands up to comparison with similar economies. In the hon. Gentleman's constituency, some 2,910 businesses have been helped by the Government's actions, which were taken forward in the Budget. He should be grateful for that and have the courtesy to come to this Committee and express satisfaction that businesses in his community are benefiting from our actions. That would never have happened had the party of which he is a member been in power today.

Malcolm Bruce (Gordon): I do not wish to take issue with the general thrust of the Budget, but the Minister's comments about Japan were particularly inappropriate and ill chosen. It has been in continuous recession for several years and no country would want to be compared with Japan. During the first quarter of this year, output increased by just 0.1 per cent. In my constituency, Pelikan has just made 80 employees redundant, Federal Tait Paper in Inverurie has made 80 employees redundant and, bordering my constituency, McIntosh Donald and Dyce has made more than 100 employees redundant and there may be more to follow. Manufacturing in Scotland is in a parlous state and the United Kingdom has a record balance of payments deficit. When will the Government address the problems in the manufacturing industry?

Mr. Boateng: We should not for one moment underestimate what has been achieved and what remains to be done. Not for one moment does anyone deny the importance of working to close the productivity gap. What we are doing in respect of training and skills, promoting and encouraging research and development in larger firms as well as small and medium-sized enterprises, the role of the Scottish Executive in promoting the Scottish economy and building capacity and partnership with industry and financial services are all part of a picture that we should not be complacent about but in which we are entitled to take some satisfaction. The basic essentials of the Scottish economy are sound.

Let us examine the predictions of independent forecasters for Scotland's economy in 2003. Both Cambridge Econometrics and Business Strategies are predicting growth above the long-term average in 2003. That is a prediction of what will happen on the ground. There are challenges for manufacturing and we must not be complacent about the importance of bridging the productivity gap, but the research and development tax credit, changes in corporation tax, simplifying VAT, modernising tax reform for

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businesses, the new deal, employer training pilots, and Future Skills Scotland all contribute to a picture in which we are entitled to take some satisfaction. Much has been achieved and much remains to be done, but the good news is that we are getting there and the Scottish economy is showing all the signs of making a turn for the better. Jobs are being created, there is hope and some businesses are beginning to experience in their order books the upturn that we are all working for.

Sir Robert Smith (West Aberdeenshire and Kincardine): Does the Financial Secretary recognise that one of the biggest investors in manufacturing is the North sea oil and gas industry? Can he explain to my constituents and those of other hon. Members how taking £5 billion—according to Wood Mackenzie—of its net present value and allocating it to the Treasury will encourage investment? Does he realise that exploration is financed from profits and if he takes away the profits less money is available for exploration? Will he ensure that the Chief Secretary puts his letter in the Library before tomorrow's debate on the relevant clauses of the Finance Bill so that we can understand the logic behind his announcement? Finally, will he explain to his analysts that when drilling an exploration well, if a small well is found the company makes less money and if a large well is found it makes a lot more money? Thirty percent. of a large well in Angola is worth a lot more than 60 per cent. of a small well in the North sea. Some North sea oil companies are still paying marginal tax rates of up to 70 per cent.

Mr. Boateng: I hear what the hon. Gentleman is saying—he has said it before with equal vigour. However, he must appreciate that the changes that my right hon. Friend announced in the Budget will ensure that companies pay a fair share of tax on their profits from exploiting—[Interruption.] The hon. Gentleman mutters and moans into his tie, but the reality is that continental shelf oil and gas companies currently make significantly higher profits than the rest of the UK industry. In 2001, United Kingdom continental shelf—UKCS—companies made a pre-tax return of 34.3 per cent., compared with 11.2 per cent. made by other non-financial companies. It does not seem unreasonable that they should make a fair and proportionate contribution to the United Kingdom's tax resource and to ensuring that we get the public services that we deserve. I do not think that that is unreasonable, and it is a pity that the hon. Gentleman seems so—

Mr. David Stewart (Inverness, East, Nairn and Lochaber): Agitated.

Mr. Boateng: Yes, agitated—although agitation is something that one grows used to over the years—and so wedded to a view that puts the interest of one particular sector of industry above the health and well-being of the nation as a whole. That is not a proportionate response to the action that we have taken. [Interruption.] Opposition Members moan and groan, but they have yet to answer the question that we would put to them: where would they get the money from?

Several hon. Members rose—

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The Chairman: Order. We now come to the main debate, on the North sea oil and gas industry. Although I have no power to impose time limits on speeches, because of the large interest in the debate, I appeal to hon. Members to be as brief as possible to allow as many speakers as possible to contribute.

North Sea Oil and Gas Industry

11.12 am

Mr. Alex Salmond (Banff and Buchan): I beg to move, That the Committee do now adjourn.

I thank the Financial Secretary for his statement, but he introduced his remarks with complacency. I noted phrases such as ''the basic position is sound'' and ''the underlying position is very strong'', and when people say such things, it usually means that the current position is absolutely dreadful. He should take a look at some of the redundancy and closure notices around Scotland, which the hon. Member for Gordon (Malcolm Bruce) mentioned, or take the advice of the former Minister responsible for industry, Wendy Alexander. Her friends cited as the reason for her resignation that she was totally depressed about the Scottish Executive's inability to come to terms with the problems of the Scottish economy. [Hon. Members: ''Oh''.] That was in the Daily Record. If we have reached the position where the Labour party doubts what is in the Daily Record, we might soon come to the position where the Daily Record starts to doubt the Labour party.

This debate is crucial. The oil industry, as the Financial Secretary perhaps does not fully realise, actually generates 264,000 jobs across the UK, 31 per cent. of which are in Scotland and 26,000 of which are offshore. It is highly appropriate that this Scottish Grand Committee is debating the subject, given that 90 per cent. of UK oil production and rather more than half of gas production are in Scottish waters.

I am not about to paint a picture of the oil industry in which everyone is on their uppers, because I do not believe that they are. Some developments in the industry are pretty rosy. During the past few years, oil has generated some 20 per cent. of UK industrial investment. There were 21 new developments in the North sea last year. The Buzzard field, with far more than 200 million barrels, is the largest accumulation in the North sea for a generation. If we look at the Chancellor's Budget figures, we can see that during the next six years he expects to accrue £33 billion from North sea revenues—£5,000 per head for every man woman and child in Scotland—compared with less than half that sum during the past six years.

I think that all hon. Members here have people in their constituencies dependent on the oil and gas industry. I suggest to the Committee that there are some worrying signs at the moment about future North sea development. I have real concerns, which are perhaps shared privately by Labour Members and certainly shared by plenty on these Benches, that some aspects of the Budget changes will make the long-term position in the North sea rather worse.

We have heard that developments have been increasing as are Treasury revenues, but the figures

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for exploration and appraisal drilling in the North sea, which tell us what will happen not next year or in five years' time, but in 10, 20 or 30 years' time, make grim reading. In 1996, 112 exploration and appraisal wells were drilled in the waters around Scotland. Last year the number was 51, less than half what it was five years ago. I think that, for the first time, the Department of Trade and Industry—the Minister for Industry and Energy has just joined us, so he can confirm it—did not put out a press release on the oil licensing round. I was surprised about that, until I read the details in the Petroleum Newsletter, which tells us that just 12 per cent. of the acreage offered in the UK's latest offshore licensing round has been applied for. It states

    ''The European Offshore Petroleum Newsletter has learnt that 37 countries had applied for only 36 of the 280 blocks offered in the 20th licensing round.''

The Secretary of State should be concerned about that, because if she casts her mind back to our previous debate in the Scottish Grand Committee, she will recall that she cited the success of the last licensing round as a reason for confidence in the development of the North sea. By the same token, presumably she accepts that what can modestly be described as the disappointment of the latest licensing round must be a substantial cause for concern.

The Budget changes must be considered against that background. I want to address them, say a little about infrastructure in the North sea and discuss my concerns about whether the oil and gas directorate in Aberdeen is fulfilling the task that it claimed to be able to do when jobs were relocated some 10 years ago.

I want now turn to last year's debate in the Grand Committee, which I read again last night. It was a remarkably good-natured debate. At one point, the Secretary of State said that I had made several good points, which is not something I am used to hearing from her. Therefore, we can take it that the tenor of the debate was good natured. There was a great deal of consensus about the prospects for the industry, which was summed up best by the hon. Member for Aberdeen, South (Miss Begg), who said:

    ''The oil industry in the North sea is doing so well because this Government have provided a stable fiscal regime. When they came to power, my right hon. Friend the Chancellor considered the fiscal regime and took advice from the industry, and those of us from the north-east who advocated leaving well alone.''—[Official Report, Scottish Grand Committee, 28 March 2001; c. 26.]

Clearly the hon. Lady's persuasive powers have not been so great in the run-up to this Budget.

The reason for last year's consensus is that there was a general feeling—when the Secretary of State set out the Pilot initiative—that in future the North sea would be considered not simply as a grand source of revenue for the Treasury but in terms of its long-term industrial development. We have come a long way since the atmosphere last year.

 
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