North Sea Oil and Gas Industry

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The Chairman: I intend to call the Front-Bench spokesmen to sum up at 12.30, so again I remind hon. Members that the shorter their speeches, the more hon. Members who will be called.

11.52 am

Sir Robert Smith: It might be for the convenience of the Committee, Mr. Hood, if, through the appropriate channels, you could have a clock installed on each side

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of the Room. That might assist speakers to keep more tightly to time. It was a problem that we used to have in the Royal high school and it seems to have stayed with us.

The Chairman: Order. If the hon. Gentleman needs assistance, he will find that the Chairman will be helpful.

Sir Robert Smith: I welcome that, Mr. Hood. The predecessor in your office had a clock fitted to the Royal high school, and that would be a measure of what can be achieved in the House as well.

It is difficult to know where to start after that speech by the Secretary of State. In many ways George Orwell would have been proud of her spirit. She finished her speech by talking about stability, enterprise and fairness coming from the Budget. She said that there should not be a special case for the oil and gas industry, but the Chancellor has created one for the North sea industry. He has made its tax regime worse than if it was an onshore business, worse in comparison to the previous tax regime and less competitive than it was before the Budget compared with investing in other parts of the world.

The Secretary of State was also worried about Members supporting big businesses. Many of us are concerned because we are supporting our constituents. In Aberdeen and Aberdeenshire, 40,000 people are employed by companies working directly in the oil industry as well as all the other people employed in the north-east of Scotland in ancillary industries who support them with their spending power as members of the community; decorators, joiners, people looking after their houses and people using their local shops. All that money comes into our local economy from this industry.

I suppose that collective Cabinet responsibility means that Ministers have to make speeches that somehow justify what the Chancellor puts in his Budget, but it is most unusual in this Committee for an SNP spokesman to be allowed to make a speech without a single intervention from a Government Member. That reveals that the Government feel that they are on weak ground.

John Robertson (Glasgow, Anniesland): I thank the hon. Gentleman for casting that to me. Government Members have heard it all before.

Sir Robert Smith: They cannot have heard much of it before unless they followed the debates on the Budget and the Finance Bill. If they have heard it before, they have not understood it. We have to keep repeating the case until the Treasury understands it. Until the Treasury understands it, the damage will continue to be done. Tomorrow, we will debate the clauses in the Finance Bill that relate to the measure, and it would be extremely helpful if the Secretary of State reinforced the message to the Chief Secretary to get his letter into the Library in time to inform tomorrow's debate. It will still be late because those outside will not have a chance to look at it.

The Secretary of State also says that the tax should not come as a surprise to the industry because of the nature of the discussions that have come before. I can

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assure her—privately, she knows it—that it surprised the industry. I have spoken to people either connected with the industry or working at various levels within it, and they have exhibited genuine surprise. It was not synthetic surprise because the tax was a shock. The Chancellor has thrown stability out of the window. How does the industry know when he will next raid the North sea? When will he raid other businesses that are extremely successful? He is currently encouraging biotechnology, but if that takes off, will he introduce a biotechnology windfall tax? That is no way to encourage inward investment or to run a successful economy.

Rosemary McKenna (Cumbernauld and Kilsyth): Is the hon. Gentleman suggesting that the Chancellor should not have taken the windfall tax from privatised industries in 1997, a tax that massively reduced unemployment in this country and put young people back to work?

Sir Robert Smith: I am afraid to say, as the hon. Lady will have heard Liberal Democrat Members say in Grand Committee, that the Chancellor should not have done that. [Hon. Members: ''Oh!''] In the long run, such a tax disrupts job creation—[Interruption.]

The Chairman: Order.

Sir Robert Smith: It is extremely important to recognise that there is a long-term issue. Another generation could get jobs in the North sea because there is another generation of work out there. When the issue was debated in a previous Grand Committee, there was talk about the need to encourage people in school to look to the oil industry as a long-term career. The industry will have a long-term future if it receives investment and is allowed to thrive in a stable climate.

The way in which the Financial Secretary dismissed the importance of the North sea oil and gas industry to the UK economy was frighteningly complacent. He also missed another aspect of the industry, which is not necessarily related to the economy; namely the importance of the industry to our security of supply. The Minister for Industry and Energy called for an energy review on the basis that, when North sea oil and gas run out, he will be concerned about our future mix of energy supplies and their stability.

The Financial Secretary says that the industry is unimportant. However, the Minister for Industry and Energy is arguing that the industry is important not only for financial reasons, but because of the great luxury of piping gas ashore from our area of control. If we can pipe our own gas ashore, we can maintain the luxury of security that other nations envy. Anything that undermines investment will leave gas in the North sea. If fields are closed down prematurely or if we fail to explore undrilled exploration wells to look for the last small fields to tie to major fields, the fields left in the ground will be lost to future generations for ever. That would mean the Treasury losing future financing for the health service and the country losing its future security of supply. The more we can do to sustain the industry, the better.

One of the most depressing things coming back from people working in the industry is that there comes a time when an industry starts to look at a

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province in which it is operating and decides that it is not going to do any more exploration or enhancement of production because it is time to harvest what is left. The Chancellor has, however, gone into harvesting mode before the industry was ready. Profits from current production finance future exploration. Companies do not borrow to explore but use their profits. In his reply, perhaps the Minister for Industry and Energy will say whether he agrees with the analysis by Wood Mackenzie that the net present value transferred from companies to Government is of the order of £5 billion. That is money that could be invested. On a percentage basis, I would be surprised if it was not more. The industry is concerned by the figure, which could actually be £6 billion. The feedback that we have been getting since the Budget indicates that it is a growing concern.

Mr. Michael Connarty (Falkirk, East): I apologise for not being here for the earlier speeches, but I was chairing a Select Committee. The hon. Gentleman's position is supported only by the giant oil companies, which want to put the profits in their back pockets. We share a position in terms of the oil and gas group. The smaller players have been saying for a long time that if the bigger companies would give them a chance, give up some of the fields that they are holding on to and let them get into the industry, they would be willing to invest. There are profits in the North sea for many generations to come, but the big companies are hanging on to them. They should share some of them with the people of this country.

Sir Robert Smith: The hon. Gentleman does not seem to understand small companies. I had a conversation with a friend during a May day bank holiday picnic with our children. She works in an accountancy office. Someone from a small, North sea business phoned her and asked, ''What on earth does the Budget mean for us? Do we have to put all our plans on hold?'' Is that the way to treat small business? Is it right to pull the rug from under their feet in the middle of attempts to restructure their business? That is not the way to encourage investment.

The Chancellor could have announced the strategy that he wanted to explore and entered into a dialogue. That would have dealt with the stability angle. He could have considered other changes to enhance exploration. The most frightening complacency has been demonstrated by Government Members in the debate on the Budget and on the Finance Bill—and, to a certain extent, by the Secretary of State for Scotland—on relating the profit tax to the current price of oil. If any industry is cyclical, it is the oil industry. It makes huge profits when the price is high but does not make much profit when the price is low. On that basis, companies manage their business investment portfolio and make exploration decisions. The frightening thing that the Treasury and Government Back Benchers are saying in an attempt to justify the tax in the short term is the hint that, perhaps, it will be dropped when the price of oil falls. Obviously, it would be welcome if the Government took the tax away when oil prices fell, but that does not exactly encourage forward planning.

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An investment manager in Calgary or Houston cannot be expected to say that they will put more money into the UK because next year the Chancellor might cut the tax rate. The tax rate should be understandable and predictable for the long term. If the tax has been introduced because of a high price, why is there no indication of the price at which it will be phased out? At least that would provide a marginal understanding of what was happening. Tomorrow, some of the clauses of the Bill will be dealt with in Committee. I hope that we will have some real changes from the Treasury by Report stage.

The clause does not allow finance costs to be set against the new tax. The Government want to encourage investment, but one of the ways to invest is through borrowing. Obviously, borrowing costs money. It is an extremely unusual tax regime that does not allow a company to set such costs against its tax. It must be possible for the Treasury to devise a more sophisticated way of ensuring that the correct finance costs are allocated against the profit.

It is easy to take a shot at large businesses, because they are big and faceless. BP is a lovely target; it makes lots of money. However, BP makes only 15 per cent. of its profits in the UK, and not all of that is from the North sea. The tax applies only to the profits that it makes in the United Kingdom. The profits that it makes in Angola, the gulf of Mexico and Alaska are not subject to the tax. If it invests more in Alaska or Angola, it does not pay the tax. It is an easy hit for political consumption to say that there is a higher tax regime in Angola, but the fields are so much larger. If one were to drill a hole in the ground there and find a field 100 times bigger than one in the North sea, the return that one would make during the lifetime of that field would be so much more rewarding, even with a 70 per cent. top-rate tax regime—I understand the regime is price sensitive—than paying 40 per cent. on a tiny incremental field in the North sea.

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Prepared 8 May 2002