|Previous Section||Index||Home Page|
Mr. Flight: I thank the hon. Gentleman, who has beaten me to it. I was about to say that we learned our lesson in 1983 and a stable tax regime for the oil industry has been a necessary and effective platform for success ever since.
Before the proposed income tax increases, in a comparison of the profitability attractiveness of 57 countries, the UK was ranked 31st for the North sea basin and 40th for the southern basin. The UK fields are smaller, the costs are higher and the risk reward is considerably less attractive than in most other parts of the world. Extraction costs are about $8 a barrel, which are among the highest58th out of 59anywhere in the world. Those figures, as I am sure the Minister is aware, were produced by Wood Mackenzie investment bank.
Investment decisions by the industry are not based solely on rate of return computations, but are made in the context of fiscal considerations, cash flow and risk reward in relation to the size of the investment programme. They are alsothis is very much what we have just been talking abouta factor in the stability of the tax regime in which they are made. Many people inside and outside the industry view the Government's proposals as a breach of faith, given their pilot scheme, which has been extremely successful in recent years in encouraging a significant increase in North sea investment. In 2001, 21 new fields went into operation at an investment cost of £8.23 billiondouble the 2000 levelso, not surprisingly, it is felt that the significant tax increase will have a retroactive impact on investment decisions, which the Government have encouraged people to take on the basis of a stable tax regime. People are zapped with significantly higher tax on investments to which they have committed themselves.
If there is a breach of faith, previous experience shows that there is a serious risk that the multinationals, which are the main participants, will look at other areas of the world, particularly the Gulf of Mexico, as they offer much more attractive fiscal arrangements, risk rewards and field sizes.
Roger Casale (Wimbledon): The hon. Gentleman did well to remind the Committee that the previous Administration extracted a substantial revenue stream from North sea oil throughout their period in office, as they did from the privatisation of many national industries. However, the Committee will not need reminding that the Conservatives did very little with those resources. In fact, at the same time as drawing that income stream from the taxation of North sea oil, it piled up more and more national debt. Just when we are at the point of using those resources to invest in public services, the hon. Gentleman opposes the tax from which his party profited throughout its period in office, although the nation gained precious little.
Mr. Flight: That is a pretty feeble and irrelevant comment by the hon. Gentleman. The issue is simply whether additional taxation of the industry will have a major impact on investment, employment and the health of the industry. Self-evidently, as I have said, the Treasury has decided upfront that the proposal will not lead to that. However, as I am endeavouring to explain to the
The net effect of the measures will be to take £6 billion of cash flow out of the industry over the next eight years and to produce an annual fall of about £2 billion in retained earnings, which will clearly have an impact on the cost of raising capital for oil companies through their share prices and gearing.
Historically, independent analysis has shown, for better or for worse, that tax more than the price of oil has driven North sea development and North sea investment. The measure will make the UK uncompetitive and unattractive. It will increase the UK marginal tax rate from 69.4 per cent. to 73.7 per cent. at a time when the industry has been doing extremely well in a mature environment. I congratulate the Department of Trade and Industry on the success of its pilot scheme. We are producing 85 per cent. of our primary needs.
The measure will put the future of the industry at risk, and many companies have indicated that they will rebalance their world activities. I shall deal later with the depressing figures that indicate that the proportional interest in investments offered since the Budget show an immediate downwards reaction.
Let me deal with specific issues arising from the tax proposals. Not only are financing charges, as provided, not allowable against expenses, but as the charge is a special supplementary charge, it is unclear whether brought-forward losses could be offset against it. It is not a standard corporation tax charge. More fundamentallyI raised the issue on Second Readingwill the tax paid with the supplementary charge be creditable by non-UK parent companies receiving dividends from their UK subsidiaries under double taxation treaties against their tax liabilities elsewhere? If not, there is a significant risk that double taxation will be paid, particularly by US companies. If that is the case and if it is not changed, the UK will be saying goodbye to the very favourable double taxation treaty that we negotiated with the United States last year but for which, for reasons not explained, the Government have not yet put through the necessary legislation. Although that is a different issue, it would be interesting to know why.
On royalties, the Government have argued that a combination of the offer to negotiate and get rid of royalties, and capital allowances, would go quite a long way to offset the proposed increase in taxation. That is not the view of the industry. Indeed, many in the industry would argue that the abolition of royalties is not a particularly good idea as it does not encourage new developments, which have been exempt since 1982, and could give rise to windfall profits on old fields.
However, the Government have not given a commitment to abolish royaltiesthere is nothing in the Red Book to that end. Current royalty receipts are of the order of £500 million per annum. They are not allowable against petroleum revenue tax and corporation tax
The Chief Secretary argued on Second Reading that the additional taxation would be entirely offset by first year allowances. The Wood Mackenzie figures that I quoted suggested that that is nonsense. They show an impact of £8 billion on profits, assuming stable oil prices between now and 2010, versus a deterioration of £6 billion in the cash flow position. That suggests that the Chief Secretary's claim is not correct.
Given that 6 per cent. of Scottish employment is in the industry, no wonder most, if not all, Scottish Members of Parliament are worried. Given the way in which the Chancellor usually protects his back-garden Scottish interests, I wonder whether he is fully aware of the likely impact. As the House may be aware, in the past 10 years the only two economies to introduce tax increases of comparable size have been Argentina and Venezuela.
In view of all the Government's claims about consultation before imposing major measures, the industry is rightly offended that there was no consultation on these proposals. They are ill-conceived and, as precedent shows, it is dangerous to think that Governments can merrily dip into profits every time oil prices rise. When oil prices fall, that is followed by a major decline in new investment. The long-term confidence and trust that has been built up over the past 20 years has been severely knocked. Because of its mature nature, the UK industry cannot afford to take risks with its outlook.
Amendments Nos. 2 and 22 propose a year's delay in the introduction of the charge. Other amendments deal with the rate of the charge and the treatment of financing costs. Amendments Nos. 2 and 22 seek to ameliorate the impact of measures which we believe are unwise and not in the national interest, and which will do more damage to an important industry and employer than they will bring benefit in terms of additional tax revenues.
Mr. Salmond: This subject was vigorously debated in the Scottish Grand Committee yesterday, and I do not intend to repeat the contributions that some of us made there. None the less, the issue is vital and current enough for at least some of those arguments to be brought to the Committee of the whole House.
I want to try and sweep away some of the nonsense in the debate. It is not the case that Governments do not have the right to change oil taxes. For examplenever mind 1993one of the initial acts of the Thatcher Government in the early 1980s was dramatically to increase the tax regime for North sea oil. The previous Secretary of State for Energy was Tony Benn. Margaret Thatcher decided that a more vigorous taxation regime was necessary than had been decided by Anthony Wedgwood Benn. It was extraordinary. The Government's argument was that oil prices were high and they wanted to get some of that endowment into the Treasury. Similar arguments had been used for previous oil tax changes.
After the Budget announcement, I know that Labour Members feel that they must loyally dragoon themselves behind the Chancellor. His power over Labour Members in Scotland means that they will not enhance their career prospects by trying to gainsay him. None the less, hon. Members representing areas in north-eastern Scotland and more widely have a clear constituency interest in terms of employment. They should at least want to know about the impact on jobs and investment before they unthinkingly line themselves up behind the Chancellor and vote at their party's call without thinking of voting for themselves. It would be unreasonable of constituents in the north-east of Scotland to have to expect anything else.
The second bit of nonsense in this debate is the Government's argument about the impact on jobs. I used to deal with field financing, so I recognise what can be done with the figures. The Government cannot take £1 billion in a full year out of the North sea industry and claim that it will benefit investment in the sector. I remember a debate for the Republican nomination that occurred a long time ago between George Bush senior and Ronald Reagan, in which Ronald Reagan advanced a similar argument, although it was on a different matter, and George Bush called it levitation economics. That is what the Government are engaged in. According to them, we can take £1 billion out of the industry not only without damaging it, but benefiting it. They are saying, "We are going to take £1 billion out for your benefit; we're from the Treasury and we're here to help you"one of the great creative lies in life.
The measure will damage the industry; the only thing to be estimated is how much damage will be caused. The demeanour and body language of the Secretary of State for Scotland was yesterday even more vigorous than usual. I would say that it was defensive, and I am pretty certain from that alone that she found out about the proposed change in Cabinet on the day of the Budget announcement. She did not confirm that in the debate, but I detected that the measure was probably as much of a surprise to her as to the industry and the rest of us.
In the Scottish Grand Committee yesterday, the Secretary of State said that she thought that the measure would minimise the impact on jobs. That is an interesting phrase, because it concedes that there will be an impact on jobs. Will the Economic Secretary tell us how minimal
Whatever else the Economic Secretary says, she must tell us what the figure is. How minimal is it? Is it 500, 5,000, 10,000 or more? If the Treasury cannot provide such a figure, it will, by introducing a short-term and unexpected tax change that is a reversal of what was expected only last year, stand accused of putting at risk a substantial number of jobs. I take that ill. Successive Chancellors have done well out of the North sea. Some £160 billion£32,000 a head for every man, woman and child in Scotlandhas come from the North sea in the past 20 years or so and gone straight into Treasury coffers. The percentage allocated directly to Scotland was zero.
So there was a huge windfall, and it continues; the hon. Member for Arundel and South Downs (Mr. Flight) was right to say that many positive things were happening in the North sea. Indeed, I listed a number of them at yesterday's sitting of the Scottish Grand Committee. They are reflected in the estimates of the Chancellor, who says that he is expecting another £32 billion out of the North sea in the next six years, which is £5,000 for every man, woman and child in Scotland. When the hon. Member for Arundel and South Downs speaks about the Chancellor feather-bedding Scotlandthat was the implication of his remarks as I understood themhe should reflect on such figures and on how successive Chancellors have themselves been feather-bedded by that flow of revenue from the Scottish sector of the North sea. The expected £32 billion is double the amount produced in the past six years. As the Chancellor is receiving such substantial largesse from the North sea, I think that we are entitled to ask what analysis was conducted on the jobs and investment impact of the substantial tax change in question; and to ask how specific it was and why it was not published.
Many good things are happening in the North sea, including 21 new field developments last year and the discovery in the Buzzard field of the biggest accumulation of oil found for a generationa huge development that might generate 400 million barrels. Unfortunately, it has been confirmed that some of the DTI management for that project will be based in London, not Aberdeen, although it would have been reasonable to assume that management for a field that is located to the north-east of Aberdeen would be based there. None the less, that is a huge accumulation of oil and there are many successful developments in the North sea.
There are, however, worrying signs for the future. As I pointed out to the Scottish Grand Committee, the number of wells currently being drilled is sharply down on the number only a few years ago. In 1996, 112 exploration and appraisal wells were drilled in the waters around Scotland. Last year, 51 were drilleda decline of more than half in the past few years.
I had a discussion yesterday with the Minister for Industry and Energy about licensing. I pointed out that for the first time ever, as far as I can remember, the DTI did not issue a press release to announce take-up of this year's levy. I speculated that the reason for that might be that out of the 289 blocks offered, only 3612 per cent.were applied for. I had to gain that information from the trade press, as there has been no official DTI press release. The Minister said that I was being alarmist and scaremongering, and he told the Committeethe hon. Member for Aberdeen, Central will remember thisthat we should not worry too much, because in last year's round the take-up was only 10 per cent. I have since looked at the figures for the 200001 round, which was the 19th. There were 44 blocks in all, but 12 were applied for; my arithmetic produces a take-up rate of 27 per cent.
I know that it is becoming commonplace for Labour Ministers to manage to muddle, mislead and misunderstand, but never to take responsibility for doing so. I shall derive some entertainment in the next few days from gaining from the Minister for Industry and Energy information on how the 10 per cent. mentioned yesterday in the Committee can become 27 per cent. when one looks at the figures. Even if the level was 10 per cent., it would still be a matter of huge concern to me and anybody else who is interested in the future of the industry that only 36 blocks out of 289 were taken up in the latest licensing round. That is not an issue for prolonged exchanges and parliamentary debate, but it is a matter of concern, as it tells us what will happen in the industry not in the next five or 10 years, but in next 15, 20 and 25 years. The tragedy is that all available evidence suggests that if the blocks were drilled, they would have a substantial success rate.
Perhaps the hon. Member for Aberdeen, Central will anticipate my next remarks. I seem to remember him saying yesterday that the success rate in the North sea was pretty low. I have also looked at that rate in the past five years. The success rate in drilling was 17 per cent. in 1996, but in 2001, the rate was 25 per cent. in terms of the finding costs and the success rates of drilling and appraisal in the North sea.