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CORRECTED TRANSCRIPT OF ORAL EVIDENCE
To be published as HC 1018-i
House of commons
TAKEN BEFORE THE
Energy and Climate Change Committee
IMPLICATIONS FOR THE NORTH SEA OIL AND GAS INDUSTRY OF THE BUDGET 2011
Wednesday 4 May 2011
Robin DaviEs, Paul Warwick, Malcolm Webb, Steve Jenkins and alan booth
RT HON Chris Huhne MP, Justine Greening MP, Simon Toole and Mike Williams
Evidence heard in Public Questions 1 - 145
USE OF THE TRANSCRIPT
This is a corrected transcript of evidence taken in public and reported to the House. The transcript has been placed on the internet on the authority of the Committee, and copies have been made available by the Vote Office for the use of Members and others.
The transcript is an approved formal record of these proceedings. It will be printed in due course.
Taken before the Energy and Climate Change Committee
on Wednesday 4 May 2011
Mr Tim Yeo (Chair)
Sir Robert Smith
Dr Alan Whitehead
Examination of Witnesses
Witnesses: Robin Davis, Global Vice-President, Business Improvement, Subsea 7 and co-chair of Oil & Gas UK, Paul Warwick, President, UK & Africa, ConocoPhillips, co-chair of Oil & Gas UK, Malcolm Webb, Chief Executive, Oil & Gas UK, Steve Jenkins, Chairman, OGIA and CEO of Nautical Petroleum, and Alan Booth, Director of OGIA and CEO of Encore Oil Plc, gave evidence.
Q1 Chair: Good afternoon, and welcome to this one-off session of the Committee, which I think will attract a lot of interest, not just from the industry, but from outside as well. We are all familiar with your organisations, so I do not think there is any need for lengthy introductions, but we are grateful to you for making the time to come and talk to us. Could I start by mentioning that the Treasury calculations show that, over the next five years, the post-tax return per barrel of oil will be greater than the post-tax return over the past five years? If that is the case, why is the increase in supplementary charge on oil production, in particular, unfair?
Malcolm Webb: I suppose the answer to that, Chair, is that if that is the case, that is a projection that the Treasury has done using various assumptions about oil price and costs and the like, I suppose. If it is right, it is right. Time will tell. I think some of us would be sceptical about relying on five-year forecasts of that nature.
Q2 Chair: What other aspects of those five-year forecasts do you particularly have doubts about?
Malcolm Webb: I would be rather nervous about anybody who was predicting a relatively static and ever-upward projection on price, particularly oil price.
Q3 Chair: Are you saying you expect to see a collapse in the oil price in that case?
Malcolm Webb: What I am saying is I think that history shows that the oil price is a very volatile thing, and if you look back over the last couple of years, we have seen amazing volatility in it. I am not sure that, looking forward, history is not going to point us the way forward there as well. I would predict volatility.
Q4 Chair: Of course, the last couple of years coincided with a quite unexpectedly savage recession in most western economies.
Malcolm Webb: That is true.
Q5 Chair: Which tends to have a downward influence on the oil price.
Malcolm Webb: Yes.
Q6 Chair: So are you worried we are going to have another savage recession?
Malcolm Webb: I don’t know what is going to come round the corner, Chair.
Q7 Chair: Is that the collective view of the panel?
Alan Booth: If we knew the future price of oil, I do not think we would all be sitting here in this discussion, to be honest. It is unpredictable. That is the simplest thing you can say.
Q8 Chair: But do you share the scepticism about the Treasury’s claims?
Alan Booth: They obviously take the forward model for the price of oil, which may or may not be correct. I think that is what Malcolm said. If it is correct, that would be fine. If it falls below $75 a barrel or $80 a barrel, I think we will have a significant issue, because our costs are ever increasing.
Q9 Chair: How does the tax level in the UK now compare with that of other countries?
Malcolm Webb: It varies. It is towards the top end of the league now, and it is particularly towards the top end of the league for mature basins such as the UK. One would expect, in a mature high-cost basin such as the UK, where we should be turning our attention to squeezing out all the last remaining reserves, that one might see an amelioration in the tax rate, instead of which we seem to be headed further on up the league, and we are quite highly taxed on a comparative basis. Do others agree?
Steve Jenkins: It slipped. I think according to Wood Mackenzie, it slipped 21 places. Therefore the most favourable tax is the upper quartile. We are now in the second quartile, so we have slipped right the way down the league. That is obviously in competition for capital, when we are asking the City for capital and the banks to finance our activities. They look at the tax take and they want higher rewards, so they are looking at the tax volatility and say, "In a volatile tax regime; we would like higher reward because we are taking higher risk".
Malcolm Webb: Higher than Australia, higher than the Netherlands, higher than Norway; quite high.
Q10 Chair: You pick those countries out as ones you would prefer to operate in?
Malcolm Webb: Those are offshore provinces that have a certain similarity to us, I think, although in Norway’s case, it is a much younger province than ours, so I think this issue about the maturity of the basin also has to be thought about.
Alan Booth: I think it is worth saying with respect to Norway, which I think has often been compared now with the UK with our current rates, that capital efficiency in Norway is much, much higher. In Norway, if I were to invest $100 million in drilling, I would get a cheque from a Norwegian Government at the end of that year for $78 million, as my tax loss, given back to me, so I can then reinvest that straight away. In the UK, if I spend $100 million on drilling, that is $100 million. I only get my tax break when and if I ever produce, which may be five, four or six years away. Capital efficiency is significantly better in Norway, certainly for explorers without tax cuts.
Paul Warwick: One of the other areas about Norway is that it has had a fiscal stability and predictability since 1992, and capital allowances, which have been able to be set off against exploration, have been added since that time to promote exploration, but not at the detriment of production.
Q11 Sir Robert Smith: I should remind the Committee of my entry in the Register of Members’ Interests as a shareholder in Shell. May we explore one of the other sides on investor confidence as well as the absolute numbers-predictability. How much is it a concern of yours that this came as a shock announcement rather than following consultation?
Malcolm Webb: It is a huge concern. It did come as a complete shock. It also came in the face of numerous statements by Government Ministers, including the Chancellor, that they understood the need for predictability and stability with oilfield taxation, and for certainty for investors. We have repeated statements from Government Ministers to that effect. I think we were lulled into a false sense of security. It was a huge shock. Coming as it does, this is the third of these major shocks in nine years, and there have in fact been minor shocks in between those two as well. We can say there have been five negative pulses towards our industry. It is very, very damaging for investor confidence.
Paul Warwick: I come from a company, ConocoPhillips, that has made investment decisions-it seems perhaps naively-every year before the taxes have increased over the last nine years. I wasn’t in the country-I was abroad-at the time of the previous two tax rises, but the last one was set in a series of questions: what about fiscal predictability; what about fiscal stability? Then pretty substantial decisions were made to invest in the UK Continental Shelf, and then the tax rate changes.
I think, as an industry, we take confidence in statements by senior Ministers, which are made in Parliament or in reports, about understanding the needs of the industry. While we understand that nothing is absolute, we do make decisions based on advice that we get.
Robin Davies: Also, from the perspective of the supply chain, we have put in our investment programmes-in Subsea 7’s case, over the last four or five years, about 2 billion into new vessels and equipment, a lot of which is focused on the North Sea. Our plans are based on the investment plans of the oil and gas operators, and if they are uncertain about their investment plans in the future, likewise we are uncertain, too.
Q12 Sir Robert Smith: Maybe on the supply chain you could expand a bit, because some of the announcements are not that a plan will not go ahead but that it has been shelved for reappraisal. Obviously, for the company doing the shelving, it just means it is not making that investment, but for the supply chain, how does that impact on your cash flow and how do you keep going while you wait for the customer to reassess the tax system?
Robin Davies: Our business fits into roughly 50:50. About 50% of our business is new development work, so it is very much focused on supporting the investment work of the larger operators and the small operators. Most of the developments in North Sea now tend to be Subsea step-outs. They require existing infrastructure to be able to go ahead. So the concerns that people are raising about the investment are kind of impacting on me twofold, because if we don’t get the investment coming through for the new fields, obviously I have vessels to sell and people to utilise, and they all go elsewhere, I think. There are competing fields, particularly places like the far east, where there are some mega projects coming up in the next three or four years.
Secondly, there are the brownfield assets, which are now being taxed, particularly PRT paying fields at 81%. If their demise comes forward and if they are decommissioned forward, that reduces the opportunity for us to do any additional step-out. So, I have a concern on the investment side, and I also have a concern on the OPEX side where we support the work that goes on to maintain the asset integrity of the brownfield work. Again, if they come to an early demise, we will have less work to do.
Q13 Sir Robert Smith: Reading the energy supplement of the Press and Journal, Brian Wilson, the former Energy Minister, highlighted how, in a previous regime, when he was in the Department of Trade and Industry, the Treasury announced these major tax changes under that Government without consulting that Department. How confident are you that the Treasury and DECC have any better relationship in terms of ensuring that the Treasury gets the information from DECC that it needs to understand the complexities of the industry?
Paul Warwick: I think it is fair to say, at least for my company and Oil & Gas UK, that we do not believe that that consultation has occurred. There are several aspects in terms of what has been proposed, while both cumbersome and difficult to apply, that make the basin even less competitive than it is evenwith the headline tax rates-things like the dislinking of decommissioning relief against the revenue level of tax, for example. The 81% PRT on existing fields-these brownfield areas that Robin spoke about-which the industry is spending over £1 billion a year in investment on, would seem to be counter-productive, even if one were to accept that the higher tax rate was necessary, which I know there have been huge debates about. It would appear that that consultation has not occurred.
Malcolm Webb: I think that was another big disappointment as well, because much had been made of it, and the industry enjoyed the fact that very recently we welcomed to Aberdeen for the first time ever the Treasury Minister and an Energy Minister together for joint discussions. We did think, actually, that something new had happened and that we did have proper consultation going on and good collaboration between those two Departments. But, as Paul says, I think this recent outcome rather shows that that has been lacking on this big occasion.
Q14 Chair: When you say that the consultation did not occur, does that mean you think that DECC was not even involved?
Malcolm Webb: Our view is that DECC was involved at the very last moment by being notified of what was going on, as opposed to being consulted.
Q15 Chair: What do you mean by the last minute? The day before?
Malcolm Webb: Hours before.
Q16 Chair: Hours before? On the day?
Malcolm Webb: Yes.
Paul Warwick: But that is our supposition; we are not insiders, in that sense.
Q17 Chair: Has it not occurred to you to ask? You must talk to DECC every day.
Paul Warwick: We talk to DECC a lot, but they are not the sort of questions that I think we would want to ask them directly, because-
Q18 Chair: Your relationship is okay, is it? You don’t want to disturb them by asking all the questions, even in private?
Paul Warwick: Our relationship is very good. I think it would be very embarrassing for people in DECC to answer that question.
Q19 John Robertson: I am interested in, as Mr Webb talked about, going to the banks and the need for stability. What kind of money do you need to borrow from the banks? I always thought oil companies were worth a fortune.
Steve Jenkins: They are not. Talking for the independents, they are not worth a fortune. When we come to develop a field-say it costs maybe £300 million or £400 million to develop a field-we would try and borrow at least 50% of that from banks. The remainder we would have to raise from equity. However, just a few years back, the banks were lending maybe 70%, so therefore we would have to find the 30%. If the small companies are developing a field, they have to find a huge amount of equity, but they also have to get the banks to lend them.
Q20 John Robertson: So why are you in the business?
Steve Jenkins: We are in the business to make money for our shareholders. That is why we’re established-
Q21 John Robertson: So you have been very successful then, have you?
Steve Jenkins: Speaking for my company, in the past year, yes.
Q22 John Robertson: Let me move on to the volatility in costs that you complain about. Can I assume that when you go to the banks and ask for loans that you have to put forward some kind of plan of how you are going to cover the repayments and whether you are going to make? If there is such volatility in the market, and if this increase in tax to you is such a calamity, how can you do that? How can you still manage to get the money out of the banks? You told us right at the beginning that you could not answer the Chair’s question because you did not know how the market was going to react in the months and years ahead, yet you must have a fair idea of what the trend is going to be, otherwise you cannot go to the bank to get a loan.
Paul Warwick: It is a very difficult equation. In the oil industry we are used to taking a price risk per se, and oil prices, as you have seen over the years, have gone up and down. In my time in the industry, both oil and gas prices have been at highs and lows. I was remarking this morning that in 1999, I think, The Economist had the headline "Drowning in Oil", forecasting oil prices in single-dollar figures. Then two years ago, we saw $140 to $150 a barrel. We are used to taking the price risk, and my company is slightly different insomuch that we are a larger company, we have been present in the United Kingdom for over 40 years and we have a reasonably large portfolio. We tend to try to fund our investments through positive cash flow. We have a pretty substantial level of investment over the next few years net to our company and we were able to cover those investments from positive cash flow from the company. That positive cash flow has now disappeared and, equivalent to going to the bank, we have to go to our corporation to bring money in to make those investments. Initially, when we started our business, we had nothing, and then over a period of time we have built it up into something that is sustainable and, over this 40 or so-year period, reasonably successful.
Q23 Barry Gardiner: Do you think that the Treasury is working hard with the industry genuinely to come to an understanding of the impact of these fiscal measures, particularly in relation to the sort of more marginal investments that you make in some of these fields?
Malcolm Webb: We have had two meetings with Treasury Ministers since the Budget announcement: one with Justine Greening, the Economic Secretary; and one with the Chancellor. We have said that we wish to engage with the Treasury to look at what can be done to stimulate further investment in the basin, and particularly in some of the more difficult areas for investment, in the light of this decision. So we are up for that engagement and we are ready-
Q24 Barry Gardiner: With respect, Mr Webb, that wasn’t my question. What you have told me is what you said to them. My question to you was: do you think that the Treasury is really working hard with you to come to a comprehensive understanding of the problems that you face in those more marginal fields?
Malcolm Webb: We do not know yet because we haven’t started out on that purposeful engagement. We are all committed to do it, but it hasn’t actually started yet.
Steve Jenkins: Regarding the Mariner Field, which is a Statoil operated field, which we are partners in, that was fairly publicly put on pause recently. We immediately went in and started discussions with the Treasury to outline why the tax change had made the field even more marginal and why we had paused for breath before awarding a front-end engineering design contract worth $20 million. The engagement has started but-
Q25 Barry Gardiner: What was your assessment of that engagement, Mr Jenkins?
Steve Jenkins: Initially, it was very positive. Unfortunately we have had lots of bank holidays in between, and we hope that the pace will pick up next week again. But initially it was positive and they were receptive to our concerns.
Q26 Barry Gardiner: My second question: do you accept that the level of profits that you are now making has far exceeded the projections of profits that you made when you made the investments?
Paul Warwick: I think that is a difficult question to answer, because the volatility within oil price means that on any specific day you can answer that question in a different way. The oil prices today, I think, were somewhere between $122 and $123 a barrel. Historically, that is reasonably high. Two years ago, we saw oil prices going down and going below $40 a barrel. There is also a huge gap between Brent prices and West Texas Intermediate at the moment.
Q27 Barry Gardiner: Mr Warwick, without trying to equivocate too much, you will have an investment period, and you will have set periods when you say, "Well, we are putting in this investment. Here is what we hope our rate of return is going to be over the next five and 10 years," and so on. So, my question holds good. Yes, of course at any particular moment you can say, "Well, things are looking on the up," or, "They are looking on the down," but my question was quite specific: are your profits at a level that far exceeds the projections that the companies made when they made those investments? You know the reason I am asking, don’t you?
Paul Warwick: Absolutely.
Barry Gardiner: I am quoting directly from the Economic Secretary’s speech last night, which I am sure you have all read.
Paul Warwick: Yes.
Barry Gardiner: Both in relation to the impact on marginal investments and in relation to your anticipated profit, what I want to know is: do you agree with it?
Paul Warwick: As I say, I think it is a complicated case to answer. Short of small investments in single wells, in the last three years we have not made investments that have delivered. To date, they are still under fabrication and still under design, so those fields are not producing. Fields that came on production in the 2007-08 stage actually produced a lot less. We had gas prices down below 30p a therm.
Q28 Barry Gardiner: With respect, the Treasury has claimed that the levels of investment rose after the last increase in the supplementary charge in 2006.
Robin Davies: That is not true.
Q29 Barry Gardiner: You fundamentally disagree with that.
Malcolm Webb: Absolutely.
Q30 Barry Gardiner: So the Treasury are simply wrong on that.
Malcolm Webb: Yes. I think you will see what happened again this time. After the tax change, nothing much happens in the immediate 12 months thereafter because everything is committed at that point. It is in the two years after that that one starts to see the damage being done, and on the last occasion in 2006, we saw investment fall over the ensuing two years and capital investment fall by 25%.
Q31 Barry Gardiner: Is the Treasury wrong then to presume that the latest increase in the supplementary charge will not have a negative effect on investment this time?
Malcolm Webb: We believe so and, as you may know-
Barry Gardiner: Sorry, you believe it is wrong?
Malcolm Webb: We believe it is wrong, yes, and we are conducting a complete re-run of our activity survey. Each year we conduct an activity survey looking at the forward projections of our members’ plans over the next five years. We are asking everybody to resubmit their data for that, and the results of that will be known quite shortly. What we anticipate- or rather I anticipate-is that that will show, again, that in the very near term, there won’t be much of a difference, but as you look further out, the damage will be seen to be done.
Paul Warwick: May I add-and I don’t want to bombard you with figures-that 2002 investments levels in the industry were circa £7.1 billion. In 2003, they were £6.6 billion; in 2004, £6.2 billion-so a substantial reduction-in 2006, £7.3 billion, so it built back up again to a similar level; in 2007, £5.7 billion; and in 2008, which coincided with the highest oil price that we have seen, they were £4.3 billion.
Q32 Barry Gardiner: Could you make those figures available?
Paul Warwick: Yes, they are available in Oil & Gas UK data.
Robin Davies: You also see, just as another point there, a corresponding drop in exploration activity in reaction to the tax changes. We can show those figures to you as well.
Q33 Sir Robert Smith: Isn’t that quite an important thing that the Treasury needs to worry about for the future, because a drop in exploration now means the supply line of new projects is just not being generated?
Robin Davies: Absolutely. For me, something successful as an exploration well today, and two or three years ahead it is a Subsea step-out for my company and my competitors. So, yes, it is a direct concern. My concern, and that of my fellow supply chain members, is that the level of investment will go down, and it is that level of investment that we need to keep going to keep the supply chain robust. We have several technology centres in Aberdeen and in the UK overall. We export about £6 billion worth of goods and services abroad. It is a very robust supply chain.
If we do not have the investment, the supply chain will move out. We have floating assets, so we can move, but you will find even the smaller contractors will be looking elsewhere for their revenue.
Q34 Barry Gardiner: Mr Davies, do you have any evidence with which you could supply the Committee that investment projects were either halted or transferred overseas as a result of the increase in 2006?
Robin Davies: We have the evidence in terms of levels of investment not specific projects. I do not think I can give you that directly, but we have the-
Q35 Barry Gardiner: Are you able to put that together in terms of specific projects?
Paul Warwick: It is difficult for us, though. We had a debate this morning as to whether a question of this nature would come up. It is difficult to say what did not happen versus what happened. What we do know is the expenditure reduced significantly, and that would imply that certain projects-depending on how you define projects through single wells through to large developments-would have either been delayed or deferred, or did not occur.
Robin Davies: To turn the question the other way around, in direct response to the improvement in field allowances in the back end of the previous Government who made the changes, we have seen an increase in investment. We have created something like 400 jobs in Wick in northern Scotland on the back of that increased investment. We also have a part to play in the work for TOTAL west of Shetland. I can turn it the other way round and say increased investments-
Q36 Barry Gardiner: Increased investments have produced new projects, yes.
Robin Davies: Absolutely.
Q37 Barry Gardiner: Without wishing to push too much on this, it strikes me though that at any one time you are considering a whole range of projects, and you must have set thresholds of profitability and anticipated revenues and thought, "Well, yes, we may proceed with that next year," or, "We may proceed with it in a couple of years’ time, all being well." I would have thought you could have dug out of your archives the projects that you had been considering that did not progress.
Paul Warwick: I think that individual companies may be able to do that. I think, as an industry, that we probably are not allowed to share that sort of information.
Q38 Barry Gardiner: Okay, I understand. One final question then: is the Treasury right when it says that oil price rather than tax levels are the determinant when it comes to decisions on investments in the North Sea? If it is right, is it the whole picture?
Paul Warwick: I think oil prices clearly have a major influence, but so do gas prices. I think the gas price as of just before we came here today was 53.5p a therm, which is about the same that it was in 2008. As I mentioned earlier, we take price volatility as part of our risk, but what we expect is to be able to say, "Well, that is out there. We will take our view," and I am not clever enough to tell you what the oil or gas prices are going to be in the future, but we take a view within a range, and then we expect the fiscal conditions to be certain.
One of the things that is for sure about a basin like the UK Continental Shelf is that it is mature, so the oil price, if you just look at it simplistically, is a level playing field with everywhere else. Everywhere else, short of the regional variations, gets the same oil price, so whether you are investing in Indonesia or the UK, the oil price advantage that you get is the same. What you hope to be able to say with this issue of fiscal stability and certainty is that you can rely on the environment you are investing in to give you the sorts of returns within the bands that you have that you expect. What we have seen is that, with new developments, some 24% of our future value has been taken away because of the tax increase.
Q39 Ian Lavery: The projects that perhaps are to be halted or even transferred will inevitably have an impact on employment levels. Can anybody give the Committee any indication what impact that increase in 2006 has had on employment figures within the industry?
Malcolm Webb: Again, I am afraid it is difficult to get to that. We did not see in 2006 a large decline in employment. I think the industry held on to its skills and its talents to a very large degree at that time, and some of them were deployed elsewhere as well. But our statistics show that every £1 billion of capital investment in the North Sea generates about 15,000 jobs. We saw capital investment fall by something like £2 billion in the light of the 2006 increase, so we would say that 30,000 jobs, if you like, were foregone as a result of that-they would otherwise have been created but were not created.
Q40 Ian Lavery: If it is 30,000 jobs, it is extremely significant.
Malcolm Webb: Yes. This industry provides employment for nearly 500,000 people across the UK.
Q41 Ian Lavery: With the new increase in taxes announced at the Budget, what do you foresee in terms of employment levels?
Malcolm Webb: I do not think it is particularly good news for employment levels. I think that that is why we need to engage with the Government and see what we can do to try and work to get investment flowing into the basin, if we can, through these measures for the difficult fields-well, for more than difficult fields actually. I think we need to look at the style of allowance concept on a pretty broad basis.
Steve Jenkins: I think it is a very simple way of thinking about it. The more investment in the UK, the more jobs will be sustained and created. The lower the investment, the fewer the jobs, naturally. It is very hard to put a specific number on it.
Q42 Ian Lavery: What type of jobs, in particular, would you see perhaps being lost as a result of the increase in the Budget?
Malcolm Webb: I think they would be across the board. They would be technical jobs, and potentially jobs out on the rigs as well, if we do not see exploration maintaining its pace. Jobs in fabrication-
Robin Davies: It is not just jobs in north-east Scotland and the north-east-
Ian Lavery: In the food chain as well, of course.
Robin Davies: -but it is, you know, the oil and gas supply chain spreads right across the UK. Most of the constituencies that you guys represent have some oil and gas content in them.
Q43 Ian Lavery: So you just basically use the £1 billion of investment to 15,000 jobs and equate that either upwards or downwards?
Robin Davies: Yes.
Q44 Ian Lavery: And you believe that as a result of the increase in the supplemental charge, that could have a severe impact on unemployment-either due to new jobs or current jobs?
Malcolm Webb: It could do unless we can take measures to get investment flowing into the basin, and that is why we are determined to engage with the Government to see what we can do to mitigate the effects of what has been done.
Paul Warwick: May I add something about the rise in the PRT rate to 81%? I don’t speak for my own company in this case, but some of the companies that are members of Oil & Gas UK operate fields that are predominantly within that tax regime. This heralds the end of facilities more quickly than would have otherwise been the case. When those facilities go away and go into abandonment, or the infrastructure is removed-most of our infrastructure in the UK Continental Shelf is older and it is sustained in this brownfield sense that has been described-they don’t come back, and all the jobs associated with them go away. Some of our colleagues in Oil & Gas UK on the board and in the council have expressed concern about the future of those older facilities.
Q45 John Robertson: Could I go back to the figures? You say that there are roughly 500,000 people-
Malcolm Webb: 440,000 jobs are provided by the industry in the UK.
Q46 John Robertson: Is that at present?
Malcolm Webb: Yes.
Q47 John Robertson: We were talking about 2006. How many people were employed round about then?
Malcolm Webb: I will have to get back to you on that. I don’t have the exact number.
Q48 John Robertson: We have a figure of 30,000 people not getting jobs. I would imagine that the total number might have been less than 440,000 then, or would it be more?
Malcolm Webb: I that think it was slightly more, but on the 2006 point, my recollection is we did not see an awful lot of labour lost. There was a concern in the industry that these skills should not be lost to the industry, and I think that a lot of people were redeployed. Some of them redeployed on to overseas operations as well.
Q49 John Robertson: When did the industry get back to an even keel from 2006?
Malcolm Webb: It was around 2009 when things started picking up, and that was after we had had a period of consultation with the Government. We met with the then Prime Minister and the Chancellor to talk about the problems in the basin, and from that flowed, ultimately, the field allowances and a lot of new investment, and particularly some very important investment west of Shetland, and the industry started building again from that point on.
Q50 John Robertson: How many new jobs would you say have been created up until now since 2009?
Paul Warwick: If you take the Oil & Gas figures, the investment-and I hate to throw these figures at you-in 2009 was £4.9 billion. The 2010 investment was £6 billion, so the arithmetic would say that that is 16,500 jobs or thereabouts, based on the economic model that is being used to generate that.
Malcolm Webb: In the original activity survey for this year-this is also backed up by our skills academy OPITO-we were forecasting 15,000 extra jobs coming into the industry in the next year or two. We are not at all confident about that anymore.
Q51 John Robertson: We’ll call the figure 500,000, but that includes who? Does it include pump attendants?
Malcolm Webb: No.
Robin Davies: No.
Paul Warwick: No.
Alan Booth: No.
Q52 John Robertson: What does it include?
Robin Davies: Upstream jobs.
Q53 John Robertson: Is that offshore workers or refineries?
Paul Warwick: No refineries; engineering. If you think of the value chain of the upstream oil and gas business, it starts with geological people who look for hydrocarbons-so sub-surface people-through to drillers who find things, then through to engineers who determine what the field can be, through to fabrication people, through to the construction types, installation, and then through operations. And operations is not a steady state. It is a huge amount of stuff that comes in in all those areas from companies like Robin’s and vendors, as Robin mentioned. Ongoing maintenance within our facilities requires a huge amount of input all the time.
Q54 John Robertson: Greenpeace has stated that even after the Government made their announcement of the tax on you, there have been several companies who have asked for licences for drilling west of Shetland. That would suggest, according to them, that the business is still going well and that the people are not worried about the tax or they wouldn’t be doing this kind of research. Also they must be thinking the price of oil must be staying up.
Alan Booth: It is just a trend. The recent announcement-
Q55 John Robertson: Can I quote this, Chair?
John Robertson: Greenpeace states: "Oil exploration company Valiant Petroleum have, since the Budget, applied for a licence to begin deepwater exploration off the coast of Shetland. Several other companies who denounced the tax are either unaffected by it or expanding their operations into countries with considerably higher tax rates, and Brent Crude is trading almost a third more than it did in early January." Basically what it is saying is that you are crying wolf.
Alan Booth: No, that is incorrect. Valiant applied for a licence-a block-in the North Sea many years ago. I think what is causing confusion is the licence to drill a well, which is an obligation they made at the time they applied many years ago and they now have to fulfil despite the changes in tax. It is a licence to drill a well, not a licence to acquire a block. They are obligated to drill that well regardless.
Q56 John Robertson: I have never been much into Greenpeace’s figures. The fact of the matter is it is talking about other companies that are doing the same thing in investment. You must know who these companies are. I don’t think they would just make it up.
Alan Booth: It is a licence to drill, which-
Q57 John Robertson: But they are willing to invest-you told me earlier that you have to fork out the money, whether it is £300 million or £400 million, to invest into a well, and you do not get any money until it starts delivering. Now, these companies are investing in this drilling without obviously getting any money back at the moment.
Steve Jenkins: It is an obligation to the Government. When you get a licence, you say how much work you are going to do, which includes wells. You are obliged to drill those wells. A licence is awarded for four years initially and then another four years, so that is an eight-year span. You have commitments right the way through that, so you have to make those obligations and you have to drill those wells or else the licence gets taken away from you and you get a black mark from DECC, which means that you could end up not getting another licence in the North Sea.
Q58 John Robertson: So are you saying that nobody has applied for licences?
Steve Jenkins: No, what I am saying is that the licensing round happens. We just had the 26th; we have some licences that have still to be awarded. Those blocks are awarded every one or two-years for an initial four years. The oil companies say, "I am going to drill a well". What we are talking about is a license to drill a well.
Q59 John Robertson: I understand what you are saying, without getting too technical. The point they are trying to make is that you have the money and you have plenty of it, and therefore the tax that is being put on you isn’t really that bad.
Malcolm Webb: Well, we might expect Greenpeace to say something like that. It is, of course, a great supporter of this industry.
John Robertson: Absolutely.
Malcolm Webb: The thing I would say as well is that I would encourage you to think about what is happening here. There are still projects that will go ahead, as we have said. Apart from the funds are already committed to them, there are still also very robust projects that will go ahead in the North Sea, but what has happened here is that a great number of projects have been made marginal and they will not go ahead, and with some of the older assets, their life has been made marginal as well. What we are doing through this is possibly hastening the demise of the North Sea. We are increasing its maturity. It is very concerning. In this last decade we have seen constant fiscal instability, and the result has been that we are now producing half as much in the North Sea as we were 10 years ago. We were subject to a frightening decline rate of about 6% or 7% a year.
After the fiscal changes that were made by the previous Administration and adopted by this Administration, we saw capital investment flowing back into the basin and we saw that decline rate abating back up to sort of 5%, and commentators such as Wood Mackenzie, ourselves and others have said, "We can see that coming back up to 3%, and even maybe plateauing out". We could have arrested the development of the North Sea.
What is extremely concerning now is that with this latest move, what we are going to see is a reacceleration of that decline rate and an under-recovery of the remaining reserves that lie in and around our shores. There are considerable reserves that lie around our shores, but they are difficult to get, and they are in small accumulations and they are expensive to get, too.
Q60 Dan Byles: I just want very briefly to explore this 15,000 job figure, because I am a little bit confused. The implication from the exchange you just had with John is that if £2 billion of investment that was going to come in now doesn’t come in, we will forego 30,000 new jobs that would have been created. Or, are we saying that 30,000 existing jobs would be lost? I am not certain about how dynamic or static this relationship is supposed to be between the doubling of the 15,000.
Malcolm Webb: It depends. If the investment goes away from the basin, we will lose the jobs. If the investment was incremental to the basin, we will add jobs.
Q61 Dan Byles: So broadly speaking, between 2002 and 2004, when investment fell from £7.1 billion to £6.2 billion approximately, the number of jobs fell by about 15,000. Is that right?
Malcolm Webb: We will look at the figures for you, come back and give you a-
Q62 Dan Byles: But that is the relationship you are suggesting-you can count up the billions, multiply that by 15,000 and that is the jobs.
Robin Davies: I think, even with sustaining existing jobs or creating new jobs, you have to remember our supply chain is pretty dynamic. If we are not doing work in the UK, the guys will very rapidly go to the far east, Australia or KL and go and find work, or Kazakhstan or Sakhalin Island. There are a lot of places where there is an opportunity to work, so if there is not the work here, that resource goes, and it is a struggle to get it back when there is a new investment coming in. That is always a dilemma in our market. We are very cyclical, and trying to hold on to the resources to be able to maintain the level of work is quite difficult.
Q63 Dan Byles: These figures you have given us: 2002, £7.1 billion; 2003, £6.6 billion. Is this additional investment in each of these years?
Malcolm Webb: This is total investment.
Q64 Dan Byles: It is total investment?
Malcolm Webb: Capital investment.
Q65 Dan Byles: Are you differentiating between investment and ongoing fixed costs?
Paul Warwick: Yes. This is capital investment, which in our vernacular is CAPEX, and there will be an operating cost-I’m not sure whether this is included. In our company, ConocoPhillips, the operating cost in the past few years has exceeded our capital investment.
Malcolm Webb: Operating costs have been running, for the basin, at around £6 billion to £7 billion a year. The exploration spend is another £1 billion or so-just above £1 billion as well on that.
Paul Warwick: This is a high-cost basin, which is again one of the dynamics that I think one needs to understand in the maturity of it. Before the tax changes, we liked the basin. We were working actively with DECC in a scheme called PILOT, which you may be aware of, where we were trying to enhance the life of the basin and do things that move things forward. That economic model was developed for that jobs figure, so every additional billion we get creates this number of jobs. What we’ve been trying to do is to build this. How do we keep things going-I’ve enjoyed 35 years or so in this industry so far-so that people and my successors can enjoy another 35 years in it or even more? That was the task that we ran. The tax changes have really thrown us off course with that particular activity.
Malcolm Webb: On these jobs, I should point out as well that 100,000 of these jobs were involved in the export of oilfield goods and services. This is also a major exporting industry. Although we’re not exporting gas and oil anymore, because we don’t produce quite enough to supply domestic demand, we are exporting oilfield goods and services around the world, and our supply chain is regarded as a centre of engineering excellence globally.
Q66 Sir Robert Smith: Would it be fair to say that, in a way, there was almost a buzz coming back to the North Sea and that a sort of renaissance has been snuffed out by the shock change?
Paul Warwick: I think, Sir Robert, that "renaissance is" a very good way to describe it. If I take the issue of gas, for example, 46% of the UK Continental Shelf produces gas. It is an important source of gas for the UK economy and it is indigenous-produced gas. People were getting after gas to try to deliver that after a number of years of "will we, won’t we?", and part of the benefit of that was just to reduce our dependence on people like Gazprom. What we have seen now is that gas that is at the same price as it was in 2008 is now hit with another tax that takes 24% of its value away, so it is difficult to see that that renaissance can carry on. It is almost as though the Goths have come back and snuffed out that renaissance.
Q67 Christopher Pincher: I want to pursue the effect of the supplementary charge on marginal returns a little more. Clearly Greenpeace has a view, but I think that John Whiting, with his institute of chartered taxation hat on, describes the increase of the charge as a "rabbit punch", and certainly Centrica and Oil & Gas UK have been making very ominous noises about what effect that is going to have on new production and existing production. Can you quantify the risk, therefore, of an increased import of gas and what that might mean for consumers and consumer prices?
Malcolm Webb: Yes. I would have thought there is a distinct risk of increase in gas. A number of the southern North Sea gas fields are PRT-paying fields that will now be paying a tax of 81%. Their prospects must be dimmed as a result of what has happened here, and less investment stands to go into gas. If we have less investment in gas, we will have to import more, and history and actuality shows us that those imports are going to be more expensive than domestic production, so one can anticipate that the consumer is going to end up paying more for their gas eventually.
Q68 Christopher Pincher: What sort of quantity of import are we looking at, potentially?
Malcolm Webb: That depends on how far this decline goes. At the moment-right now-we are producing gas equivalent to about 60% of average annual demand. I’m afraid I can’t give you a precise answer. That depends on how far that goes down.
Paul Warwick: I think it is fair to recognise technically that the easy gas has been found, unless somebody comes up with a new geological play. In the areas where we were are looking for gas, we are finding smaller and smaller, and more difficult, fields, and tight gas that requires a lot more technical work and more wells to be able to deliver it. The challenge of delivering gas at the sorts of level we have today was difficult enough before, but it has become more difficult.
One of the things that have been said about our industry is that we get massive returns and the rest of it. Well, you know, we drill a lot of exploration wells that do not find anything, and there is not much return on an exploration well. Wells these days are exceedingly expensive, so as we go out and we are trying to find new gas, we have to have the attraction of the returns to be able to deliver that. Where we are now with the PRT-paying fields, as Malcolm said, and 24% of the future value being taken away, makes gas in the UK very difficult to explore for and very difficult to develop. That is my opinion. Time will tell, but I don’t think it has made it any easier.
Q69 Christopher Pincher: So there is a very clear risk of a greater need to import gas to make up the shortfall.
Paul Warwick: I think we were there anyway, but there is a risk of that quantity rising to a point where the indigenous industry is severely damaged. You have seen people write articles in the press, high-level people in the oil and gas industry making statements to the effect that the industry has been severely damaged, and the gas industry particularly, with the increased taxes.
Q70 Christopher Pincher: And you made those points very clear to the Treasury in the two meetings you had with them in between bank holidays.
Paul Warwick: We hope so.
Malcolm Webb: We made a very strong point that something needs to be done for gas. Gas needs to be taken out of this expense. That is what we have said, and we will go on with the engagement.
Q71 Christopher Pincher: So you presumably agree-given that gas is trading at about half the price of oil yet the production cost is something like 20% less than oil-that it is right to decouple gas taxation policy from oil.
Malcolm Webb: There is an absurdity here. We have a super-tax introduced with a trigger price of $75 a barrel, and gas is selling, if you are very lucky, at $60 a barrel at the moment. Something has to be done about that.
Paul Warwick: I think there are ways of dealing with gas, and it would be very complex to create a tax scheme where oil and gas were treated totally separately. Much of the gas produced by my company is associated gas. It comes from fields with condensate, so it would be difficult to make that break even though you can concoct it, but areas for future investment that include things like field allowances are a way that might handle that. I think, as an industry, part of the conversation that we’ve had with the Treasury, and part of the conversation we had in an emergency PILOT meeting, is that we would like to be part of something that tries to see a way through to how you could move a regime that gets this more difficult gas to be produced.
We don’t like the tax rise, obviously-I am sure you have that message from us-but if you say, "Well, where are we today?" we really want to be helpful so that we try to get things to work in a better way. Clearly, that would be in our benefit, but also we believe it is to the benefit of the UK from the gas point of view of more indigenous gas, and also because if we get more indigenous gas, we do pay tax on it. There are the production taxes. Gas that comes in from a pipeline from Europe pays no production tax, so the UK taxpayer is the net loser.
Robin Davies: We do pay tax on all the jobs in the goods and services that are part of that development as well.
Malcolm Webb: Indigenous production is also safeguarding the balance of trade to the tune of £30 billion a year at the moment.
Q72 Christopher Pincher: Do you have a list of additional criteria for field allowances that you would like to see included, because the Treasury has talked about expanding that list?
Paul Warwick: We are working on those issues at the moment, and at Oil & Gas UK we have established a number of teams that are trying to see whether there is, as we describe it, "running room" to work with the Treasury in those areas. We understand the Treasury is concerned about things like deadweight costs on investment, and we are not naive enough to think that suddenly we start waving our arms around and we’ll get our own way, but what we want to do is to create objective evidence around issues that are material to both the industry and the Government so that we can find ways to make this happen. That requires staff work that we have yet to properly complete.
Q73 Christopher Pincher: Just two last questions. What sort of time scale are you looking at to create that?
Paul Warwick: Hopefully soon.
Malcolm Webb: Very soon. We want to get into this engagement as soon as possible. We must be talking about a need to deliver within months, if we can. This can’t be allowed to drag on.
Alan Booth: I think the longer it takes and the longer the uncertainty lasts, the fewer people are willing to make those investment decisions, so the sooner we can get to a greater predictability of the regime, the better for everyone concerned, particularly the gas producers.
Q74 Christopher Pincher: One final question. We have talked about your engagement with the Treasury. What about your engagement with DECC? Do you find that DECC and the Treasury are aligned?
Paul Warwick: We are engaged with DECC a lot, as I said at the beginning to the Chair, and I think that, as an industry, our alignment with DECC is really quite positive. We don’t agree on everything, but I think if you were to look at the minutes from the PILOT meeting we had in the beginning of March-and I have worked in eight different countries-I have not seen a relationship between the Government and an oil and gas industry that was as positive in terms of promoting investment and promoting the future of the industry as we had with DECC at that time.
Malcolm Webb: If I could give you another example of that-it is not investment-related-in this industry’s response to Macondo, I think it has been so purposeful and it has been so strong because we have had exceptionally good engagement with the regulators, with DECC and also with the trade unions as well through the OSPRAG forum, and it shows what can be done when the parties come together and put their minds to working together to tackle a problem. That is what we think we should be doing with the North Sea now; we really should be getting together, addressing the problems of the North Sea in an open and constructive way and finding the best way to maximise the recovery from this basin. I think that means the industry working together with the Treasury and with DECC for that common purpose.
Paul Warwick: One of the things before the change occurred, and before the PILOT meeting, was that we did start working with the Treasury around decommissioning, and decommissioning is a major factor for this industry. It is part of the projects that we approve, even though it may be 30 years or so out. We have been somewhat destabilised on that, because we were hoping to get a clear understanding of what would happen in decommissioning going forward, and we have seen a delinking from revenue taxes to the decommissioning relief, which sends a very negative message to the international industry and I think the local industry as well about what the future would be like.
Christopher Pincher: I think we will go on to decommissioning shortly.
Q75 Dr Whitehead: On the subject of the extent to which gas and oil can be assessed separately for tax purposes, the Managing Director of Budget, Tax and Welfare, to be precise, recently said to the Treasury Committee that it really was quite impossible to separate gas and oil out for the purposes of taxation, and also said that gas was part of the oil production process and that 60% of gas comes from oil production, so that’s not possible to separate out. Do you agree with that analysis?
Malcolm Webb: I think it is possible to do it. It could give rise to a rather complicated fiscal regime, I suppose. We would like to talk to the Treasury about this. We believe that this particular problem of relieving the gas stream of the incidence of this extra tax can be done without having a separate taxation regime. Basically, what you need to do is look at the gas revenue stream and just go back appropriately for the purposes of calculating the tax.
Paul Warwick: There are different views across the industry on this.
Q76 Dr Whitehead: I was about to mention the fact that you do not agree on this.
Paul Warwick: I agree with Mr Webb, but there are different views.
Alan Booth: Certainly there are areas that you could simply put a red line around. The southern gas basin produces only gas-that would be easy to do-but the issue, as Malcolm says, is that it gets complicated, and I think there is a genuine desire in the Treasury to have less complicated measures of assessing tax, but we all have to remember that gas heats our homes and keeps the lights on. One could see a symmetry between oil prices and petrol prices. We can all choose not to drive our car, or to put less fuel in our car or get a more fuel-efficient car. You can’t really choose not to heat your home and not to keep the lights on. We have to think very carefully so that we are not affecting gas because, inevitably, more volatility and more imports means higher prices, because the risk of providing that service will increase. We have to be very careful about how we treat gas.
Q77 Dr Whitehead: Alan, I think you suggested that fields that come on stream after field allowances would get an additional allowance, but the oil and gas producers association has suggested a rather different mechanism. What are the mechanisms you think might be-
Alan Booth: We have one mechanism for new fields, which is that you can broaden and deepen the allowances, and you can target that at gas-at tight gas. As Malcolm said, where the gas and oil are produced together, it is more complicated and, as I say, I think the Treasury would like to avoid a complex method of this tax assessment.
Robin Davies: I do not think there is a disagreement between us; we are trying to say the same thing. For associated gas, there is a way of dealing with that without setting up a separate taxation regime for it, but in the light of these changes, further moves need to be made with regard to value allowances for gas fields, and Alan has also shown that you could geographically exclude some 100% gas from this as well.
Steve Jenkins: It has already borne fruit. The small fields allowance is 20 million barrels of oil or 120 bcf of gas. That has allowed quite a few small fields in the southern gas basin to be developed, so the mechanism is already there and let’s just expand it. Let’s expand it, as my colleagues have said, to tight gas and also low-calorific gas. There is a lot of gas in the North Sea that has CO2 and nitrogen that has to be stripped out. These elements do not burn, so therefore only a certain percentage of the gas has a calorific value. We have to broaden the field of allowance to embrace that as well. If you are in Holland, that’s fine, because they have a low-calorific line, but in the UK, we have a very high-spec line and we have to strip those out offshore, which costs money. An embracing of low-calorific gas would mitigate for that.
Q78 Dr Whitehead: Centrica has proposed a $75 a barrel-equivalent to 80p per therm-trigger price as a separate arrangement. Would that be an acceptable change?
Malcolm Webb: I wasn’t aware of that proposal. We have a $75 trigger price.
Sir Robert Smith: I think that that proposal was for gas.
Dr Whitehead: A trigger point for gas, so if gas reached $75 a barrel equivalent, the taxation regime would change. Obviously, Brent Crude coming in at $119 a barrel is well above that trigger point, so you would differentiate by that procedure, I assume.
Malcolm Webb: I think we would all agree that gas needs separate and special attention. How that precisely works is, I think, something on which we need to sit down and agree with the Treasury the best way to operate that-whether it is a separate trigger mechanism. I think the industry and the Treasury together would probably prefer to avoid the complication of two taxation regimes for oilfields; one for the oil component and one for the gas component.
Paul Warwick: As I mentioned earlier, we need to do a lot of staff work for the Treasury to determine something that is sustainable and that works in the long term so that we do not suddenly find ourselves saying, "Well, we didn’t know about that," and the law of unintended consequences develops.
Q79 Sir Robert Smith: Is that not a lesson for the Treasury that if you suddenly come up with a political fixed tax at the last minute, you have the law of unintended consequences and you hit gas production that is crucial to the national interest when you are aiming at something else? It has to engage in picking up the pieces because of what it has started. I know you want to be constructive and to engage, but there is a responsibility on the Treasury, in the national interest, to do something about gas.
Paul Warwick: Sir Robert, we are very open to be part of consultation around these complex issues and we understand the vagaries that Treasury Ministers have to work under and the difficulties of that, but, as I mentioned earlier, I think that if we were consulted, a lot of these issues would be able to be put to bed, and some of the concerns that the industry has-and we’re not waving our arms and sort of crying wolf-we think are bona fide concerns. With the right consultation, we would be able to create something that was sustainable.
Q80 Dan Byles: If we were able to come up with some sort of a system that insulates gas from these tax changes, if the Treasury wanted to continue to raise the same sum of money to pay for what this is paying for, it would presumably have to hit the oil side a bit harder.
Malcolm Webb: I can tell you, on that, the industry is in full alignment. There is absolutely no scope for taking more out of the oil side of this equation. No.
Q81 Dan Byles: So you are basically proposing that the Treasury don’t readjust it so it is more off oil and less for gas. You’re saying, "Less overall," and that less overall comes from the gas side of it.
Malcolm Webb: Yes, and there is no disagreement on that across the industry between gas producers and oil producers.
Steve Jenkins: Encourage exploration and look to the future. Do not restrict your view to the life of a Parliament; look to the next 30 years. To pick up Sir Robert’s point, if we explore for hydrocarbons on this predictable basis, we are going to find more hydrocarbons. The hydrocarbons we find are going to pay tax and employ people, so encourage exploration, some of which will be successful.
Alan and I are both involved in the Catcher discovery. The Catcher discovery is a cluster of significant accumulations. It is very large. That was discovered by small companies that had the courage to explore outside what was understood of the boundaries of the North Sea. We will find the hydrocarbons, given some luck, which will pay the tax and provide jobs.
Alan Booth: Give us some predictability-I think that is what we would like. We understand it is the Government’s remit to set appropriate taxes. We would just like to be able to predict what they will be in different circumstances, because it will allow us to make more considered investments.
Q82 Chair: Let us just sum up your views on a couple of points. First, DECC was not consulted about this; it was merely informed at the last minute.
Malcolm Webb: We believe not.
Steve Jenkins: We believe not.
Alan Booth: We believe not.
Q83 Chair: Secondly, if the Treasury forecasts of a high and rising oil price turn out to be true, the returns you earn over the next five years will indeed improve.
Malcolm Webb: Yes.
Alan Booth: Yes
Steve Jenkins: Yes.
Chair: Thank you very much for coming in.
Examination of Witnesses
Witnesses: Rt Hon Chris Huhne MP, Secretary of State, Department for Energy and Climate Change, Justine Greening MP, Economic Secretary, HM Treasury, Simon Toole, Director of Oil and Gas Licensing, Exploration and Development, Department for Energy and Climate Change, and Mike Williams, Director of Business and International Tax, HM Treasury, gave evidence.
Q84 Chair: Good afternoon; welcome. Thank you very much for making time to come and see us. As I recall, the Budget was on 23 March this year. On which day was DECC informed about these tax changes?
Chris Huhne: We do not comment on the consultations that happen between departments before the Budget. We never have, and I doubt that we ever will.
Q85 Chair: Well, it is not necessary to comment on this occasion, is it, because you were not consulted?
Chris Huhne: I think it would be entirely wrong for anybody to infer from a decision that we don’t comment on these matters that one thing or another is the case, Chair. Perhaps I could say, in opening, that I am delighted to be here, and perhaps I could introduce the home team that we have. I have, on my right, Justine Greening, to whom I will duly pass over all the difficult questions; Mike Williams from HMRC, who I think has been before the Committee before; and Simon Toole from DECC, who is our expert on the oil side and running that. We are very pleased to be here.
Q86 Chair: The evidence we have just heard in the earlier session from senior figures from the industry expressed the unanimous view that they thought that you probably were told on the day of the Budget, and certainly not earlier than the day before.
Chris Huhne: All I can say is that that must be their speculation, and you will no doubt put whatever weight you want on it, but the Government’s line is the same line as every Government whom I followed when I was a financial journalist, which is that we do not comment on discussions and consultations between Departments ahead of the Budget.
Q87 Chair: As a former financial journalist, I expect you are aware of the widespread view that, on this occasion, you were not consulted about these changes.
Chris Huhne: There are many widespread views out there and there is public opinion about all sorts of matters. If I was to keep up a running commentary, I can assure you I that wouldn’t have anything else to do in my life.
Q88 Chair: Your recent remarks about the Chancellor have attracted a certain amount of attention. Could it be possibly the case that they are based more on an irritation about the failure to consult you about an important aspect of the tax policy than anything to do with the alternative vote?
Chris Huhne: Absolutely not. Nice try, Chair, but I can assure you that my comments on the alternative vote campaign were precisely that.
Q89 Chair: When you heard about these proposed tax changes from the Treasury-whether it was hours, days or weeks before-did they immediately fill you with enthusiasm about the result that they would have on investment in UK waters?
Chris Huhne: Well, I recognise that circumstances have changed in the oil market and that we have had a very substantial increase in the oil price. As you know, I think last year the average price for Brent Crude was about $80 a barrel, and we’re now looking at a price more around $125 a barrel, so there has been a very substantial increase. It is, in circumstances that we all know, very difficult fiscal circumstances where the Chancellor has to square the circle of inheriting a situation where we were spending 113p for every pound that was coming in. That was clearly not sustainable, and I think it was absolutely essential that we got a grip on the public finances or we would have remained very much in the danger zone. We can see what happens to countries like Portugal and Ireland and Greece if they remain in that fiscal danger zone, and I personally fully support the Chancellor’s efforts to get us out of it. I think that was the right pro-growth decision; it was the right thing for British business, the right thing for profitability and the right thing for jobs.
Q90 Chair: Does that mean the Liberal Democrats are now leaning towards the Conservative interpretation of coalition?
Chris Huhne: You do seem to be trying to get rather off policy piste, if I may say so, Chair. We took the view very clearly at the time of the coalition negotiations that there had been a very big sea change in what had happened in the financial market. If you remember, the day after our general election was the peak in the 10-year bond rate for Greece. That had been slowly rising through our general election. I suspect all of us had other things to be concerned about during the period, but there was no doubt that as soon as our general election was over, there was a major problem that we had to address.
I think those of us who have been involved in the financial markets-I worked in the bond market myself for five years-did not need any advice from the Government, the Bank of England or the Permanent Secretary of the Treasury to tell us that this was a very serious problem that needed to be addressed, and that if we did not address it, there was a risk that we would land up in the same sort of situation as Greece found itself in.
Q91 Chair: Coming back on piste, what are your Department’s projections for the oil price over the next five years?
Chris Huhne: As I remember, the last published oil price projection of the Department-this is off the top of my head, and you will excuse me but I should perhaps have said that I don’t know about the rest of our team, but Justine and I were both up, as I’m sure were many members of the Committee, at 4.30 am this morning, so I may be a little groggy-was for an $80 per barrel price in 2020, but that was the DECC forecast. The OBR oil price, which I have to say obviously was a forecast that came subsequent to the DECC forecast, was $100 over the forecast period.
There is quite a substantial range of forecasts. I seem to remember at the time of the last Annual Energy Statement that we had the US Administration projecting over $100 a barrel-I think it was $108, if I remember off the top of my head. There was at that time, and there continues to be, quite a wide range of views about the forecast oil price but, as is the way with forecasts, since I used to be in that business myself, forecasters do tend to track reality and extrapolate what has been going on, and as the price has risen over the last year, so-surprise, surprise-has the forecast.
Q92 Chair: Nevertheless, it is the case, is it not, that if the DECC forecast turned out to be correct, the returns that the oil companies would earn over the next five years would be much lower than those claimed by the Treasury?
Chris Huhne: Well, clearly that crucially depends on the trigger threshold. As you know, the Chancellor stated a swing point for the oil price of $75 a barrel, and clearly, if you posit a situation where the oil price hovers marginally just over the trigger, the situation could be as you describe. Equally, it could hover just marginally below the trigger, in which case the figures would be very different, and it is worth pointing out that the Chancellor was open to consultation on this when he stated very clearly, in the Budget, that that was the case. Justine, perhaps you want to add something on that point.
Justine Greening: Yes. I think it is fair to say that we were very clear in the Budget that we saw there being a trigger price at which point the supplementary charge would be coming back down to 20%, and that was precisely to address the sorts of concerns that you raise, which is that there is a scenario by which the oil price could fall, and therefore in that scenario we would not want to see investment damaged. As the Secretary of State has said, the OBR’s forecast is that it expects to see oil prices over the course of the Parliament at $100 or more over this coming five years, and I think part and parcel of this is the profitability of an industry that has seen its profitability rise by 50% just over the last two years alone.
Q93 Chair: Coming hard on the heels of the decision to change the feed-in tariffs for large-scale solar, do you think that these changes, on which the industry were not consulted, will have increased investor confidence in the predictability and stability of tax and incentive policy for the industry?
Chris Huhne: We have obviously had extensive consultations following the announcement. Justine and I and our officials, and Michael Moore, the Secretary of State for Scotland, met Oil & Gas UK, for example. We’ve had one to ones. I think the Chancellor has also met Oil & Gas UK, so we’ve had quite extensive discussions about this and we have obviously made the point that when circumstances change, reasonable people are allowed to change their minds. There’s a famous quotation from my favourite economist, Lord Keynes, about this very point: "When the facts change, I change my mind. What do you do?" I don’t think anybody can deny that a very substantial increase in the oil price from an average of $80 a barrel to $125 a barrel today is a very substantial change in circumstances. The Chancellor obviously has to take that into account in the decisions that he makes, and I think that people realise that when they are assessing investment decisions. They realise, too, that this has been, for a very long time, a very attractive place to invest, and I hope that they will go on regarding it as a very attractive place to invest.
Dealing particularly with the issue that you raise on feed-in tariffs, I think that the issue there, again, was one where a new set of products and a new set of subsidies were introduced, and the increase in the take-up of large-scale field solar was massively bigger than had been projected. It is very, very difficult to make projections when you don’t have any history. The standard way of making forecasts is to churn your data through, run a regression on it and project something that is a function of what has happened in the past. If you have no past, as was the case with feed-in tariffs, it is difficult to make these judgments. I am not criticising the former Government for the judgments that they made, but they made the judgment that there would not be any substantial large-scale solar for three years. Now, contrary to that, we have, in fact, had the most enormous increase and so again, the circumstances have changed. I am afraid that Governments do have to react to changed circumstances, and I think that investors understand that, and I don’t think it will undermine the general view that the UK is an extremely attractive environment in which to invest and make profit.
Q94 Sir Robert Smith: I think you have to take on board that our previous witnesses were talking about the need to be constructive and helpful, and to engage and work with the Government to try to limit the damage, and to rebuild confidence and trust, but that maybe has to be a slightly two-way process. The Government are made up of two parties that both endorse stability for the fiscal regime for the North Sea in the knowledge that oil had reached $145. There is also an acknowledgment that, for investors, it is not just the absolute figures but the confidence with which they can plan on those figures. I suppose that the thing that the Government perhaps need to recognise is that whether they meant to or not, they have shocked the people who are in charge of trying to attract investment into this country for the North Sea. They’ve been told by their bosses, "You told us it was a good bet and the bet was changed. Why didn’t you see it coming?" I think we need to acknowledge the difficult place we put them in and, also, the engagement has to be very genuine on this trigger price, because if there is intervening planning, people need to know. If they see a downside in the price, they need to know what is going to happen to the fiscal regime.
Chris Huhne: I don’t disagree with that, and obviously that is very much why we are consulting on that. Justine, do you want to say anything specifically about those points?
Justine Greening: I think it is fair to say that we did understand clearly that the rise in the supplementary charge would not be something that the North Sea oil and gas industry would welcome. It is one of the reasons why we were very clear in the Budget document to explain that we wanted to then work with the industry to look at how we could specifically look at marginal gas fields, and we recognised the issue in relation to gas, and more generally. I think it came on the back of discussions that we had already had with the staff within the industry on other long-term issues around, for example, certainty on decommissioning and we are meeting the industry on Friday to initiate those formal discussions that we had talked about prior to the Budget.
I think it is also worth the Committee bearing in mind why we took that action in relation to supplementary charge. It was because although the North Sea oil and gas industry had very much benefited from the substantial rise in oil prices-as I have said, it saw North Sea profitability and profits rise 50% in just two years-in the broader economy, the effect of that higher oil price had caused some real strains and stresses, not just to families who were having trouble coping with the cost of living generally, but specifically in relation to motoring, and also hauliers and businesses more generally that need to get around in order to pursue their line of business. I think it is worth bearing in mind that the motoring package we have brought forward cost £1.9 billion, and rather than seeing fuel duty go up by 5p, in fact, we were able to cut it by 1p. That has brought some real benefits. I think we have to realise that if we were going to take action on the broader economy, it was going to mean this difficult decision in relation to North Sea oil, and I am sure we will come on to have a discussion about what it means for future investments later on, and I am very happy to answer those questions as well, of course.
Q95 Dr Whitehead: Just on the issue of the consultation relationship between DECC and Treasury on these matters, the feed-in tariff cap is now in the control measure for levy spending by DECC that was announced by Treasury just at the same time as the Budget. It might well be the case that DECC was not consulted about that either. Is that something you-
Chris Huhne: In fact, that is based on an agreement we have with the Treasury, which I think is totally appropriate, that the imposition we make in terms of our policy on consumers should be understood, that we should be transparent about it, and that it should therefore be part of an understanding about what the taxable capacity of the economy actually is. I mean, it is effectively a charge on consumers that is not a voluntary charge, so I think it is perfectly legitimate for the Treasury to have a control overview of that-jointly, obviously, with us-and that is exactly what we have agreed. That agreement, I can assure you, was something that I was very happy to see happen. I think it is totally legitimate if we are going to sustain public support for the sort of policies that I believe and you believe are necessary to support renewables and to support energy saving. It is absolutely essential that we are clear and transparent about what is going on, and that will involve policy costs being passed on to consumers, and you have heard me make the case before that we will be absolutely open and honest about that, as we were in the Annual Energy Statement. We will make another assessment of the total policy cost in the next Annual Energy Statement in the autumn, and on the basis of our last assessment, the overall policy cost of all DECC’s policies on renewables, for example, and on energy saving is to add about 1% to household energy bills, but that was at the old oil price and associated gas price assumption of $80 a barrel.
I asked, at that time, what the break-even point was, and I think we have talked before in the Committee that the break-even point, at that time, was $100 barrel. Since we are now at $125 barrel, I think we can honestly say that the latest assessment of DECC economists is that the total package of measures-energy saving and renewables; the low-carbon package-over the forecast period is saving British consumers money, because we are not reliant, or we will not be as reliant, on imported fossil fuels as we would otherwise be.
Q96 Sir Robert Smith: You have the right gas price in that scenario.
Chris Huhne: We did assess, of course, the gas price in that, and you are absolutely right that, potentially, the gas price may move differently from the oil price over time. I don’t think that it has been, as yet, significant, but the potential for the gas price moving differently to the oil price in the future has to be recognised, because we have already seen that happen very dramatically in the United States where the Henry Hub gas price has diverged very dramatically from the standard benchmark crude in the States-the West Texas intermediate. If I remember rightly, the last time I looked, the cost per therm of the Henry Hub in the States was about 26p, so it is about half-I think the gas price here is about 58 pence a therm. Obviously it is possible, in the future, that we will see the same sort of development in Europe and in Britain as we have seen over the last few years in the States, with a very substantial divergence of the gas price from the oil price, but we have not seen it yet. If anything, events post-Fukushima have involved anticipation in the markets that the Japanese will have to buy substantial extra quantities of LNG cargoes from our suppliers-Qatar amongst others. The anticipation is that the price of gas will tend to firm up and, in fact, in the far east, there has been absolutely no delinking of the gas price from the oil price. Yes, there is a separate consideration of the gas price, but I just warn you of going too far down that track because certainly, up until now, this is a matter of speculation about the future rather than observed fact about the past.
Q97 Christopher Pincher: I am sure we all recognise that the Treasury anticipated that the industry would not find the change to the supplementary charge welcome, but I just wonder if you are conscious, Minister, of how unwelcome the change has been. I have here the Oil & Gas UK quarterly index, and as the Secretary of State is a former tracker of reality, he will understand how these things work.
Chris Huhne: I hope I still do track reality. I briefly jumped in at that point.
Q98 Christopher Pincher: I thought you might. The conclusion in this particular index is quite stark, and it says: "Compared to Quarter 4 2010, when the sentiment by sector showed the highest ever levels of confidence seen for activity and investments for exploration and production companies. This quarter, Quarter 1, we have seen activity levels, investment and business confidence show the largest falls in confidence". Clearly, that is quite a stark message. I wonder if you were conscious that they might be the measures when you made your decision.
Justine Greening: As I said before to the Committee, I do not think that we were under any illusion that the measures that we were needing to take to deliver a package to support motorists, hauliers and businesses was going to be one that the North Sea oil and gas industry would welcome. However, our assessment-and indeed, if you look at analysts like Wood McKenzie, their assessment-is that because of the increase in profitability driven by the higher oil prices we are experiencing, very few new projects would become uneconomic as a result of this tax change, and that is very much borne out by the work by Professor Kemp of Aberdeen University. What their research showed is that although there would be an impact, it would be a marginal one, and the dominant factor driving investment is around oil prices-in other words, the inherent value of what there is to be taken out of the North Sea basin and also, of course, the hurdle rates that companies set themselves in terms of their required return on investments.
Our analysis-and I think it is shared by people like Wood McKenzie-is that there will be some things at the margin that become uneconomic. That is precisely why, at the Budget, we talked about looking at field allowances and working with companies to ensure that we mitigate that aspect of raising the supplementary charge. As you have no doubt heard, we have indeed been getting on with that already, and we have discussions with Oil & Gas UK as an organisation, but also, on top of that, with individual companies.
Chris Huhne: Just one thing, if I can add to that. I think it is important again to put this in context. Obviously one of the changed circumstances you talked about is the very sharp increase in the oil price. The other is the fact that the Chancellor has had to deal with a very, very difficult fiscal situation, and it is worth pointing out that the 10-year bond yield for the UK has been declining relative to the German 10-year bond yield over a substantial period of time. That will benefit all businesses that are proposing to invest, because they all tend to take and mirror their hurdle rates for investment from a mixture of short-term interest rates and what they can get in the long-term market. Getting those long-term market rates down is a supportive factor for investment right the way across the economy, not just in the oil and gas sector. I think it is important to see it in that wider context.
Q99 Christopher Pincher: I understand that completely, but you will appreciate that when businesses make their investment decisions-and of course they make all sorts of decisions before they make an investment-confidence is key. When you change a tax regime three times in 10 years compared with other countries in which the tax regime doesn’t change over 20 or 30 years, that confidence can be undermined, and surely that is something that you need to bear in mind.
Justine Greening: Of course we do bear that in mind, and we have been very clear, as a Government, that we want to have stability and certainty in the tax system. However, at the end of the day, I think that we are clear, as previous Governments have been clear, that tax rates themselves are things that can be a matter for the Chancellor to consider changing at Budget.
Also, I think we have to be pragmatic about the fact that the high oil price is having a real impact on our economy overall. There was the particular sector that you are inquiring about today that was doing incredibly well out of it, but I was trying to think of any other industry sector in the UK that had seen a 50% increase in profits in just the past two years. There is not really one that springs to mind, but I do know that, for the rest of the economy, the impact of high oil prices has been a real strain, and I think it was absolutely right for the Treasury, the Chancellor and the Government as a whole to look at what we could do to try to strike that balance between ensuring that we still have a North Sea oil and gas taxation regime that incentivises investment of what is a national asset and, at the same time, allowing that additional value from high oil prices to be shared, if you like, with people who are really struggling as a result of those high oil prices. As I said before, these are the motorists, the hauliers and businesses, and I think that that was absolutely the fair thing to do to the extent that it clearly has an impact in investment at the margin, as analysis shows.
Of course we want to work with the industry to make sure that we can mitigate that and that we can deal with those particular issues, and I think that both the last Government and this Government took steps to introduce and improve field allowances, and that is what we want to continue to do over the coming months. In addition, as I have said, we are also keen to work with the industry, and we are working with the industry to look at finding a longer-term solution on the thorny issue of decommissioning, which has been something that the industry has raised with us as a source of uncertainty in the tax regime to which it would like a resolution.
Q100 Sir Robert Smith: In a way, though, these projects are a snapshot of the profitability in one year when you are making a 10 or 20-year investment decision. Is it not quite important for the Treasury to understand the long-term nature of the risk? Obviously, if you do develop a proper trigger price, that does have an upside. You have not yet done that but you have promised.
Justine Greening: That is because we want to work with the industry to make sure we get that at the right level and the mechanisms-
Q101 Sir Robert Smith: Until that exists, all the downside of oil price is being borne by the investors who are now not getting all the upside.
Justine Greening: Well, I don’t think that is the right way of looking at it. I think many investors will have taken their decisions to invest in the North Sea at a time when prices were possibly expected to be around $80 a barrel. They are currently-
Q102 Sir Robert Smith: For the lifetime of the investment?
Justine Greening: The price is $125 today, and obviously you’ve taken evidence from the industry, but certainly in the discussions that we had with some companies post-Budget, many of them were saying to us that they are, alongside the OBR, similarly projecting continued high oil prices into the future, so I think that we were absolutely right to look at how we could try and alleviate the cost of oil prices for the price of petrol at the pump, and at the same time to raise the supplementary charge to fund that but, as I said, at the same time to work to mitigate the marginal effects of what that tax rise would do.
Q103 Sir Robert Smith: Do you accept that some of those operating are not getting that $125 because they had hedged it already and sold at, say, $80something?
Chris Huhne: That, if I may say so, is not going to affect any rational company’s future-
Q104 Sir Robert Smith: But they are facing the higher profit tax without necessarily the headline profit.
Chris Huhne: You cannot hedge an investment decision. You might make a windfall gain or a windfall loss on the hedge, but it would be irrational of you, as a company, if you are profit maximising, to make a decision based on the post-hedge price rather than the pre-hedge price.
Q105 Sir Robert Smith: No, but if you are sitting there having sold at $88 and you are being told in the press that you are getting $125-
Chris Huhne: Well, you may have a cash flow issue, and obviously that is a matter for the finance directors of the companies concerned.
Q106 Sir Robert Smith: But the hedge funds will be making a profit that is not being taxed at any special rate. The banking or financial side of it-
Chris Huhne: Whether or not a company decides to hedge the oil price is obviously a matter of its own judgment about its own finances and things like, for example, its level of gearing and how averse it and its shareholders are to risk. All these factors will come into it and they will vary enormously, but you cannot design a tax regime for people’s different propensities to avert risk. That would be extraordinary. We don’t do that in any part of the economy.
Q107 Sir Robert Smith: What you can do is limit the risk of the tax regime so that all the other risks-
Chris Huhne: Clearly, in an ideal world, we do want clarity and certainty for investors when it comes to the policy regime and the tax regime, but when you have very sharp changes in circumstances of the sort that we’ve described-in terms of our fiscal situation and the oil price, and in terms of the point that Justine was making about bearing down on people’s living standards because of the impact through pump petrol prices, which are, off the top of my head, if I remember rightly, about 13p a litre from the last Budget through to this one-all these factors are ones that any responsible Chancellor has to take into account when he or she makes their decision. I think it is absolutely appropriate to do so.
Q108 Chair: Can I just ask why the Treasury thinks that investment went up after the last increase in supplementary charge? The evidence we’ve just had from the industry earlier this afternoon said it went down.
Justine Greening: Yes, so I understand. Our figures show that when you screen out general inflation between 2005 and 2008, investment was about £0.8 billion higher between those two periods. I don’t know exactly what the data were that the industry shared with you today. It would be interesting to see the detail behind that, but in terms of CAPEX, exploration and appraisal investment, there was a real-terms rise between 2005 and 2008. I think the other point to make is, of course, to what extent was all of that change correlated with tax? Well, possibly some was, but I think, again, that what is driving these decisions is the innate profitability of projects in relation to the oil price and, of course, the hurdle rates that companies are using to appraise individual opportunities, and whether they meet their hurdle rates that they have for themselves.
Chris Huhne: Can I shed a bit of light on this? We have not had the industry’s calculations on this, so I can only speculate, but with my former professional hat on, I suspect that any differences might arise from a difference in the deflator that is used to adjust the figures from cash terms into real terms, and obviously, if you were to use the GDP deflator, that would be the normal way of assessing real levels of investment. You might potentially use the investment deflator for the whole of the economy, and that would give you a real-terms measure. I haven’t seen the figures from the industry, but clearly it would be free to use some other potential deflator that might lead to a different result, and that might be one of the reasons why there is a difference. Certainly, on our numbers, there was an increase.
Chair: In that case, we might explore that in correspondence.
Q109 Dan Byles: I am curious to know whether you accept the analysis of UK Oil & Gas that every additional £1 billion of investment supports approximately 15,000 jobs across the industry. Is that an analysis that you recognise and would agree with?
Justine Greening: Again, we haven’t seen the detail behind how it supports those particular figures. What I would say is that we do absolutely recognise the value of the North Sea oil and gas industry-not just to Scotland, where it is particularly focused, but across other parts of the country more generally. I think the question was how we could strike a balance between the taxation of North Sea oil and gas in a way that meant it was possible to continue to invest, to be successful, to create jobs, and to see new projects being started and, at the same time, address this particularly acute issue of how the high oil price is feeding through into petrol prices at the pump for people in businesses across the country.
Chris Huhne: There is also a problem with that sort of analysis because it is a partial analysis of a particular sector that does not take account of the overall macro-economic problems and the financial problems that the Chancellor faced. As Justine has said, we have not seen the detail of that calculation, but normally, if you were to do that as a reasonable view of what might be an alternative course of action, you would expect to raise the same amount of money in a different way, so would that be an overall increase in income tax or VAT? You would then have an offsetting effect there, so I think I would caution you against these partial equilibrium analyses because they are very much favoured by lobbying groups that like to see their own particular sector as remote from the wider economy, but, of course, the wider economy is what the Chancellor has to deal with.
Q110 Dan Byles: I absolutely accept that, and I accept that if this move enables us to keep petrol down, for example, that has a knock-on effect itself on the wider economy, but I’m very keen to know just how much of a dynamic assessment the Treasury made of this tax change and the amount of revenue it will bring in versus the potential fall in investment and the potential reduction jobs, and perhaps the wider loss to Treasury’s income as a result of the total impact of this change.
Justine Greening: We did our modelling. As I said, it is, interestingly, aligned in many respects with the work that was done by Professor Kemp at Aberdeen University, which did demonstrate some effect, but a marginal one. Of course, unlike under previous Governments, although the Treasury does its modelling of how it proposes the Budget will feed through into the broader economy, it is now the OBR that decides what the real forecast will be. It has signed off the approach that we took in relation to looking at what this tax change would mean for broader economic effect, and in fact I think I can quote Robert Chote when he was before the Treasury Select Committee: "We are assuming there is no significant effect on the investment and production profile of that change. We thought the changes to the tax would be relatively modest". I think that that, again, supports the fact that yes, it was a difficult decision that we took to make sure we could fund a £1.9 billion package to support motorists, but the way in which we did it and the way in which we are now determined to work with the industry to combat any margin investment effects is probably, I believe, the right way to have gone about this.
Q111 Dan Byles: One final one from me. This is linking this back to the point that the Chair raised about the mismatch in evidence we have had in the two evidence sessions this afternoon about whether investment rose or fell after the 2006 increase. I am pleased to learn that perhaps we might explore that a bit further. If it turns out that the Treasury has been looking at this incorrectly somehow, and that there was a decrease in investment following 2006, would you then look again at your assessment of what the impact might be on this change? We were told absolutely unanimously-and very strongly-by the industry just before you came in that investment fell between 20% and 25% in the two years following the 2006 increase.
Justine Greening: But I think, in a sense, the reason you’re putting that line of questioning is to suggest that if we look at what happened to investment after the last tax change, somehow that would be a direct indicator of what we might expect to happen to investment after this tax change, and I think you cannot look at it that simplistically, because of course investment decisions are not taken in a vacuum where the only thing that changes is the tax rate. The research is very clear about this. The two dominant factors driving investment are the oil price and the gas price, and the hurdle rates that companies use to judge whether or not that investment meets their criteria or their benchmark for getting the go-ahead. I think that you would need to do a comparison of not just what the tax changes and the investment changes were, but the extent to which the oil price was different and the extent to which individual companies’ hurdle rates had changed in the two different periods. I think the real answer to your question is: "Well, what are people saying about this tax change and what do they expect to happen going forward?"
I draw you back to Wood Mackenzie-industry analysts, effectively, who have done a lot of work around decommissioning, for example. Their assessment is that there would be a margin impact, but, in fact, they highlighted only one or two fields explicitly that they felt would become uneconomic. They highlighted the Mariner and Bressay fields. We have already met with Statoil, which leads those explorations, to talk about what the tax rise means for those fields. It does seem to me that there is a marginal effect, of course, but it is one that we can manage, and it is one that we said in the Budget that we would.
Chris Huhne: I would strongly caution you against going down the track of assuming that a particular deflator applied to a particular sector is the appropriate way of doing these things, and you might want to consult your economic advisors on this, but as Justine said, Wood Mackenzie, who for many years now have been the leading analysts in this field, say, and I quote: "At current high oil prices, few new projects will become uneconomic as a result of the change. However, the uncertainty created will impact investment decisions, in particular reinforcing perception of fiscal instability." So they make that point, but the key issue is that few new projects will become uneconomic, and if people are going to follow their self-interest, which I think is a fair assumption-in the oil and gas sector as elsewhere in the economy-there is not going to be an impact of these sort of oil prices on investment.
Q112 Chair: You must be hoping that they are not too persuaded by DECC’s forecast of the oil price, in that case.
Chris Huhne: Well, Chair, having been involved in economic forecasting myself, I perhaps have a fairly good appreciation of how difficult the job is, and forecasts do tend to bounce around. You will see that there is quite a substantial difference between the forecast of the DECC economists last summer and the forecast of the OBR and, in turn, of the US Administration, and I think the best thing that we can do in ploughing our particular furrow, as Ministers attempting to struggle with all these uncertainties, is to produce a comparative table and let people judge for themselves about the likely uncertainties.
Justine Greening: But I think that is the other reason precisely why part of this approach means we have this trigger price, so it is absolutely about saying that if oil prices end up being substantially lower than perhaps the OBR is forecasting, we should have an automatic mechanism, if you like, by which we then do see the supplementary charge come back down, and that is precisely so that we don’t have a more structural impact on investment that we absolutely don’t want to see.
Q113 Sir Robert Smith: Is there a sort of timetable for the trigger price process as to when that will be firm and in legislation?
Justine Greening: We are shortly going to launch the informal consultation that we will be having with the oil and gas industry, and of course I think, as you can no doubt tell, we’ve already had a number of discussions with them on this. We are also obviously keen to see the motoring groups have their input, of course. We expect those discussions to start very shortly and we very much hope that by late autumn or winter of this year we will be able to set out more detail around what the trigger price will be and precisely how it will work.
Q114 Sir Robert Smith: Would that then be put into the next Finance Bill?
Justine Greening: We haven’t said whether we will need to legislate for it or not, but that is precisely the point of talking with the industry-to get a sense of their thoughts around this area and what they feel needs to be in place to provide that certainty, but at the end of the day, we were clear in the Budget document that we thought a trigger price of around $75 may be appropriate, but of course we now have those discussions with the industry, and of course with the motoring groups, to get some clarity on that over the coming weeks and months.
Q115 Ian Lavery: Getting back to the employment situation, we were speaking to representatives from the oil and gas industry, who are very concerned at the increase in the tax in the Budget, and as Dan correctly pointed out, they estimate £1 billion in investment represents 15,000 jobs supported within the industry. They have clearly said that there is a problem with the tax, which could mean lack of investment, a reduction in investment, projects stalled, transferred, withdrawn and cancelled, which would mean a reduction in employment. From what has been said, there could be as many as 30,000 jobs at risk as a result of the decision made at the Budget.
Chris Huhne: Well, can I-
Ian Lavery: I will just finish, if that is okay. That is what has been said by people from the industry. Now, that is extremely concerning. I assume that at the time of the increase, either DECC or the Treasury, or both in consultation, made some sort of impact study on employment and the possibility of job losses. If that is the case, what was the result? If it wasn’t the case, why was that not done?
Chris Huhne: The whole thrust of the Government’s policy is to try to improve employment, and that is absolutely central to our objectives, so you are absolutely right. We want to see the big increase that has occurred in private sector employment over the last year continue, and we want that to continue right the way across the economy, including in the oil and gas sector, and that is one of the reasons why the Chancellor took the overall decisions that he took. What you’re really asking, if I may be so bold, is just in another guise the same question that was previously being asked about investment, because if there is no impact, or a negligible impact or a very modest impact, on investment, it also follows that there will be a very modest impact or a negligible impact on employment, so you’re really just putting it in a different way, since the relationship between spending-because investment is a spending component of GDP-and employment is very clearly there. You are really just repeating the questions which we were previously answering in the-
Q116 Ian Lavery: With the greatest respect in the world, I am not repeating the question at all. What I am asking is this: you correctly point out that growth and jobs are extremely important to get the economy ticking over.
Chris Huhne: Absolutely central objective, yes.
Q117 Ian Lavery: That comes up every day in Parliament, and I accept that. A result of the increase in the taxes could mean a loss of up to 30,000 jobs. What I am asking is-Dan never mentioned this-what study was done from either DECC, from the Treasury, from any department on how the increase in the taxes in the oil and gas industry could impact on jobs and adversely impact on the economy in the projects which-
Chris Huhne: Again, you have to come back to an overall-
Ian Lavery: I’m asking what you did. Did you do anything? That is what I’m asking.
Justine Greening: Let me try to answer that. The independent OBR looked at the impact of this measure, and as I have just said, it was Robert Chote’s opinion, and I think we either accept the OBR is independently forecasting or we don’t. It was his opinion that this would be minor in terms of its effect. The other point I would make is that if you look at levels of profitability and how they have risen in the North Sea in recent years, the Kemp work showed that at his most optimistic scenario, which was a price of $90 a barrel, he expected the difference between the old supplementary charge rate and the new supplementary charge rate to mean that rather than 1,099 new projects being initiated over the coming years, it would have fallen to 1,074; in other words, 25 projects. When you look at what sorts of project profiles would have fallen out of that analysis, I would have thought they were likely to be the much smaller fields and the more technically challenging ones, and therefore not the major additional investment. In other words, it was a 2% difference, and therefore I think what the Kemp work showed was there is still the prospect for significant additional investment to flow into the North Sea oil and gas basin, with of course the support for jobs that that will bring.
Q118 Ian Lavery: Without being rude, you haven’t answered the question. Was there an assessment of employment made or was there not? If there was, what were the figures?
Chris Huhne: Sorry, let me be absolutely clear. Yes, of course there is an assessment of employment.
Q119 Ian Lavery: What are figures?
Chris Huhne: That is done by an independent agency now-the Office for Budget Responsibility.
Q120 Ian Lavery: That is fine. What’s the figure?
Chris Huhne: It is published. It is completely clear what it is, and you are once again inviting us to perform a partial analysis on one sector without taking into account what the alternative might be. If you say, "Well, what is the impact going to be of this increase in the tax on oil and gas?" what is your alternative way of raising the money, or would you borrow more? If you borrow more, what will the long bond rate be? What will the effects be on financial confidence?
Ian Lavery: I never even mentioned that.
Chris Huhne: Well, I’m sorry, but this is quite a significant part of the analysis.
Ian Lavery: Well, I never mentioned it. Perhaps you could answer the question.
Justine Greening: I think it’s absolutely a fair point to make about jobs. The Secretary of State has said the plan for growth that we launched alongside the Budget was an absolutely critical part of what we were announcing on 23 March. I think what the Committee understands very clearly is that there were two halves to this approach. One was the supplementary charge rise in relation to North Sea oil and gas. The second part was what it was funding-the motoring package. In other words, you can’t just take it on its own. The OBR do look at how they see projections of employment and unemployment across the economy over the coming years, and what they are saying is that they expect to see unemployment falling year on year and employment rising year on year, and a rebalancing-critically-between the public sector and the private sector so the movement is absolutely in the right direction that has been projected by the OBR.
It is going to see getting on for 1 million net extra jobs being created in the economy, and I think what that shows is that the steps we are taking are designed to support all industry, all businesses, and we have focused particularly on regions outside London and the south-east. There’s a very telling statistic: between something like 2002 and 2008, for every 10 jobs that were created in London and the south-east, just one was created outside, and that includes Scotland. When we get growth fully back in the economy, what we are determined to see as a Government is that all sectors of the economy benefit from that and that all regions of the economy benefit from that.
I think we have learned from what happened over the last decade that you cannot have a sustainable economy when it is basically focused on predominantly one region-the south-east-and predominantly one sector, which was financial services. We absolutely recognise the need to support industries across the country, including North Sea oil and gas. We looked very carefully at the impact of this measure before we announced it and we understand that it will have what we assess and what industry analysts assess will be a marginal effect. We are determined to now work constructively with the industry, and we are working with them to make sure that we can look at opportunities for field allowances that mean we can still get over those additional hurdles that the increase in the tax rate has brought in.
Overall, what we have been able to do with the motoring package will in its own way very clearly support growth in the economy, and I think every single MP in this Committee will have received e-mails, letters and representations from their constituents and from their businesses about how difficult it was for them to cope with the burden of high oil prices as it fed through into petrol prices at the pump. We absolutely felt it was necessary to take some action on that. We simply did not inherit an economy and public finances that gave us the luxury of making a tax reduction on fuel duty instead of the tax increase that had been pencilled in by the last Government without finding the funds to pay for that. The steps that we took with the supplementary charge were clearly difficult ones. They weren’t ones that as a Government we took lightly. We understand there will be a marginal impact and we now want to work with the industry to find a resolution to that and to take the opportunity to see if we can find a resolution on longer term issues, like decommissioning relief, which have been raised with us as an incoming Government as well. We will work with the industry and we are determined to make sure that we absolutely support continued investment in our national asset, which is the North Sea oil and gas basin.
Q121 Christopher Pincher: We all recognise the wider value of the motoring package, but that withstanding, is there not a risk that the change to the supplementary charge will benefit overseas jobs? Because we have heard from the industry that as a result of the change, we are going to depress investment and we are going to therefore potentially depress domestic production. That is also what Professor Kemp says in his submission to this Committee. Is there a risk that as a result of this change we are going to see greater reliance on gas importation, and can you quantify what that risk is?
Justine Greening: I think possibly what is driving your question is the decision by Centrica to shut down Morecambe for what is in fact maintenance, we understand. I take you back to the analysis by Wood Mackenzie. We don’t expect there to be anything other than a marginal impact on investment and the economic nature of fields. That, I think, is supported by the OBR, and I think you also have to accept the extent that these fields are themselves assets. I think PwC made this point last week. If companies decide that for whatever reason they do not want to exploit those assets, those assets will be bought, and indeed are being bought and have been bought. We can look at what happened, for example, a number of years ago in the Forties field, where BP sold to a smaller company, Apache, who have now put fresh investment into that particular field. Those asset sales will also continue, so I can only reiterate that I think the level of the oil price, and indeed, the gas price, does mean that it is profitable to continue investing in the North Sea oil and gas basin, and that investment will continue.
In fact, the Professor Kemp work does of course show the marginal impact, as I have said previously to the Committee, but it is marginal impact that affects 2% of the projected new projects, and it still shows well over 1,000 on the optimistic scenario that Professor Kemp picked. Again, I reiterate to the Committee, that optimistic scenario is the scenario of a $90 per barrel price, and I think a lot of motorists up and down the country would relish the thought of the oil price coming down to $90 a barrel and the impact that would have on petrol prices. Of course, it brings me back to perhaps my final comment. Because we recognise that there can be volatility and things can change, that is precisely why we are now talking with the industry about making sure we set the trigger price at the right level to ensure that if actually oil prices don’t fundamentally stay at their high levels, we see the supplementary charge reduce, and therefore investment can continue. Of course, by the same token, we would of course see a lessening of this very acute pressure on petrol prices at the pump for motorists, hauliers and businesses.
Chris Huhne: And a corresponding increase in the fuel duty of that.
Justine Greening: That is precisely what we mean by putting in place this fair fuel stabiliser.
Q122 Christopher Pincher: That might work for oil, currently at something like $117 to $121, but gas is priced very differently. It is about half that price, and its production costs are only about 20% less than oil, so do you see a case for decoupling the tax regime for gas from the tax regime for oil?
Justine Greening: I think you have to go behind the pure price. I mean, obviously profitability is not just about revenue. It is about cost as well. If you look at the cost of gas fields, for example, in the southern North Sea, it is probably about half the price of getting oil out of the North Sea, so in terms of profitability, there isn’t quite that disparity that the difference in price might suggest, and therefore we don’t think it is right to decouple the two.
Increasingly, in our discussions with the industry and Oil & Gas UK, I think they realise that not only would that add some complexity, which might be difficult to manage, and indeed, may be complexity built in to reflect somewhat of a short-term decoupling, as it may prove to be, of the oil and gas price, but also of course we have to make sure that this measure can fund the motoring package. Therefore I think we would have recognise that if there were some additional measures taken to support gas, that would mean that the trigger price for oil would necessarily be at a different level, and therefore, I think, for the industry themselves, they increasingly reached the view that what we need is a simpler trigger price and that we shouldn’t be adding complexity through carving out gas.
Chris Huhne: I think, in the long run, if developments in Europe and in the UK mirror those in the US, that may be a route that we would want to go down, but it hasn’t happened. As I said before, we don’t know what the full impact is likely to be of two countervailing factors on the gas market. One is obviously the increasing level of discoveries of unconventional gas-shale and tight gas-particularly in North America, and the impact that has had on the US gas prices is very clear, but on the other side, we clearly, post-Fukushima, have a major economy, in the shape of Japan, likely to rely much more on gas. What you have seen in far eastern gas markets is an absolute clinch once again of the gas price and the oil price, and many of the big exporters of LNG cargoes, like the Qataris, are insisting once again on oil-linked contracts. The jury is going to be out on this, but certainly I think it would be very rash to change the regime to a much more complex regime, given that the facts do not support as yet that we are seeing that sort of long-term divergence that appears to have happened in the United States. I mean, there is an interesting question as to why the US can be so different.
Q123 Christopher Pincher: Even at the risk that we might end up having to import more gas at higher prices, which will have an effect on the consumer?
Chris Huhne: There are always risks in energy policy, but you are building a case on the basis of a presumption that we do not accept, which is that there are likely to be more than marginal impacts on investment.
Q124 Sir Robert Smith: The worrying thing for the gas consumer is that the Treasury are forecasting oil is going to go high and stay high, and DECC are saying that gas and oil are not going to stay decoupled, so the message is that we are going to face massive rises in our gas bills to heat our homes and the gas for generating our electricity.
Chris Huhne: But we’re not making that forecast.
Sir Robert Smith: Well, you are. The logic of your two positions-
Justine Greening: But I don’t think that argument stands up.
Q125 Sir Robert Smith: You are not saying oil is going to stay high? What is the Treasury forecast for the price of oil over the next ten years?
Chris Huhne: Well, it is an OBR forecast.
Justine Greening: As I said, the OBR forecast-
Sir Robert Smith: Which you’re relying on as independent, yes.
Justine Greening: The forecast is over $100 a barrel over the coming years.
Q126 Sir Robert Smith: So you’re saying that gas is going to double in price?
Justine Greening: In relation to gas, if you look at the logic of the argument, if we are assuming that gas is going to go up, at that stage it would be nonsensical for people who own gas fields and could pump gas out of those fields-
Sir Robert Smith: I am just trying to understand the economic analysis.
Justine Greening: You’ve asked about the potential. It would be illogical for people who own gas fields and therefore can pump gas out of them at maybe several pence per therm to decide that it was a better commercial option to buy in gas at a price that might be 53 pence or 58 pence a therm. Now, obviously they operate in a commercial market here in the UK, and I think if consumers suddenly started seeing prices go up, they would of course start to shop around even more, and I think that there is a commercial market.
Q127 Sir Robert Smith: Is there going to be a convergence or a decoupling of gas and oil?
Chris Huhne: You can look at the OBR forecast. It is on page 95 of the OBR’s Economic and fiscal outlook.
Justine Greening: The OBR forecast shows gas price per therm rising to 63p by 2015.
Q128 Sir Robert Smith: So they see a decoupling.
Chris Huhne: No, I mean, they see a-
Justine Greening: No, they see a convergence.
Q129 Sir Robert Smith: What is the dollar equivalent barrel of oil that the OBR see for gas?
Chris Huhne: From a fiscal and British economic point of view, the key thing is the sterling price as opposed to the dollar price, but they see overall a rise in the dollar price-as you asked that-from $80 a barrel, as I said, on average, in 2010-11 to $113 in 2011-12 and $112, 109, 107, 107-
Q130 Sir Robert Smith: For gas?
Chris Huhne: No, that’s oil.
Justine Greening: For oil.
Chris Huhne: What they have gas prices per therm is 43.3 in 2010-11, to 53.1, to 58.4, 61.4, 61.9 and 63.3, so they actually see a recoupling, but I would-
Q131 Sir Robert Smith: A similar trend, but not a recoupling.
Justine Greening: No, they’re actually recoupling in the ratio, so if you look at what that ratio was back in 2005-
Q132 Sir Robert Smith: Eighty pence a therm is $75 a barrel.
Justine Greening: Just hold on, and it may be that I can answer your question with some of these stats. If you look at, for example, 2005, the oil price per barrel was $55: gas price per therm, 28p. In say, 2007, oil price per barrel $72: gas price per therm, 33p. In 2009, oil price per barrel, $62: gas price per therm, 38p. What you see is that ratio is realigning. At the moment, we have a ratio where the OBR is forecasting $112 per barrel for 2011 and 53p per therm. In fact, of course we now know the oil price is way ahead of that. The gas price is broadly in line with the OBR forecast, but the oil price of course is $125 per barrel. What you see is that by 2015 it forecasts an oil price of $107 per barrel and a gas price per therm of 63.3p, and I think what you start to see is that ratio, as the Secretary of State says, starting to recouple into the more traditional ratio that we have seen between oil prices in dollar terms per barrel and gas prices in pence per therm.
Chris Huhne: A key point is that both of these prices are volatile.
Sir Robert Smith: Precisely.
Chris Huhne: I have a graph here that I am very happy to send on to the Committee, showing the Brent oil price and the IPE gas price in nominal terms, and obviously they diverge short run, but there has not yet been the clear disassociation of the gas from the oil price that we have seen, as I said, in the US as a result of shale gas developments in the Henry Hub from the West Texas Intermediate. We have to base policy, including tax policy, on the world as it is, not as some analyst may think it is going to be, and if we have to face a situation where there is going to be a decoupling, obviously we will reconsider, but at the moment, I don’t think it would be sensible to base policy on one particular view of what may happen in the market when this is probably the issue that causes market participants more ability to have a good, robust discussion about what is going to happen in the future than any other.
Justine Greening: Chair, I gave a snapshot of a few years, for the purposes of time more than anything else, but if it would be helpful, why don’t I send the Committee the table that I was reading from? I think that might be helpful, if there is an interest in this decoupling question.
Q133 Chair: Thank you for that. We accept that we cannot assume there is going to be a decoupling-there could be, but we are not there yet. However, the implications of the Treasury’s forecast on oil prices-with which it is telling the oil industry, "Don’t worry, chaps, you are going to go on making more money"-for consumer gas prices may be significant. I think it would be helpful if we could just work through, with the help of your figures, what that will mean for people who rely on gas to heat and cook in their homes and so on, because I suspect that given we have teased out quite a substantial difference between the OBR forecast for oil prices and DECC’s admittedly slightly more historic ones-
Chris Huhne: I really wouldn’t make a meal of those differences. One of the great dirty secrets of economic forecasting is that the best forecasts tend to be the ones done on the most recent data.
Chair: That is right.
Chris Huhne: So however good a forecaster you are, if you forecast today on the basis of today’s data, you’re going to produce a forecast that is a hell of a lot better. The DECC forecast is now pretty old.
Q134 Chair: Yes. I wasn’t trying to make a point about the accuracy or otherwise of the DECC forecast. I was simply saying, for precisely the reason you said, that what we now need is an up-to-date forecast of what the consumer gas price is going to be, based on the latest OBR prediction for the oil price.
Justine Greening: But you would need to get that from the utility companies, obviously. As with oil and gas, they are effectively spot market prices, and therefore those are the things that feed through, to the extent that some companies will have a hedging strategy, for example, so they may be able to give you a projection. In fact, under the Ofgem proposals, I think that companies now need to flag up to consumers in advance when they plan to raise prices, so I think that question is probably better directed to the industry that sets consumer prices, and may or may not necessarily relate them to the cost of purchase.
Chris Huhne: But there is a wholesale forecast-
Justine Greening: This is just wholesale, yes.
Chris Huhne: -on page 95 of the OBR document, and you can build on that with standard assumptions of what you think is going to happen. Forecasting what is going to happen next year is quite difficult. Forecasting what is going to happen in 2015-16 is, in my experience, very, very difficult, so do not build a great house of cards on what is going to be a very uncertain forecast for the future, however good the economists are-and they are excellent at the OBR.
Q135 Chair: Yesterday-it might have been this morning-the Economic Secretary said in the Chamber that the oil companies would make more and they would have a better return in the next five years than they had in the past five years. Now, that statement must have been based on some prediction-however dangerous it is to predict-of the oil price.
Justine Greening: That is right, and the OBR is for that.
Q136 Chair: If it is okay to tell the oil companies, "Don’t worry, chaps, you are going to make lots more money in the next five years because of the oil price," why is it not okay for this Committee to say, "Let’s just explore the implications of that for the poor old gas consumer?" Why is it wrong?
Chris Huhne: Let me explain the problems with forecasting. Obviously, you can take the forecast and you can build whatever you like in terms of projections from that, and that is entirely up to you-and you are entirely free to do that-and it is very easy to do as a matter of arithmetic.
Q137 Chair: Doing so, it would be following the Treasury example.
Chris Huhne: Well, it is an OBR independent forecast, and that is-
Chair: But it is an argument that the Treasury is now using.
Chris Huhne: Let me make my point, which is that another one of the dirty secrets of economic forecasting is that it is much easier to forecast big numbers than it is to forecast small numbers, and there is a difference the more sectoral and detailed the forecast gets. If you look at investment and consumer spending separately, you will find that the error rate is substantially higher than the margin of error for the GDP forecast, which is an aggregate, because what you find with the GDP forecast is that you have some things wrong in one direction and other things wrong in the other direction, and they balance out. The more you look in an economic forecast at particular things in more detail, the greater the error rate further out is likely to be. I would just caution you again before getting too excited about the possibilities of foreseeing the future base, even on the admirable and estimable work of Robert Chote and Steve Nicholl and his colleagues, who are outstanding economists.
Q138 Chair: Could you explain why it is wrong for a gas consumer to say, "If the Government itself is saying, ‘Our policy on North Sea taxation is based on the following forecast of oil prices for the next five years and the Secretary of State for Energy is saying we must not assume any decoupling between the oil and gas prices’"-
Chris Huhne: I am simply saying there is uncertainty-
Q139 Chair: Hang on. Why is it wrong for the consumer then to say, "Can we now have an idea of what our gas bills are going to be based on what two Ministers from the relevant Departments have just told us?"
Chris Huhne: We will produce, as we did during the last Annual Energy Statement, a completely updated calculation. I give you that assurance because we are determined to be totally transparent about this, but do not assume on the basis of the DECC forecast, which is now pretty long in the tooth, that you should be comparing that with an OBR forecast that is brand new. The newness of the data is absolutely critical.
Justine Greening: I think what would be helpful to understand is that obviously the OBR has to make a forecast of what it thinks oil and gas prices will be-it has done that. That is a forecast of what it expects the commodity markets to do, and I think that the Committee may be interested to say, "Well, what might that independent OBR forecast of commodity markets mean for gas prices for consumers?" I am sure the Committee could look at that. That is an independent forecast done external from the Government that is used by the Government so that it is seen as credible, and you might want to look at how that forecast might translate into prices to consumers.
I thought the other thing you would need to look at, if you wanted to do a robust study, would be a far more sophisticated analysis of what you expected perhaps the regulatory scheme system to change, how you might expect companies’ business models to change, how you might expect consumer preferences to change in relation to switching between companies, and how you might expect companies’ marketing strategies to change in terms of how price-competitive they wanted to be versus their service delivery model. I think you could do a crude translation of this independent forecast by the OBR which, as a Government, we use to inform our economic model. You could do a crude analysis of seeing that purely flow through, but I think there would be a danger that it would actually just focus on one of what would be many variables that would affect whether that independent analysis of the gas price might or might not feed through to household prices.
Chris Huhne: Of all of the important things that Justine has mentioned-they are absolutely right-another absolutely key thing that has to be taken into consideration when you assess bill impacts for households is what will be the impact of our energy-saving policies.
Justine Greening: Absolutely.
Chris Huhne: That has a very dramatic impact. If, for example, you look at the recent pilots that British Gas has been doing-again, I will have to write to you if I don’t remember this off the top of my head-the impact on overall gas bills for the households that were involved in those projects was a reduction of 44% as a result of energy saving. With the Green Deal coming on in October 2012, the whole point about our policy in terms of both energy saving and energy security is to make sure that if we face a world-an increasing number of analysts think this is likely-of rising fossil fuel prices, our consumers can be secure in knowing that they are going to be able to rely on non-fossil fuel electricity generation and on major energy-saving initiatives to insulate them from some of the effects that are going on in the world market. That is an absolutely key part, and that, by the way, is taken into account in the calculations that DECC does for the Annual Energy Statement, and we will be doing a full update of that for the next Annual Energy Statement.
Q140 Dr Whitehead: You said earlier that you thought the inclusion of all DECC levy arrangements now and for the future in the present spending round into a control cap is a very good thing, which means-
Chris Huhne: It is not a cap. It is not regarded as public expenditure in the same way as if it was a departmental expenditure, but it is in a framework that we and Treasury analyse-obviously we keep an eye on it-and it is absolutely crucial that we understand the impact. We want value for money out of that money as much as we want value for money out of public spending more generally.
Q141 Dr Whitehead: Which means that if you put a new levy in within the present spending round, you have to take it out of the existing cap, which means that you will not be able to get the amount of money you thought you might have done into the energy company’s obligation, which is the basis of the 44% saving that you have just quoted for various houses in Walsall-
Chris Huhne: No, no, it isn’t.
Dr Whitehead: That was an obligation.
Chris Huhne: No, the 44% comes from a straightforward pilot scheme that British Gas was running, but it shows the potential. It is merely there to dramatise the potential for energy saving of making a dramatic difference in people’s bills.
Q142 Dr Whitehead: Thanks to an obligation put on energy companies.
Chris Huhne: No, no, this was a straightforward pilot, but, as part of the Green Deal and as part of the Energy Bill that is about to come to the Commons and has already been in the Lords, we are going to have that eco-obligation. We will be replacing CERT, in a sense, in what it is doing to support energy-saving measures, and that is-
Q143 Dr Whitehead: You have just taken that out and shot it in terms of the new framework you have put in.
Chris Huhne: No, absolutely not. I can assure you that everybody is aware, both in DECC and the Treasury, of the importance of the Green Deal as a way of providing real insulation for British households against these very volatile fossil fuel markets, and that is a positive benefit, because of course it means that living standards are likely to be less variable, that the economy will be less volatile and that investment will be less volatile. This is a win-win. We want to have very front-foot energy saving policy, and that is what you have with the Energy Bill that is going through both Houses at the moment. You will have also next year, in the next Session, an Energy Bill dealing with electricity market performance.
Q144 Sir Robert Smith: On that previous discussion, it does seems to highlight the importance that both sides are attaching to the engagement dialogue and consultation, especially on the costs of gas, because there seems to be some disparity about the costs of gas and where it is going.
One final thing that the Government are committed to consult on and bring certainty to is decommissioning. Do you accept that there have been certain alarm bells caused in the industry with the first time ever when there has been a decoupling of the tax rate from the tax relief? In most businesses, your profit is after expenses, and decommissioning is a very genuine expense, and yet the tax on profits is not going to be completely allowed against the decommissioning for this year?
Justine Greening: The steps we took on decommissioning really reflect the fact that the supplementary charge increase isn’t necessarily a permanent one, and that is precisely why we need to consult on where we will set the strike price and the trigger price, but you were right to point out-we recognise this more broadly-the question about decommissioning relief in terms of liability to the Government, what it means for individual companies, and of course the way in which it works with individual fields. It is really important for the industry to get more certainty on that.
We had already talked with the industry actually about establishing a working group, and we talked about the different strands of work that would need to happen prior to the Budget. That work is commencing; it is kicking off as anticipated. In fact, we have our first major meeting with the industry on Friday, so we are, despite what has been a very difficult rate rise at the Budget to help us deliver this motoring package, working very closely with the industry. In terms of investment, we will work with it closely on looking at marginal fields and field allowances to ensure that investment continues to be unlocked, even in those most marginal fields.
Q145 Sir Robert Smith: You emphasised earlier the importance of trade in assets and getting the optimal operator into the mature province, and I think one of the things that does seem to be causing concern is that until there is certainty on the decommissioning, some of those trades are disrupted and it is not quite clear how best to optimise.
Justine Greening: Interestingly, I think the other point that I would like to make is that I think you are right to say that the tax is something that has been flagged up. There is also the decommissioning relief and, as I have said, we are going to work with the industry on that. The other points it makes are around licensing, and there is a suite of issues, if you like, in relation to decommissioning and liability, and the way in which liability isn’t handed over when you do an asset sale and pass on a field. I think there are a number of different issues that the industry has raised with us in terms of certainty around decommissioning. A big part of it though-you are right-is around tax relief, and so for Treasury that is something that we are going to work on with the industry to see whether we can find a resolution to that.
Chair: Thank you very much for being very generous with your time. It is much appreciated, and we will have an opportunity to explore these issues with Ofgem and others very shortly.