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North Sea Oil (Petroleum Revenue Tax)

Volume 887: debated on Tuesday 25 February 1975

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With permission, Mr. Speaker, I should like to make a statement about petroleum revenue tax.

On Second Reading of the Oil Taxation Bill I indicated that any relief for marginal fields would be decided in the light of the consultations with the oil companies launched on 19th November. Following these consultations the Government have decided that safeguards for the marginal fields will be of two kinds. First, there will be a discretionary provision in the Petroleum Bill to refund royalties in whole or in part. Any refund of royalties will be free of PRT and corporation tax.

Secondly, there will be a non-discretionary provision within the tax system. In considering what form the provision should take we have paid careful attention to the various suggestions put forward by the spokesmen of the companies themselves, and our proposals follow some of those suggestions, though I do not claim that they go as far.

The non-discretionary provision will contain two elements. First, under the present PRT provisions of the Bill an uplift of 50 per cent.on capital expenditure is allowed in lieu of interest; we propose an additional 25 per cent., making a total uplift of 75 per cent., all of which can be claimed in the first year of tax liability. This will give the industry a further element of front-end loading, that is revenue free of PRT, which will help it to recover capital early in the life of the field.

Secondly, we propose an oil allowance per field of 1 million tons of oil a year, which will be free of PRT, subject to a cumulative total of 10 million tons per field. That is to say, in each chargeable period of six months, an allowance in money terms equivalent to half a million tons will be available to set against PRT liability.

These provisions will of course benefit all fields, not merely marginal fields, in exempting a substantial tranche of their revenue from PRT, and to that extent giving them a more secure prospect of return on their investment. But, since the tonnage allowance is the same for large fields and small, it will be of proportionately greater benefit to the latter, and we have had this in mind in adapting the suggestions received from the industry.

I believe that these provisions will help us to fix a rate of PRT with greater security that it will leave the companies an adequate rate of return. I am, of course, fully seized of the fact that a change in the price of oil relative to price levels generally could have a profound effect on profitability. I therefore made it clear on Second Reading, and I take this opportunity to reaffirm, that the Government will stand ready to review and adjust the incidence of PRT in the event of a sustained and significant change in the price of oil in real terms.

I have given careful thought to the representations made that there should be some more automatic protection against a fall in the oil price and a consequential reduction in revenues. We therefore propose that there should be a safeguard provision that to the extent that in any year the PRT charge reduces the return on a field before corporation tax to less than 30 per cent. of capital expenditure measured on the basis of historic cost, that charge will be cancelled. There will be a tapering provision above 30 per cent.

These non-discretionary provisions will be introduced at the Report stage of the Oil Taxation Bill.

I come now to the rate of tax. I had originally envisaged that the rate of PRT would be enacted in the spring Finance Bill. However, now that the timetable allows this, I propose that it be incorporated in the Oil Taxation Bill. In considering the rate, we have in mind two objectives. First, we must ensure that the Government, on behalf of the British people, secure sufficient overall revenue and sufficient benefit to the balance of payments from this raw material asset. Secondly, we must ensure for the companies an adequate return on capital and an adequate incentive for further development and exploration so as to ensure that the oil continues to flow. In the light of these considerations we propose a rate of PRT of 45 per cent.

It is evident that the Paymaster-General has listened with a good deal of care and understanding to the views of the industry. Is he aware that we are glad to see that he now accepts unequivocally the need both for an adequate return on capital investment and for adequate incentives for development and exploration? Is the right hon. Gentleman aware that the proposals in the statement, coupled with the other substantial amendments which have been made or promised, represents a considerable improvement in the Bill as it was introduced?

Is it not equally clear that the right hon. Gentleman's task in devising a variable tax on windfall profits has been made far more difficult than necessary by his clinging to the wholly inappropriate flat-rate prior charge field-by-field structure that is in the Bill?

As 1 million tons a year is equal to no more than 20,000 barrels a day, does the right hon. Gentleman agree that it is only the tiniest fields that are likely to be exempt from PRT under his relief? I accept that the Paymaster-General's purpose is to achieve both profitability and incentives for the industry, but is he aware that we entertain serious doubts whether his reliefs are adequate and whether they will be enough to restore confidence to an industry in which confidence has been badly shaken by the Oil Taxation Bill as originally introduced?

I hope that the right hon. Gentleman will not say anything that will reduce confidence in the future of this country's oil industry by attaching himself to any claim, however extravagant, made by the oil companies.

The right hon. Gentleman suggested that we had now accepted unequivocally the argument that the oil companies must have a reasonable rate of return. We have from the beginning accepted that unequivocally. It was for that reason that on 19th November I called the oil companies into consultation, a consultation that has gone on since. The object of that was to ensure that we had the right facts on which to base our decisions.

The right hon. Member says that the task of making provision for marginal fields had been made far more difficult by the structure of the tax. That is not the case. I am sure that the provision we are making is adequate for the marginal fields. Many fields will be largely relieved of PRT, particularly the smaller fields, and in considering the problem of marginal fields one has to look to the future at least as much as to existing fields. As a result of this concession, exploration in future fields which may be smaller than some of those so far discovered will be encouraged.

The method used by my right hon. Friend in presenting his statement and the basis of the calculations he has presented to the House suggest that the price of oil will be left to free market considerations under commercial conditions. Does he accept that the Labour Party is committed to having regulated and controlled prices of oil in very strictly controlled conditions? Will he therefore now give confidence to the Labour movement rather than to the commercial oil market by saying that he is to carry out the provisions of our manifesto and insist, for as far as the future can tell, on complete regulation in oil prices?

I am sure that the manifesto is being carried out completely. Of course these decisions are based on the assumption of market prices and the safeguard provisions; and the marginal field provisions, are to take care of possible changes in real terms of market prices.

Will the Paymaster-General accept that we on this bench have consistently held the view that there should be a direct relationship between the revenue-raising potential of the oil and the funding of the Scottish Development Agency? When will the Government bring forward proposals on that score?

As the hon. Member knows, the proposals for the SDA will be brought forward shortly.

Has not Burmah taught us that the cash flow position is absolutely critical in the rate of oil exploitation? Will my right hon. Friend say precisely what he means by the recovery of capital "early in the life of a field"? What does "early in the life of a field" mean in the case of marginal fields?

In the case of marginal fields, as in other fields, 175 per cent. of the capital expenditure will be offset against revenue before PRT makes any impact on the field. In addition there will then be the oil allowance. The companies are given front-end loading, that is to say they are relieved at a very early stage of their capital liabilities before they pay PRT, and this should be of great assistance to them and also a great encouragement to future development.

If the right hon. Gentleman is not in a position to do so this afternoon, will he be kind enough to make available to the House subsequently a comparison of the net effect of tax and cost in respect of a million-barrel-a-day field sited in Norway, the United Kingdom and the United States?

I shall certainly look at the right hon. Gentleman's question and see what help I can give him.

What benefits will the regions of high unemployment in England get from the oil revenue?

I trust that one of the effects of this tax and of the discovery of these raw material resources will be to give some impetus to the British economy, with beneficial effects on employment generally.

Will the Minister accept that his statement about concessions to the international oil companies will be greeted with considerable horror and anger in Scotland—[HON. MEMBERS: "Rubbish."] Will he further indicate his estimate of the revenues to be expected at a production of 150 million tons at current prices on current rates of corporation tax and taking account of the rate of PRT which he has just announced?

Does he accept that the 30 per cent. guaranteed rate of return is far too high, particularly in present circumstances? The 50 per cent. uplift which was previously proposed would have led in certain fields to capital investment being repaid over two or three years' production. Does he accept that the situation has been worsened by his proposal to increase this uplift in interest to 75 per cent.?

I cannot believe that the people of Scotland will greet this announcement with horror and anger. On the contrary, the people of Scotland are as aware as people anywhere else in Britain that it is necessary that the oil should flow before we get any tax revenue out of it, and the measures I have announced today will assist that to happen.

The hon. Member asked for an estimate of revenues on the basis of certain figures of oil production in—I take it—the 1980s. He will understand that in the early years the revenue from North Sea oil will be relatively small but growing fast. In the early 1980s, at a figure of 100 million tons, it should be £2,000 million or £3,000 million. Of course, the higher the production the greater the consequent revenues. However, all figures in this respect must be treated with some caution because they depend, first, on the price of oil and, secondly, on the cost of exploration and development. I therefore suggest to the hon. Gentleman that we wait to see what we get before relying on it too much.

Is the Minister aware that whatever the reactions in Scotland, many English Members will see this as giving in to the wealthy oil companies? Is he aware that his action is similar in pattern to giving in to the office property people—ending the freeze on office rents—and to the landowners on CTT? Does he agree that this is not in keeping with the concluding paragraph in our election manifesto which talked of a great and irreversible switch from rich to poor and of greater equality in our country? I understand the pressure to which my right hon. Friend has been subjected, but we seem to be giving in all down the line, and the Labour movement must resist that.

By this tax we are trying to achieve a great and irreversible switch of profits from the oil companies to the British Government. However, it is necessary to ensure that the oil flows and we have to accept that the oil companies must make a reasonable return on their investment. That is all that we have done. We have established a reasonable sharing between the British people and the companies which are doing the work and on whose expertise we continue to rely.

Is the Minister aware that the most important thing he has said has been his reference to the necessity to get the oil flowing, and one of the main factors in delaying things in the North Sea and in other areas such as Canada has been the sheer uncertainty surrounding so much of the operation. Will the right hon. Gentleman assure the House that every effort will be made to expedite the further negotiations with the oil companies over participation? Does he not agree that the simplest way of getting things going and of enabling the companies to raise money would be to bring forward these proposals as quickly as possible even if he is unable to drop them entirely, which is what he should do?

Every effort will be made to expedite progress on participation. The hon. Member referred to uncertainty. One of the objectives of our handling of the Oil Taxation Bill, in conducting the talks concurrently with the legislative process, has been precisely to reduce the period of uncertainty. We should now be able to complete this measure in a period of four months which I think is a considerable contribution to reducing uncertainty in this area.

Will my right hon. Friend proceed according to the earlier consultations with the oil companies and ensure that there is no further delay or dithering with regard to North Sea development? Will my right hon. Friend agree that the green light he has given is at least adequate, even though the Opposition think that the oil companies should be given even more?

We wish to see North Sea development going ahead fast. The evidence we have suggests that it is going ahead as fast as is practicable. There are many causes of delay, some of which are due to natural circumstances—such as the North Sea in which the development is going ahead. It is our objective that it should go ahead as rapidly as possible.

Does the right hon. Gentleman remember saying in Committee, during the discussions on the Oil Taxation Bill on 10th January, that marginality was not a question of petroleum revenue tax alone and that corporation tax represented a large proportion of the burden that companies would have to pay? Does the right hon. Gentleman's statement today rule out any possible change in the rules governing the disallowance of interest for corporation tax purposes, for example? Does he realise that the concessions he has announced today in an inflationary era are no substitute for the disallowance of interest, and that interest burdens increase progressively with inflation, while concessions on capital decrease progressively?

We are looking very carefully at the arguments advanced in Committee on the Oil Taxation Bill regarding interest and in respect of corporation tax. We have had further consultations with the companies on that point. We shall be coming to a decision on it in time for Report. Since marginality is not simply a matter of petroleum revenue tax, we have introduced into our scheme the possibility of a discretionary refunding of royalties free of PRT and corporation tax. I think that the discretionary power in the hands of my right hon. Friend the Secretary of State for Energy, in consultation with the Treasury, will suffice to help any marginal field that should be developed.

In the course of his negotiations on this subject, did my right hon. Friend make it plain to the oil companies that the Government would not go back on their commitment to 51 per cent. participation? Is he aware that Government supporters will take a much more lenient view on taxation if they know that control of the subsidies means that the revenue taxable cannot be shifted around?

There is a commitment to 51 per cent. participation, of which the oil companies are aware. The strategy we are following requires that the British people's share of the profits will be obtained by taxation. The participation negotiations are directed to securing greater control.

Does the Minister accept the proposition which the Government have put forward that the oil companies' profit will be the same on 49 per cent. participation as though they had 100 per cent. control?

In so far as we think it right to take a share of the profits—and we do—that course will be achieved by taxation. The participation negotiations are related to the control of the oil and the operation.

Is my right hon. Friend aware that his statement today will be regarded by the Labour movement with a great deal of concern? Some would go so far as to consider that this is little short of a sell-out in response to the blackmail which has gone on for a considerable time by the oil firms both within and outside this country. Will my right hon. Friend answer this more detailed question? When we consider that the 45 per cent. will be offset by the capital allowance of 175 per cent., and then by the £1 million allocation to assist the marginal fields, overall, what will the amount of tax be in relation to those offsets, taking them into account over the period of the first five years' operation? Will the figure be much nearer 30 per cent. than 45 per cent.?

My hon. Friend says that there will be a great deal of concern. However, he must remember that in addition to PRT there will be corporation tax at 52 per cent. and royalty at 12½ per cent. As a result of the rate of PRT which I have just announced, estimating the proportion of the revenues in a field which the Government will take, and accepting that that will vary from field to field because marginal fields have a lower take while other fields have a higher take, I estimate that the average over the next 10 years will probably be of the order of 70 per cent. I do not think that that figure should lead to concern.

Is the Minister aware that the vindictive and spiteful attitude of the Scottish National Party to the oil companies does not represent the views of the people of Scotland, who will welcome the statement of the concessions he has made? Has he evidence, which I believe exists, that if the burden of taxation is unreasonably high, the oil will not flow and jobs and prosperity will disappear?

It is necessary that the burden of taxation shall not be unreasonably high. We have had that in mind in fixing the rate of tax, which, at this level, we think is right. On the basis of our estimates, founded on figures provided by the companies, we think that this leaves the companies a reasonable rate of return which will enable them to continue their development and exploration work, which is essential if the oil is to continue to flow.