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North Sea Oil and Gas

Volume 539: debated on Wednesday 25 January 2012

[Relevant document: Oral and written evidence taken by the Energy and Climate Change Committee, on Implications for the North Sea Oil and Gas Industry of the Budget 2011, HC 1018-i and -ii.]

Motion made, and Question proposed, That this House do now adjourn.—(Michael Fabricant.)

Thank you, Mr Speaker, for allowing this short Adjournment debate on North sea oil and gas taxation. It is a very serious and important matter. It is not one with which I have previously been concerned, but I think the Economic Secretary should know that I was invited to a briefing the other day, given by the oil industry, on the impact of taxation changes in the North sea and it excited my interest. I had always been aware of what a very substantial business it was but had no idea of how very important it is to the United Kingdom economy on the scale of employment and other matters, and I thought it right to bring the matter to the attention of the House. I am therefore, as I said, very grateful to you, Sir, for allowing the debate.

The United Kingdom is indeed fortunate to be endowed with significant resources of oil and gas. Over the years, hundreds of millions of pounds of hard-earned, always risky and sometimes very courageous investment and endeavour have allowed the nation to realise these resources, and for the British people to enjoy the substantial benefits of employment, sophisticated and high-level skills at all levels of the skill chain, tax revenues and balance of payments, and to develop a leading position in the global oil and gas supply chain—all of which has stood this country in good stead down the recent years.

Figures for 2011 show that around £16 billion was spent by the oil and gas industry on exploration, development and operations. This included £8 billion in new capital investment, an increase of 25% over 2010. I know that the Economic Secretary will agree that in anyone’s terms these are massive numbers, and thus once again make the oil and gas sector the single largest investor of all the industrial sectors in the United Kingdom.

The positive benefits of this remarkable industry are not confined to Scotland. They extend throughout the United Kingdom, supporting employment for more than 400,000 people, and those jobs are widely distributed throughout the whole country. Unsurprisingly, of course, a substantial proportion—45% in fact—are in Scotland, but that means that 55% of the jobs, which is the majority, directly benefit employment throughout the rest of the UK.

The taxes forecast to be raised from the industry in 2011-12 include some £6 billion in income tax, national insurance contributions and corporation tax paid by the supply chain companies, with an additional £11 billion from taxes on production itself. That amounts to 25% of all the corporation tax received by the Exchequer. The production of indigenous oil and gas improved the balance of payments by £35 billion in 2011, thus halving the trade deficit, and the supply chain added another £5 billion to £6 billion with exports of oilfield goods and services. Incidentally, that aspect of the industry is doing extremely well here and overseas, and it is flying the flag for Britain effectively.

At a time when Britain above all else needs growth and the energetic encouragement of inward investment, I regret to have to say to the Economic Secretary that all is not well in this crucial sector that is so important to our economy. Production declined by 17% from 2010 to 2011, which was the biggest fall seen by the industry in the past 40 years. As a result, future tax receipts will decrease rapidly without new investment. Receipts for 2011-12 have already suffered a £2.3 billion downgrade due to lower than expected production.

I understand that the reduction in North sea oil production is due to many factors, but one of them is maintenance. There have been many maintenance programmes over the past 12 months. Is the fact that production is down, because maintenance is up, one reason why taxation is down?

The hon. Gentleman raises an important point. I am sure that it is germane, but the decrease that I am highlighting is, in my judgment, due to the taxation regime.

The United Kingdom already imports around 10% of its oil and almost 40% of its gas, and such imports will increase rapidly without the benefit of new investment. The Government’s decision in March 2011 to increase tax rates on the industry, which increased the top tax rate to 81% and the corporation tax rate to 62%, is inevitably and regrettably having a chilling effect on the leading indicators of investment.

While total capital investment this year has increased to about £8 billion from £6 billion in 2010, that was largely due to development momentum from previous years. Worryingly, just nine new fields accounted for 40% of the total capital invested and all the development projects were well advanced prior to the tax increase.

The signs of lower investment in the future are already apparent. Indeed, my hon. Friend the Economic Secretary will see from the Department of Energy and Climate Change’s latest energy trends analysis a significant impact on drilling activity, with exploration wells down 50% in 2011.

It is from that exploration drilling that the future large capital investments will flow. The March 2011 tax increase reduced the value of future projects by 25% overnight. My hon. Friend knows that the future development of the North sea depends in large part on clever, technical solutions at the very forefront of what is manageable for marginally economic fields, but the increase in the tax rate has rendered many of those future fields uneconomic to develop. That serious matter for the country must be addressed.

I gather from the estimates of Oil & Gas UK, the industry’s trade body, that investment of at least £12 billion in more than 1 billion barrels of oil and gas resource will not occur without some stimulus. That is 60,000 jobs that will not be created and a loss of a benefit of £15 billion to £20 billion to the budget deficit as a result of the tax increase.

I remind the House of my entries in the Register of Members’ Financial Interests to do with the oil and gas industry. I intervene to reinforce the right hon. Gentleman’s point about the industry’s importance not only to the north-east of Scotland, but to the whole of the United Kingdom. I thank him very much for bringing the spotlight to bear and bringing the message south that it is the whole United Kingdom that would benefit from tax reform.

I am grateful to the hon. Gentleman, whose championship and knowledge of the industry are well known. He emphasises the important point that this is a United Kingdom industry, relevant to the whole country, and therefore even more important than might otherwise be the case.

Oil & Gas UK estimates that a further 1.7 billion barrels of the UK’s oil and gas resource would be recovered if the uncertainty about decommissioning reliefs—a very difficult subject—was resolved.

In an industry with highly mobile capital, investment will flow to other, more attractive destinations. We must not let that happen. Further repeated change in the taxation regime of this vital UK industry is causing great uncertainty in the boardrooms of both the international and the home-grown companies involved in all sectors of the industry. That inevitably has a further unhelpful impact on inward investment, at a time when we should be doing all we can to attract that investment, as well as the jobs, the tax receipts and the balance of payments benefits that come with it. I am sure the Economic Secretary agrees that doing that is even more important given the Government’s genuine determination to generate greater growth in the economy, without which many of the difficult problems we face cannot be dealt with.

I am aware that discussions are ongoing between the Treasury, the Department of Energy and Climate Change and the industry to try to find ways to stimulate investment, and I welcome that. I ask the Economic Secretary to confirm that she understands—I know she does—the serious impact on inward investment being caused by the tax increase and other adverse changes in taxation, and the damage to the future tax base and future tax receipts. Further, will she confirm that the Treasury will give serious and detailed consideration to measures to protect future investment through extensions to tax allowances and giving certainty on decommissioning reliefs, and see to it that those measures are enacted or headlined in the Budget, to the greater advantage of the British economy in the years to come?

I am extremely pleased to have the opportunity to discuss this subject in the House at perhaps greater length than I did when my hon. Friend the Member for West Aberdeenshire and Kincardine (Sir Robert Smith) asked me on Tuesday for an update on the ongoing work. I thank him, and, of course, my right hon. Friend the Member for Mid Sussex (Nicholas Soames) for calling for this evening’s debate, and for their contributions to it.

My right hon. Friend is absolutely correct: the oil and gas sector makes a huge contribution to the UK economy. He is right to draw out the statistics as he has done this evening. I concur that UK oil and gas provide about two thirds of the UK’s primary energy needs, and even as we move into a less carbon-intensive future, they are set to remain a vital part of our energy system for years to come. The Government recognise the crucial role the sector plays in driving jobs and growth. Together, oil and gas contribute about 2% of the country’s GDP, and the industry supports about 350,000 jobs directly and indirectly across the UK, as well as another 100,000 in exporting goods and services. Of course, as my right hon. Friend said, it is also source of skills, expertise and technology. Finally, as my hon. Friend the Member for West Aberdeenshire and Kincardine said, oil and gas are a UK-wide concern. Indeed, that has an impact close to my constituency around the coast of Norfolk, where there is a North sea gas industry.

It is vital that we do what we can to maximise the economic recovery of our indigenous hydrocarbon reserves. It is for that reason that the Government remain committed to encouraging investment and innovation in the North sea. We recognise that tax plays an important role in helping us to achieve those objectives. The Government’s aim is therefore to shape a tax regime for the North sea that encourages exploration, development and production while ensuring a fair return for the UK taxpayer.

That is not always an easy balance to strike, and at times it can require us to make difficult decisions, to which my right hon. Friend the Member for Mid Sussex has referred. Everyone who listened to the Budget 2011 will understand that. In the Budget the Government sought to soften the impact of record pump prices for car fuel on households and businesses by abolishing the fuel duty escalator and replacing it with a fair fuel stabiliser. We also cut fuel duty by 1p a litre on Budget day. Since then, we took steps in the autumn statement further to ease the burden on motorists to ensure that there will be only one retail prices index increase in fuel duty in 2013. All told, that means that the Government will ease the burden on motorists by approximately £2.5 billion in 2012-13. At a time when businesses and families across the country are coping with extremely difficult economic circumstances it is right that we should support them as best we can through these tough times, including looking at measures that affect the cost of living such as fuel pricing.

Given the economic situation and the state of the public finances, that support must be funded. In the Budget, at a time of exceptionally high oil prices, the Government felt that it was fair that the oil and gas industry should make an additional contribution through an increase in the supplementary charge. Indeed, that increase was voted on in the House.

At the time of the Budget the Government made it clear that although they accepted that some marginal projects might be affected, they did not expect a significant impact on investment or production over the forecast period. To answer the points that my right hon. Friend raised about receipts, investment and the state of the industry, our assessment of the impact on production was supported by the independent Office for Budget Responsibility. Moreover, while the oil price remains well over $100 a barrel, the fair fuel stabiliser means that taxes on oil and gas production will reduce if the oil price falls below a certain threshold.

Indeed, there have been announcements of further significant investment in the basin over the past few months. For example, BP has said that with its partners it will invest almost £10 billion in North sea oil and gas over the next five years. That investment will provide an extra 3,000 jobs across the oil and gas supply chain. 2012 could be a prosperous year for the North sea. We expect a substantial increase in offshore field approvals over last year’s figure, and many other discoveries are being worked up for the years ahead.

None the less, I recognise that those tax changes have not been welcomed by the sector. I understand that, and I acknowledge the recent news suggesting that there were lower levels of exploration and drilling than expected last year. I believe a range of factors contributed to that, and tax is only one part of what my right hon. Friend will accept is a complex situation for businesses seeking to operate in and around the basin.

Tonight’s debate gives me an opportunity to tell the House a little more about the way in which we have engaged closely with the industry since the Budget last year to ensure that we fully understand its views on a range of fiscal issues related to investment. Only last week, as my hon. Friend the Member for West Aberdeenshire and Kincardine noted, I chaired the first meeting of a new oil and gas industry fiscal forum. It was attended by the Minister of State, Department of Energy and Climate Change, my hon. Friend the Member for Wealden (Charles Hendry) and representatives from more than 15 companies across the sector. We had an extremely productive discussion covering the points that my right hon. Friend the Member for Mid Sussex has noted, including decommissioning and field allowances. I believe that the fiscal forum will continue to provide a structured basis for further dialogue between industry and Government on oil and gas tax issues.

We hope this will complement the excellent work already being taken forward by the industry and Government task force, known as PILOT. This group seeks to contribute to the long-term future of the UK continental shelf through initiatives focusing on reducing costs, eliminating barriers and maximising the effectiveness of resources.

In addition to these wider discussions, the Government have been engaging closely with industry to consider changes to specific elements of the tax regime that could unlock additional investment in the basin. For example, in line with our commitment at last year’s Budget, we have been working closely with industry with a view to making a further announcement on greater long-term certainty about decommissioning tax relief at Budget 2012. We have also been considering the case for improved or new types of field allowance to act as a further incentive to investment in marginal fields.

Hon. Members here today following the debate will know the range of detail encompassed in the representations made to me and my colleagues by industry, and they will be aware of the number of different proposals put forward under those headings of decommissioning tax relief and field allowances. Following such detailed discussions with industry, we have already increased the rate of the ring-fence expenditure supplement from 6% to 10%, which helps to ensure that existing field allowances work more effectively and equitably.

I am very encouraged by the positive engagement that we have had with industry on these issues. I believe that this sort of constructive dialogue can only be helpful as the UK continental shelf matures and the tax regime has to evolve accordingly. We remain committed to supporting the sector in realising its ambition of fully maximising the growth and jobs potential from our oil and gas industry. Ultimately it is in everyone’s interest that we foster a regime that continues to promote investment and harness our mineral wealth effectively, while also ensuring a fair return for the UK taxpayer from this valuable national resource.

Once again, I am very grateful to my right hon. Friend for having brought this debate here tonight and for giving me a short opportunity to expand on some of the valuable work that we have been endeavouring to undertake to support the industry and meet the aims that I know he shares.

Question put and agreed to.

House adjourned.