Increase of Petroleum Revenue Tax

Orders of the Day — FINANCE (No. 2) BILL – in the House of Commons at 8:45 pm on 4th June 1980.

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Photo of Mr Trevor Skeet Mr Trevor Skeet , Bedford 8:45 pm, 4th June 1980

I beg to move amendment No. 26, in page 66, line 16, leave out '70' and insert '65'.

I had an occasion to read the Official Report of 3 June, when the Financial Secretary said: To introduce a discriminatory tax on the profits legitimately earned of one particular sector of the economy requires a very strong case to be made. In my judgment, that case has not been made in tie instance of the banks this year."—[Official Report, 3 June 1980; Vol. 985, c. 1286.] My hon. Friend went on to say that the clearing banks had used their profits to strengthen their reserves, to enable them to support domestic business, to invest in future technology and to cope with increasing risks. Exactly the same argument could be made for the oil companies, large and small, which are making a great contribution to the energy situation in the United Kingdom. The Government may therefore be encouraged to reduce the petroleum revenue tax from 70 to 65 per cent. Seventy per cent. would yield £2·5 billion, and 65 per cent. £2·3 billion, so the loss would not be that great.

With three major tax changes within the compass of one year, the Government are making effective use of Socialist legislation—the Oil Taxation Act 1975. [Interruption.] The record is instructive, and the hon. Member for Bolsover (Mr. Skinner) may like to listen to the record. In June 1979, under part III of the Finance (No. 2) Act, PRT was advanced from 45 to 60 per cent., coupled with substantial alterations in the allowances. The Petroleum Revenue Tax Act 1980, drafted in December 1979, provided for accelerated payments of PRT, and this clause, drafted in March 1980, advances the rate from 60 to 70 per cent. retroactive to 1 January 1980. Clause 92 provides for further acceleration of PRT payments. The advanced payments under the clause may be increased by statutory instrument.

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After such an annual performance in 1979–80, what is to be expected in 1980–81? Surely there must be a crossover point when the burdens placed on a single industry in the economy will become too great. After all, of their marginal earnings the companies will retain only about 12p in the pound.

I remind the Minister of State that in 1975 certain assurances were given. I recollect that on 25 February 1975 Mr. Dell said that the incidence of PRT could be changed in the event of a sustained and significant change in the price of oil in real terms.

The real price of North Sea oil in sterling in February 1979 was only 46·8 per cent. above that on 25 November 1975, when PRT was introduced. This increase was adequately covered by the 1979 PRT increase from 45 to 60 per cent. On the basis of Mr. Dell's assurance, a further increase in PRT is not now warranted.

The Select Committee dealing with the Treasury and the Civil Service has looked into this. Mr. Pollard, the under-secretary of the policy division of the Inland Revenue, indicated that he did not accept the concept of 46·8 per cent. based on the wholesale price index as the deflator. The deflator which he intended to use, purely for his own purposes, was the GDP. He worked out the figure at 65 per cent. Therefore there is an anxiety between UKOOA, which has put forward its own arguments in this case, and the Treasury, which is looking for more revenue or, for its own purposes, to raise additional revenue.

What concerns me is that in 1975 there were reasons why the PRT should be increased. The talk at that stage was for a stable tax. Three major changes in the course of one year is not an indication of the stability of tax.

There have crept in various criteria which are now used for altering the rate of PRT. I have cited the first, which is a sustained and significant change in the price of oil in real terms. That has already been breached. The second is the reassessment of the internal rate of return of the companies operating in the North Sea, an argument advanced by Mr. Pollard before the Select Committee on 16 April 1980.

Apparently the argument runs " We accept the concept to a broad extent." Apparently what the Revenue does is, to take 34 or 35 fields, both producing and under development, and some hypothetical fields for the future. Then it makes various assumptions about the price of oil, the rate of inflation, the pound-dollar exchange rate and production profiles. Then, by looking at these variables and working on further assumptions, it works out the internal rate of return of the company. There was the further argument that the Inland Revenue's workings could not be disclosed because they might reveal highly confidential information.

I conclude that PRT is thus assessed by the Inland Revenue on assumed company internal rates of return worked out by a complex formula derived from confidential information assembled in relation to about 35 fields either in production or under development. The relevant elements are not published and can have little real connection with the individual company's estimates of its own rate of return from a given field. The weight attributed to specific elements, such as the movement of future oil prices, the inflation rate and production profiles, is not given and may be subject to a broad range of error.

The formula is therefore designed to load the dice firmly against the companies and in favour of the Revenue, extracting from the wretched taxpayer 87·4 per cent. at the marginal rate. I should have thought that we must come to the conclusion that the Treasury is not concerned about the real price of oil, but is concerned only about extracting as much as possible from the companies, when they do not have enough left to carry out necessary work in the North Sea to ascertain new reserves for future years.

Although Mr. Dell assured the industry that PRT was intended to be a stable tax and not to be used as a short-term regulator, the Bill provides that the 15 per cent. advance payment may be altered by statutory instrument. It is difficult to argue that this is not making use of the tax, in part, as a short-term regulator. An acceleration in payment increases the rate of PRT. The pure Revenue requirement to reduce the PSBR has been outlined by the Chancellor.

It is further argued that increased prices yield the companies better returns than formerly. This is a misconception. The Wood Mackenzie North Sea report of 27 March 1980 states: It will be seen that the effect of oil price increases is counter-balanced by delays, increased costs and so on. Even before tax increases, a field of 150 million barrels with a peak rate of 50,000 barrels a day is barely more profitable than envisaged five years ago, and a 450 million-barrel field with a peak rate of 180,000 barrels a day is significantly worse off. Thus it would appear difficult to argue that the tax increases are justified on the grounds of better returns compared with the position in 1975.

Photo of Mr Trevor Skeet Mr Trevor Skeet , Bedford

The hon. Gentleman may scoff, if the companies have 12p in the pound left on a marginal rate with which to do their exploration and development work, they are driven down to a pretty low figure.

Photo of Mr Dick Douglas Mr Dick Douglas , Dunfermline

The hon. Gentleman is presenting an absurd case. He is knowledgeable in these matters. He knows that the expense, including an additional uplift in capital expenditure, is set against profits before companies start paying PRT. I do not want to make a speech, because I hope to speak on the motion, That the clause stand part of the Bill, but the hon. Gentleman really is over-egging the pudding. None of these fields of 150 million to 450 million barrels is unlikely to be developed at present rates of PRT or present prices.

Photo of Mr Trevor Skeet Mr Trevor Skeet , Bedford

I am surprised that the hon. Gentleman puts forward that argument. I am aware of front-end loading. This was conceded in the 1975 Act, but the companies are faced with new work in the North Sea. The ring fence applies. The revenue cannot be utilised in work elsewhere, or the oil has to be thrown into the pool available for distribution. The hon. Gentleman is aware of the facts.

I agree that the price of oil has been going up. On the other hand, one has to consider the expenses. The cost of inflation in the North Sea is higher than one would normally expect. There are the costs of developing fields in deeper water, using new technology, greater attention to small accumulations, abortive drillings and the phenomenal rise in interest rates. Surely the hon. Member realises that about a year ago, when the uplift was reduced from 175 to 135 per cent., interest rates were unstable. They have since soared to almost record levels.

Photo of Mr Bob Cryer Mr Bob Cryer , Keighley

The hon. Gentleman seems to be arguing with passion the case for the oil companies. He does not often argue in that way on behalf of the poor and the needy. To judge from what the hon. Gentleman has been saying, the oil companies would want to get out of the oilfields, but they are desperately queuing up for new concessions. His passionate conviction in support of the oil companies leads me to conclude that he must have some sort of financial support from them. He is incredibly zealous in his arguments in support of a nonsensical case.

Photo of Mr Trevor Skeet Mr Trevor Skeet , Bedford

That is the sort of comment that I expect from the hon. Gentleman. If he wants to learn of my interests he can look at the book, which is available to the public, and, can examine any financial implications. When he considers all the matters involved he will realise that my argument is backed by a great deal of common sense. I am concerned about self-sufficiency in oil, not merely now but in the 1990s.

The fields now under development will reach their peak in the 1980s, after which they will gradually decline over a number of years. It is necessary for the United Kingdom to be self-sufficient in the 1990s which means that a lot more oil must be found in the years ahead. The lead time for the development of an oilfield, from discovery to the time when it reaches its peak, is from 7 to 10 years. We know perfectly well that at this stage any surpluses that we may have in the 1980s are equivalent to only one year's United Kingdom consumption. With high marginal rates, less funds are available for future investment.

Let us consider the scale of the work that is involved. Drilling reached the peak of its success in 1975, when 79 wells were drilled in the North Sea. They produced 3,175 million barrels. In the last year under the Labour Government, 33 wells were drilled and they produced only 250 million barrels. It is apparent from that that if we do not discover a great deal more oil there will be a deficiency in the 1990s, and that will mean importing more. That is when the man in the street will feel the effects most severely.

In order to secure self-sufficieny it is necessary, according to UKOOA, for between 65 and 90 exploration wells to be drilled a year. At present only 50 per cent. of that number are being drilled. Whereas before 1975 one well in eight was successful—that is, produced oil in commercial quantities—since that year the figure has been only one in 51. Therefore, more money is required to be invested.

Perhaps Mr. Christopher Laidlaw, managing director of BP, was correct when he said that the Government should create a climate in which the companies could operate and pay more attention to the way in which profits are used than to how they should be taken away. There is one interesting point about BP, and it was mentioned by the chairman in his speech. This year, for every £50 of Government spending, £1 has come from BP taxes.

Photo of Mr Trevor Skeet Mr Trevor Skeet , Bedford 9:15 pm, 4th June 1980

The hon. Gentleman says that that is all right, but he is leaning on one industry and making it pay heavily for the rest of the nation, even though I have pointed out that the time may come when instead of being self-sufficient we shall face the situation, in the 1990s, in which wells are not being drilled because not enough contractors are coming on to the continental shelf. I agree that others are flocking into the United Kingdom now, but last year only 33 wells were drilled, and only 250 million barrels were recovered under the hon. Gentleman's Government. The Labour Government could not move. On that basis we shall run out of oil in the early 1990s.

It may be greedy of Governments in the United Kingdom and in Western Europe to demand such high marginal rates, but let us look at what the other democratic countries are taking. The situation in the United States is more advantageous, because incentives are provided. In Alberta, in Canada, the highest rate does not exceed 60 per cent. On the Canadian continental shelf the federal Government take between 45 and 63 per cent. In Australia the Government take 51 per cent.

If the hon. Gentleman has any doubts, let him look at the analysis prepared by Doctor Alexander Kepp, senior lecturer in economics at Aberdeen university, and Mr. David Curry. There are other democracies that take smaller amounts. The hon. Member for Dunfermline (Mr. Douglas) says that Norway takes a higher figure and there is every reason why Norway should do that. There is less urgency for the Norwegians to raise the oil from the sea bed. They wish to keep the oil there, and they wish to have less production. The Norwegians do not wish to export more oil, because they are not part of the Common Market. We have certain obligations to our neighbours in Europe, and we certainly have an obligation to the people of the United Kingdom. We have an obligation to the motorists and all those who depend on fuel.

Photo of Mr David Penhaligon Mr David Penhaligon , Truro

Will the hon. Gentleman say whether it is preferable that this country should be three quarters self-sufficient in oil for 40 years, or totally self-sufficient for 30 years?

Photo of Mr Trevor Skeet Mr Trevor Skeet , Bedford

If the hon. Member had listened to my observations he would have realised that if we take the likely available surplus in the 1980s it will provide only one further year of United Kingdom consumption. Therefore, all the surplus that we have above our requirement will carry us for only one additional year.

Even if we had a full depletion policy, it would not help a great deal. Everybody says that we must not waste our natural gas and oil. It is said that we must bring them forward at a planned rate. That is being done under the various Acts of Parliament, and I do not quarrel with that. I am simply saying that we must be circumspect, to ensure that we have financial resources so that we may uncover at the appropriate rime the necessary amount of reserves that are yet to be discovered.

Let me mention one aspect of the Government's use of revenues. There is no doubt that the petroleum revenue tax and corporation tax payable by five companies in 1979–80 will yield about £2·2 billion. The figure for the current year, 1980–81, will be £4·1 billion. That is a lot of money going into the economy.

According to the Chancellor of the Exchequer, those revenues may play a crucial part in reducing the PSBR, and to that there must be added transfers from the national oil account. I do not wish to cover the figures twice, because while those sums are paid into the national oil account, which in turn is paid into the Consolidated Fund, a part of this will be new money. Transfers were made by the Secretary of State for Energy on 31 March 1980, 23 March 1979 and 30 October 1979. They totalled £1·2 billion. I should have thought that we could rely to a certain extent on a particular industry, because it must play its part.

Let us examine what the industry is paying in revenue to the Government. I have given the figures for North Sea oil revenues. Vehicle excise duty amounts to £1·1 billion. Hydrocarbon oil duties amount to £2·9 billion, and VAT on all carbon oil amounts to £450 million. These are large sums for one industry. Together they total £6·7 billion. That is the amount contributed to the Government by one industry.

I agree that the public sector borrowing requirement should be reduced. However, one industry is making an enormous contribution at the expense of its future. The advance sale of oil was to bring in between £400 million and £500 million, the sale of BP shares brought in £275 million, and fixed down payments on the seventh round will net another £1,000 million.

The Opposition will say how right it is that all that money should fall into the Government's coffers, and how unfair it is that the private sector should behave as it does. There is no avoiding the conclusion that both this Government and the previous one have exploited one industry. Perhaps that is reminiscent of the Emperor Constantine exploiting agriculture in Byzantine times.

It is normal for politicians to talk about the private sector exploiting the public sector, and the modern State is responsible for doing just that. That can be illustrated by reference to the Government take on a typical barrel of OPEC oil. In 1978 the cost was $33·80 a barrel. The host Government in the Middle East received $13 and consumer Governments in the United Kingdom and elsewhere received $13·40. Refining and marketing costs were only $5·35. The freight to Rotterdam was only $1 and production costs amounted to only 50 cents. Of the $33·80 sale price, about 80 per cent. went to Governments. Where is the greed? Is it in companies or in Governments?

Let us examine the industry's margin. The margin is 55 cents. What about the public? Where do they come into the picture? I have examined the price of a litre of Dutch petrol in 1979. The host Government in the Middle East received 25 per cent. The Dutch Government taxed at a rate of 55 per cent., refining and marketing took 17 per cent., and the industry's margin was 3 per cent.

A company paying the full rate of PRT, corporation tax and royalties will be left with 12·6p in every pound of net revenue, against 16·8p at present and 23p when the tax was initiated. From that 12·6p, it is expected to put aside enough to enable it to recover the essential oil for self-sufficiency in the 1990s and beyond—to meet all Britain's requirements—and to provide enough for our exports to Europe and elsewhere. Is it possible to do that, or will we force the oil companies on to the market and make them borrow?

It might be useful to say to the oil companies " Much money will be earned, but provided that it is spent on energy requirements and purposes to provide more fuel for the Unitd Kingdom and for essential exports, it should be scheduled for that requirement and should not fall into the Consolidated Fund ". That seems reasonable. I am concerned with the future not of the oil companies but the United Kingdom. I wish to ensure that we have sufficient for our requirements.

I think that raising the rates for the third time from 45 to 70 per cent. is too much. The figure should be set at a lower rate. The Government would not net quite as much, but perhaps they could call on other industries to make contributions, as this industry is making its contribution.

Photo of Mr John Garrett Mr John Garrett , Norwich South

What about the banks?

Photo of Mr Trevor Skeet Mr Trevor Skeet , Bedford

It is a great confession by Opposition Members, after many years of Labour Government, to say that there is no profit in any industry other than banking. They have reduced industry in the United Kingdom to what it is today. They are responsible for de-industrialising the United Kingdom. They picked on one industry and exploited it to the maximum. The Government should not make the same error. They must realise that there is a point of no return. At present people are prepared to come to the North Sea because oil is more important than price, but the time will come when price will count, and less development will be undertaken.

I emphasise once again that 1975 was the peak year, and one which we have not been able to rival since. Many wells were drilled in the North Sea. Now, well under half of that number are being drilled. We must return to a higher figure. While it is right to have a balance by taxing the companies for the benefit of the nation, the nation is also assisted if it allows the compames to have a little revenue that can be applied to the recovery of new oil.

Photo of Mr John Garrett Mr John Garrett , Norwich South

I oppose the amendment to reduce the rates of petroleum revenue tax. The amendment gives us an opportunity to press our case that the level of petroleum revenue tax, and, indeed, other taxation on oil companies, is too low. [Interruption.] I hope that I shall be allowed to develop the argument in my own way. If I manage to catch your eye, Mr. Godman Irvine, on the clause stand part debate I shall make a few remarks about the uses to which the revenue may be put.

We last debated the form and incidence of petroleum revenue tax in December 1979, on the occasion of the Petroleum Revenue Tax Bill. That was a measure designed to advance the payment of tax by two months and thereby to improve the Government's cash flow. In that debate, I pointed out that the five-year history of petroleum revenue tax has been one of Government continually trying to catch up with the profits of companies operating in the North Sea, and usually lagging well behind.

The central question has always been whether there are adequate arrangements for securing for the Exchequer and for the economy a fair share of the results of the exploitation of North Sea oil and gas. The proposal in the Bill to raise the rate of tax falls far short of what is necessary. The amendment is wholly misguided. From listening to its proposer, we would never know that it is a profits tax, levied not only after all the capital expenditure associated with development has been met but with an uplift on capital expenditure to 35 per cent.

In 1974, the Conservative Opposition attacked the concept of petroleum revenue tax and accused the Labour Government, in introducing it, of badly shaking the confidence of the oil industry. They accused us of trying to drive the oil companies away from the continental shelf and on virtually every occasion they defended the interests of the oil companies.

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In the debate last December I asked whether the oil companies were still getting over the garden wall with their windfall of golden apples because the petroleum revenue tax was insufficiently effective. We urged a windfall profits tax on the companies because of their enormous, fortuitous gains from the rise in oil prices. The Minister of State, Treasury, who is to reply to this debate, blandly turned down this call for economic justice, saying that these industries were light of foot and might flit off to Mexico.

At the time of that debate, North Sea oil was priced at $23 to $26 a barrel. Today it is $34.20 a barrel, after three price increases so far this year. The result of this rise in the price of oil has been a phenomenal increase in the profits of the oil companies. Most of the international groups are turning in profits of 70 to 100 per cent. higher than a year ago. Last year, BP's after-tax profits reached £1·6 billion—nearly four times the figure for the previous year. Shell's profits increased by 180 per cent., Texaco's by 111 per cent., Exxon's by 55 per cent., and Mobil's by 77 per cent. But, interestingly, Esso UK showed a tenfold increase in profits for the year. The reaction of BP to this windfall was to call for tax cuts and to plan to spend £6 million on an advertising campaign: to show the friendly face of an oil giant to the man in the street. The agency chosen to handle this £6 million account was the one with the highest reputation for concealing ugly truths—one might say the one with the reputation for gilding the cabbage—Saatchi and Saatchi.

Photo of Mr Timothy Eggar Mr Timothy Eggar , Enfield North

Since the hon. Gentleman has obviously studied BP's annual reports so carefully, and as BP is a majority State-owned corporation, would he comment on how much investment BP has in the North Sea at present?

Photo of Mr John Garrett Mr John Garrett , Norwich South

No. I am talking not about investment by BP in the North Sea but about the profits made by BP. This is a tax on profits. We say that these windfall profits deserve to be further taxed.

Photo of Mr Timothy Eggar Mr Timothy Eggar , Enfield North

Is the hon. Gentleman saying——

Photo of Mr John Garrett Mr John Garrett , Norwich South

I am not giving way. I am coming to the question of investment. I am about to come to one aspect of BP's investment. The oil companies always maintain that they need these levels of profit to fund the exploration for and development of new oil. Who are we to doubt them? But if that proposition is true, why is BP spending many millions of pounds on coal in South Africa and on coal, copper, gold and uranium in Australia? BP plans to spend £600 million in the next decade on a copper, uranium and gold deposit in South Australia, thougr apparently the Labour Government in that State has a ban on uranium mining.

BP is not the only oil company using its windfall profits to diversify out of oil production. Shell is investing £500 million in coal production in the next 10 years, having invested unsuccessfully in nuclear power generation. Exxon is trying to invest in electronics—a move which I understand is the subject of an anti-trust investigation in the United States—and in word processing, all on oil profits. Mobil is trying to get into department stores, and Gulf into property. It seems to me that they have more funds than they know what to do with. Some of these funds—the greater share—must belong to the British people since they arise from the exploitation of a community resource—namely, North Sea oil.

Photo of Mr Trevor Skeet Mr Trevor Skeet , Bedford

The hon. Gentleman must know that the National Coal Board will be mining at German Creek in Queensland, Australia, even though it is in a dreadful situation in the United Kingdom.

Photo of Mr John Garrett Mr John Garrett , Norwich South

The Electricity Council has an investment in uranium in Canada. What is it doing with that?

I should like the Minister to answer one simple question. During his administration, after the peak year of 1975 why did the number of wells drilled in the North Sea go down and down, and the amount of oil that was discovered fall away? In 1975, 3,175 million barrels were discovered; in 1977 725 million barrels were discovered; and last year only 250 million barrels were discovered. Why?

Photo of Mr John Garrett Mr John Garrett , Norwich South

No, I shall not give way.

Presumably it was not a case of the level of the oil taxation regime, because oil exploration is now improving in the light of an even richer oil tax regime, in the sense of raising petroleum revenue tax, that this Government are introducing. As for diversification, clearly it may be in the interests of the National Coal Board to exploit coal elsewhere in the world, but BP and the other oil companies are diversifying right outside their line of business, using profits made from the exceptionally profitable regime for them of the North Sea oil.

Photo of Mr John Garrett Mr John Garrett , Norwich South

No, I shall not give way at the moment.

The chairman of Tricentrol, reportedly a tax exile in Geneva and who has not been enticed back to Britain by the Chancellor's last incentive Budget, did not think this change at all bad. Most oil companies clearly expected worse, such as the reduction of the generous allowance against tax. The Economist of 29 March called this increase in tax " loose change ".

It said: How could the Chancellor let the oil companies escape so cheaply? Scream as they will, their profits are barely scraped by the PRT rise. It is not enough of a change to worry the oil companies. The Wood Mackenzie report on the tax changes commented that they were more restrained than had been feared. It included a table on the impact of the PRT increase on rates of return for different fields. Clearly, from examination of that table, the impact is negligible. The rate of return on the Argyll field is reduced from 41·2 per cent. to 41·1 per cent., on the Auk field from 42·7 per cent. to 42·6 pere cent. on the Forties field from 37·5 per cent. to 34·2 per cent. and on the United Kingdom part of the Statfjord field from 26·5 per cent. to 26·2 per cent. No wonder there were no screams from the oil companies.

The oil companies make an exceptionally high return in Britain, and we already provide a uniquely favourable climate for them.

Other countries have a more robust attitude to the oil companies. The United States Congress hit them with a massive windfall tax. The Norwegians——

Photo of Mr John Garrett Mr John Garrett , Norwich South

I shall give way in a moment. I shall choose when to give way.

The Norwegians, whose oil tax regime is more comparable with ours, have intensified their drive to " Norwegianise " the oil industry by requiring a 50 per cent. stake for Statoil, the State oil company, in new licence allocations and by introducing an excess profits tax which raises its take from 77 per cent. to 85 per cent. The oil policy White Paper produced by the Norwegian Government proposes increasingly to relegate the oil companies to paid consultants, with little or no influence over how new fields should be exploited. When the Norwegians are increasing their national stake in oil, we are reducing ours. If plucky little Norway can say " boo " to the oil companies, why cannot we?

Norway takes a much firmer line towards the oil companies than we do, as can be seen from a lecture in Edinburgh last month by Dr. Jans Evensen, former chairman of the Norwegian Petroleum Council. He said: The oil business is becoming too important to leave it in the hands of the oil companies&the traditional way of granting offshore concessions to private companies should give way, at least in part, to a system in which the government retains ownership of both the seabed and the oil flowing from it&The self-evident starting point of Norwegian oil policy was that the oil on the Continental Shelf belonged to society as a whole. No tax or licence fee, for example, could cope with the enormous windfall profits that were being earned as a result of the recent oil crisis. In his view, therefore, it was time that the Norwegian Government considered introducing service contracts for offshore oil production as other oil producing countries had done.

This is a question that we must ask ourselves. Can any form of taxation adequately secure the community interest, and should we not simply move to a situation in which the companies simply receive a fee for producing oil?

In the next round of licensing the companies will apparently be required to make a down payment of £4 million for 20 or so of the blocks on offer. By contrast, the recent auction of exploration tracts in Alaska produced $1 billion for the Government of Alaska, with some companies offering the State up to 90 per cent. of the profits in order to get the blocks.

The Bow Group produced a pamphlet on the issue which called our system a " give-away " and showed that the Government could collect up to £3 billion from an auction. I quote the Bow Group, a body with which I have absolutely no connection: Even if the Government fears that an oil licence auction might give an advantage to foreign multinationals, it might at least consider a far higher charge for blocks since this again is common practice overseas.

Photo of Mr Timothy Eggar Mr Timothy Eggar , Enfield North

Will the hon. Gentleman confirm that it is Labour Party policy that a Labour Government would auction blocks in the North Sea? That is the implication of what he has been saying Will he consider going even further than that and stating categorically that if they are auctioned no discretion will be retained by a future Labour Government as to which oil companies would be given the blocks if they bid the highest amount?

Photo of Mr John Garrett Mr John Garrett , Norwich South

That is rather a stupid question. As the hon. Member knows, Labour Party policy on these and other issues is made by the party conference.

Photo of Mr Michael Brown Mr Michael Brown , Brigg and Scunthorpe

We need not take any notice of the Opposition Front Bench now.

Photo of Mr Timothy Eggar Mr Timothy Eggar , Enfield North

Sorry chaps, you can all go home.

Photo of Mr John Garrett Mr John Garrett , Norwich South

Our policy is not made by spokesmen speaking in debates on individual questions of taxation when asked silly questions by Conservative Back Benchers in a boisterous mood.

Then we come to the mystery of the missing billions. The Government are exceptionally coy on what the Government revenue from North Sea oil is likely to be over the next few years. The Chancellor did not feel able to supply details of the revenue to the Select Committee on the Treasury and Civil Service, although that Committee observed that the tone of Treasury evidence on the question confirmed the widely held opinion that the revenue from North Sea oil was considerably understated in the Financial Statement. I see from today's newspapers that the chairman of the Select Committee, the right hon. Member for Taunton (Mr. du Cann), intends to press the Treasury Ministers in future cross-examinations to make them come clean on a whole variety of information, including, no doubt, information on this matter.

The Treasury assumptions were that North Sea oil would yield £2¾ billion in 1980–81, rising to £4¾ billion in 1983–84. Wood Mackenzie estimates that the revenue would be £3 billion in 1980–81, rising to £15 billion in 1985. We should like to know the Government's view on this matter. It should be a matter of common concern to us all.

It is likely that revenues could be considerably greater than even this, given the tendency of oil prices to rise faster than world prices generally and the continuing discovery of new fields. We are already a bigger producer than Kuwait, and all the evidence is that there is much more oil to be found under the North Sea.

The upshot is that we consider that the Government, true to the tradition of the Tory Party of fawning on oil companies, are letting the oil industry get away too lightly, that the oil companies are making more profit than they know what to do with, and that, because of the inadequate State presence in the North Sea, Britain is not securing a fair and proper share of the wealth from the North Sea. If that is not so, we expect the Minister to refute it. We shall certainly oppose any attempts on the Conservative Benches to reduce the proposed level of PRT and, therefore, the just share of the British people in the resources of the North Sea.

Photo of Mr Michael Brown Mr Michael Brown , Brigg and Scunthorpe

As I hope is my custom, I shall be very brief.

To a considerable extent, I support the remarks of my hon. Friend the Member for Bedford (Mr. Skeet). I represent a constituency that has growing oil interests. We have a number of oil refineries in the Killingholme area of the Brigg and Scunthorpe constituency which provide a considerable number of jobs. Labour Members are rather unfair when they pick on an industry which is expanding, which needs to be encouraged and which provides a considerable number of jobs.

9.45 pm

I ask my hon. and learned Friend the Minister of State to consider the arguments behind the amendment. I recognise that it may not be possible now for the Government to accommodate the amendment. However, it should be useful for the Government to consider the arguments that have been advanced by my hon. Friend the Member for Bedford.

There is no doubt that we shall have to encourage the oil companies in future. There may come a time when they will be discouraged if we have the system of petroleum revenue tax as at present constituted. I ask my hon. and learned Friend to bear in mind that the time will come shortly when we shall have to give some encouragement to the golden goose. It is laying eggs now, but it will not do so indefinitely. As my hon. Friend the Member for Bedford said, we have not reached the peak of oil exploration since 1975 and further exploration will be required. That will have to be encouraged.

I take up the general argument advanced from the Opposition Benches. We have heard it on other occasions. Their approach seems to be a desire to bash the oil industry. It is our one boom industry, and surely we want to encourage it.

Photo of Mr Trevor Skeet Mr Trevor Skeet , Bedford

They do not like success.

Photo of Mr Michael Brown Mr Michael Brown , Brigg and Scunthorpe

Exactly. We happen to have a successful industry, which is pro viding taxation revenue. The hon. Member for Norwich, South (Mr. Garrett) referred to BP. Has he forgotten that earlier this year BP made over to the British Government——

Photo of Mr John Garrett Mr John Garrett , Norwich South

What is the surcharge on gas prices introduced by the Government if it is not bashing a successful industry?

Photo of Mr Michael Brown Mr Michael Brown , Brigg and Scunthorpe

We are discussing PRT. I shall be happy to debate the gas industry on a future occasion. Time is pressing and I must be brief.

We have a boom industry that needs encouraging. However, it is the victim of bashing, which is encouraged by the emotions of Labour Members. There are jobs in the industry that need to be preserved, encouraged and expanded. Some of the jobs happen to be in my constituency, where all too many jobs are being lost through declining industry. We need to consider everything that we can to encourage the oil industry instead of discouraging it, as some Labour Members seem to wish to do.

Mr. Donglas:

Mr. Donglas rose——

Photo of Mr Dick Douglas Mr Dick Douglas , Dunfermline

Mr. Douglas rose——

The First Deputy Chairman (Mr Bryant Godman Irvine):

Order. The hon. Member for Brigg and Scunthorpe (Mr. Brown) has resumed his seat.

Photo of Mr Peter Rees Mr Peter Rees , Dover and Deal

I am sure that the Committee is indebted to my hon. Friend the Member for Bedford (Mr. Skeet) for having provided the opportunity for a brisk and highly charged even though perhaps rather circumscribed debate. My hon. Friend has a long and consistent record of pressing the Government, and perhaps even the Labour Administration, on the need for treating those involved in the extraction of oil from the North Sea rather more gently than either Administration has been disposed to do.

On the other hand, we have had a powerful case deployed by the hon. Member for Norwich, South (Mr. Garrett) for a rather tougher regime. The Administration have been accused of fawning over the oil companies. I am not certain how to circumnavigate the Scylla of my hon. Friend the Member for Bedford and the Charybdis of the hon. Member for Norwich, South. However, I shall do my best.

Photo of Mr Gordon Wilson Mr Gordon Wilson , Dundee East

Go through the middle.

Photo of Mr Peter Rees Mr Peter Rees , Dover and Deal

As always, the hon. Member for West Lothian (Mr. Dalyell) has words of comfort and advice.

Photo of Mr Tam Dalyell Mr Tam Dalyell , West Lothian

That is the first time that the words of the hon. Member for Dundee, East (Mr. Wilson) have been attributed to me, and vice versa.

Photo of Mr Peter Rees Mr Peter Rees , Dover and Deal

I beg the hon. Gentleman's pardon. I had assumed that it was the hon. Member for West Lothian, not the hon. Member for Dundee, East (Mr. Wilson).

Leaving aside the attributions that I have rightly or wrongly made, I should like to turn to the central issue. The increase in world oil prices since the introduction of petroleum revenue tax poses a problem for this Government, as it would for any Government. In August 1978, the then Chief Secretary announced the increases that he would have proposed in the next Finance Bill. At that time the price of North Sea oil stood at $13·70 a barrel. When we debated the last Finance Bill, which proposed an increase, the price stood at $20·70 a barrel. In March 1980, at the time of the Budget of my right hon. and learned Friend, that oil cost $33·75 a barrel. Since then, the world price of oil has drifted upwards slightly as a result of events in Saudi Arabia.

Could any Government have stood back and said that the rates introduced last June were the final word? I hope that the Labour Government would have faced this problem in the same responsible way as we have. However, having listened to the hon. Member for Norwich, South, I doubt it. A balance must be struck between the interest of the Exchequer—and of the country as a whole—and the interest of the oil companies that extract the oil.

I think that the hon. Member for Norwich, South has misquoted me slightly. I did not say that oil companies were light-footed. I said that their capital and expertise could be deployed in other parts of the world. If I did say "light-footed ", so be it. Their capital and expertise are necessary to us, just as our oil reserves are necessary to them. If we strike the wrong balance, they will be tempted—I do not know whether they have been tempted—to defer further investment in the North Sea or to invest at a slower rate. A balance must be struck.

We concluded that it was fair to increase the rate this year from 60 per cent. to 70 per cent. At the same time, we felt it right to ask oil companies to accelerate their payments by a payment on account.

It has not been sufficiently stressed that the Finance Bill contains some small measures of relief. It may have been overlooked that clause 93 permits the un-absorbed expenditure in a particular field to be transferred when the interest in that field is transferred to another company. That is known as stranded reliefs. We felt that the oil companies had a legitimate case. The case has been pressed on the Government before, and it may have been pressed on the Labour Administration. One may think that that is something that the oil companies have been offered.

Clause 95 offers some relief on gas banking schemes. Again, we felt that that was a legitimate case and that it was right to concede it. We shall debate that issue in Committee upstairs. Clause 96 offers some relief fractionation. That is a complex operation and I do not propose to weary the Committee with it now. We shall have plenty of opportunities to debate that subject in Committee.

Photo of Mr Trevor Skeet Mr Trevor Skeet , Bedford

I appreciate that several anomalies have been removed. That is excellent. However, if companies have 12·6p in the pound left for all their future exploration, will they not be in some difficulty? During the period of the Labour Government the amount of drilling fell continually. To what extent will the Government make further impositions and changes? Will my hon. and learned Friend say something about giving companies the taxation stability which was promised in 1975?

Photo of Mr Peter Rees Mr Peter Rees , Dover and Deal

Against such an uncertain prospect, no Minister could possibly give a total assurance that there will be no further changes in PRT. Does my hon. Friend really expect me to say that no matter what increases may take place in the real price of oil in the next year and the years to come, no changes can be contemplated? I am sure that he realises that that would be an irresponsible statement.

I remind the Committee that when Mr. Edmund Dell gave his assurances, which were warmly supported and confirmed by my right hon. Friend the Member for Wanstead and Woodford (Mr. Jenkin), he said that the position was subject to alteration in the event of increases in the real price of oil. That is precisely the situation that we faced last year and are facing this year.

Endeavouring to strike a fair balance and disregarding the cheap gibes that we were fawning over the oil companies, we felt it right to raise the rate of PRT. My hon. Friend the Member for Bedford will recall that reliefs are built in which should cover the exploration costs. We are told by the Opposition that the reliefs are too generous. The hon. Member for Norwich, South was right to remind the Committee, against the background of his assertion that the rates were too generous, that we cut the uplift last year and cut the amount of free oil because we felt, on reflection, that we could moderate them a little. It is a matter of fine political and economic judgment where the balance should be struck.

Photo of Mr Trevor Skeet Mr Trevor Skeet , Bedford

If I accept the view indicated by Mr. Dell that if there is a significant change in the real price of oil the rate of tax may be altered, I understand that there must be an accretion of the tax. But the Treasury seems to be moving along different lines. It is establishing the tax on the basis of the internal rates of return of the companies concerned, working it out for all the fields in the way that I explained.

Surely the Government are altering their position. That was fully explained to the Select Committee. What does my hon. and learned Friend say to that? Are we to have PRT assessed in future on the basis of the internal rates of return of the companies?

Photo of Mr Peter Rees Mr Peter Rees , Dover and Deal

This is not tailored to the internal rate of return of individual companies in individual fields. If it were, the provision would be regarded as hybrid. In fact, it is a general tax devised for a general situation. That is the basis on which it was commended to the House in 1974 and the subsequent amendments—we would say improvements—are also commended on that basis.

Of course my hon. Friend is right in saying that the marginal rate paid by the companies will be increased, if the proposals are accepted, from 83·2 per cent to 87·4 per cent. His mathematics are correct when he deducts that figure from 100 per cent. and tells us what would be left in the companies' hands. But the hon. Member for Norwich, South is right in saying that that is the marginal rate on profits. We have scaled down the reliefs, but they are designed to enable the companies fully to absorb their costs. In addition, the uplift is designed to compensate them because they do not get any relief for interest. We hope that we have struck a fair balance.

I appreciate that my hon. Friend the Member for Bedford is sceptical, but so far the response to the seventh round does not seem to indicate that we have cooled the ardour of the oil companies.

Photo of Mr Timothy Eggar Mr Timothy Eggar , Enfield North

Will my hon. and learned Friend confirm the evidence given by Mr. Pollard to the Treasury Sub-Committee that the average take on a marginal North Sea oilfield will have increased from 70 per cent., where it stood when the Government took office, to 80 per cent. if this measure becomes law?

Photo of Mr Peter Rees Mr Peter Rees , Dover and Deal

As I said, the marginal tax take has risen to 87·4 per cent. Is that what my hon. Friend is talking about, or is he asking about the marginal take of the companies?

Photo of Mr Timothy Eggar Mr Timothy Eggar , Enfield North

My question related to the average take of the companies in the field——

It being Ten o'clock, The CHAIRMAN left the Chair to report Progress and ask leave to sit again.

Committee report Progress.