Phasing Out of Aprt

Part of Orders of the Day — Finance Bill – in the House of Commons at 7:45 pm on 28th April 1983.

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Photo of Mr John Wakeham Mr John Wakeham , Maldon 7:45 pm, 28th April 1983

Certainly not. It was necessary at that time because there were considerable economic difficulties. It was a time of massive increases in oil prices and generous front-end loading on the first generation of fields. It was right that a tax of that sort should have been introduced. I know that the right hon. Gentleman speaks eloquently for the oil industry, but I suspect that if he had been in government he might have taken a slightly different view. That is something we can speculate about.

When we debated oil taxation in the House a year ago, many hon. Members expressed anxiety about the position of smaller, marginal fields under the fiscal regime. The industry was making representations on that and other points, so the Chancellor agreed that there should be continuing discussions with the industry about future field profitability. As I said on Report: I hope that in the forthcoming discussions with UKOOA about the tax regime companies will feel able to support their arguments with chapter and verse about individual projects." —[Official Report, 13 July 1982; Vol. 27, c. 981.] The point that I was making was that we wanted to use the best and most reliable data available in the profitability analysis which was central to the way that we go about reviewing the North sea fiscal regime. There was, perhaps, a natural reluctance on the part of companies to divulge commercially sensitive information about future possible projects and in previous reviews we have had to rely primarily on data for hypothetical future fields. While that can be useful, it is always difficult to tell how representative of prospects the models will be.

In the review leading up to the Budget we were determined, if at all possible, to base our analysis on actual future projects. We sought that information from the operators and I am pleased to say that we had their fullest co-operation. We also had extensive and helpful consultations with UKOOA, both in relation to its study of profitability and representations about tax.

The results of that survey showed that the level of profitability of existing fields was generally satisfactory and, viewed in isolation, the results did not suggest that fiscal reductions were required for existing fields. On our middle market price assumptions, the average pre-Budget return for the future incremental projects was an attractive 22·8 per cent. The 10 free-standing future fields were split into two groups — five more profitable, five less profitable—with average pre-Budget returns of 13 and 8·7 per cent. respectively. Those returns were significantly less than those that we found on average for existing fields and prospective incremental projects.

The finding that future free-standing fields are likely in general to be less profitable than hitherto reflects the fact that they are likely to be smaller, geologically more complicated, and proportionately more costly to develop than previous fields. The industry shares that conclusion. Indeed, because of the work done by both sides this year, Government and industry are closer together in their understanding of the future profitability of the North sea than ever before.

Therefore, we thought it right to target relief selectively and cost-effectively to benefit future free-standing fields, as my hon. Friend the Member for Enfield, North (Mr. Eggar) pointed out. That is consistent with our twin objectives of encouraging future exploration, appraisal and development in the North sea, while at the same time securing the maximum benefit for the nation. If there are those who feel that even the projected rates of return sound relatively high, I remind them that the risks that the companies are running, and the uncertainties about price, production and costs, are considerable. The returns need to recognise that.

The Budget changes improve post-tax returns for future free-standing fields by around five percentage points. Post-budget, and on middle oil price assumptions, the average post-tax return for the five more profitable fields was 18·2 per cent., and for the five less profitable, 13·7 per cent. Those were some of the figures that the hon. Member for Blackburn sought. Where companies are able to get immediate corporation tax relief for expenditure on such fields that may add a further six percentage points to the post-tax rate of return.

My hon. Friend the Member for Canterbury (Mr. Crouch) was supportive of the Government in the main. He referred to the rates of tax on the oilfields. He quoted the marginal rate of tax at the top end, which is by no means the average rate of tax. My hon. Friend rightly pointed out that the cut in the marginal rate was from 89·5 per cent. to 88 per cent. The new fields benefit much more from the extra oil allowance. The average rate of tax is down from about 70 per cent. to about 60 per cent.