With this it will be convenient to discuss the following amendments: No. 22, page 64, line 10, leave out "17th April 2002" and insert "1st April 2003".
No. 33, page 65, line 17, at end add—
"(11) This section shall come into force on such day as the Treasury may by order made by statutory instrument appoint, but no such order shall be made until an economic impact assessment has been made of the effect of the changes on activity and employment in the oil industry in the North Sea.".
I have agreed to allow a separate vote on amendment No. 33.
The issues raised by the amendments are some of the most important that we shall consider. The Committee and the Government will be aware that a broad cross-section of people in political parties—certainly Scottish MPs of all parties—and the oil industry think that the proposal is not wise. I hope that the Government will listen to the arguments and think about them before we reach the Bill's final stages.
To make sense of the amendments, I shall run through the arguments. The clause imposes a 10 per cent. supplementary charge on top of the 30 per cent. corporation tax charge on oil companies. Clause 91 sets out the process for assessment and clause 92 sets out the transitional provisions. The amendments are designed, in different ways, to prune back or check what is provided and, in some cases, to delay implementation until proper further consideration is given.
The central issue is that the Treasury argues that it will be commercially successful to levy significant extra tax on the oil industry. The Treasury knows that independent assessment estimates that, if oil prices remain reasonably stable, between now and 2010 that will generate about £6 billion in extra tax, some £2 billion of which will be realised in the coming fiscal year. The Government's case is that that would not materially damage investment, employment and operations in the North sea.
I beg to disagree with the Minister, and I shall run through why. If he is not aware of the industry's concerns, he has not done his homework. The trade representative body for the industry has set out in detail the full reasons why the industry believes that the proposal will be extremely damaging.
The Government have made the wrong judgment. On the central issue of the movement of oil prices, I suspect that they did their thinking earlier in the year when oil prices were higher. They did not expect oil prices to be in the order of $18 to $20 or take account of the increases in output from Russia over the next few years.
Has my hon. Friend in his researches discovered any analysis to explain whether North sea oil production is undertaxed, which would justify the proposals dealt with by his amendments?
I have found no such evidence; if anything, oil production is overtaxed, particularly in relation to the risks and nature of the businesses, as I shall explain. I have been trying to stress that the Treasury decision was made in the expectation of higher oil prices and was commercially wrong. That has nothing to do with whether it was morally right or wrong. The Treasury's analysis was grounded on excess profitability, but was based on far too short a period of profitability in recent times when oil prices have been higher. Independent analysis of profitability shows that between 1996 and 1999 profit margins have been as little as 1 to 8 per cent., based on an oil price of $15 to $20 a barrel. The United Kingdom needs to be fiscally attractive to meet the challenge of a mature industry that has an unfavourable risk reward profile compared with other parts of the world, particularly the Mexican basin, and whose operations are relatively expensive.
The hon. Gentleman's arguments would be a little stronger were it not for the fact that in 1993 the Conservative Chancellor raised oil taxes and took £600 million to £700 million from the North sea. Some commentators, encouraged by the then Chancellor, described that as a boost to the North sea oil industry. How is that consistent with the hon. Gentleman's position?
First, the lesson was learned. I am not sure that the hon. Gentleman gave the correct date. He mentioned 1993, but I think that the lesson was learned in 1983 when the Conservative Government put up taxation on the back of rising oil prices. There was a reaction, which will be repeated if the present measures are accepted, but thereafter there was a settlement with the industry.
I thank the hon. Gentleman, who has beaten me to it. I was about to say that we learned our lesson in 1983 and a stable tax regime for the oil industry has been a necessary and effective platform for success ever since.
It is true that there was a tax change in 1983, which the then Government described as a boost for the industry. Over the past few days, Mr. Doran has been describing the current proposed tax change as a boost for the industry. It appears that he has been learning lessons from the Conservative Government.
Things never change.
Before the proposed income tax increases, in a comparison of the profitability attractiveness of 57 countries, the UK was ranked 31st for the North sea basin and 40th for the southern basin. The UK fields are smaller, the costs are higher and the risk reward is considerably less attractive than in most other parts of the world. Extraction costs are about $8 a barrel, which are among the highest—58th out of 59—anywhere in the world. Those figures, as I am sure the Minister is aware, were produced by Wood Mackenzie investment bank.
Investment decisions by the industry are not based solely on rate of return computations, but are made in the context of fiscal considerations, cash flow and risk reward in relation to the size of the investment programme. They are also—this is very much what we have just been talking about—a factor in the stability of the tax regime in which they are made. Many people inside and outside the industry view the Government's proposals as a breach of faith, given their pilot scheme, which has been extremely successful in recent years in encouraging a significant increase in North sea investment. In 2001, 21 new fields went into operation at an investment cost of £8.23 billion—double the 2000 level—so, not surprisingly, it is felt that the significant tax increase will have a retroactive impact on investment decisions, which the Government have encouraged people to take on the basis of a stable tax regime. People are zapped with significantly higher tax on investments to which they have committed themselves.
If there is a breach of faith, previous experience shows that there is a serious risk that the multinationals, which are the main participants, will look at other areas of the world, particularly the Gulf of Mexico, as they offer much more attractive fiscal arrangements, risk rewards and field sizes.
The hon. Gentleman did well to remind the Committee that the previous Administration extracted a substantial revenue stream from North sea oil throughout their period in office, as they did from the privatisation of many national industries. However, the Committee will not need reminding that the Conservatives did very little with those resources. In fact, at the same time as drawing that income stream from the taxation of North sea oil, it piled up more and more national debt. Just when we are at the point of using those resources to invest in public services, the hon. Gentleman opposes the tax from which his party profited throughout its period in office, although the nation gained precious little.
That is a pretty feeble and irrelevant comment by the hon. Gentleman. The issue is simply whether additional taxation of the industry will have a major impact on investment, employment and the health of the industry. Self-evidently, as I have said, the Treasury has decided upfront that the proposal will not lead to that. However, as I am endeavouring to explain to the Committee, the industry and most outside commentators believe that that is not the case; the change is unwise because it will seriously damage employment, investment, operations and the amount of oil that we produce; we are now virtually self-sufficient. All Governments, going back to the Labour Government of the 1960s, have taken tax revenue from North sea oil.
The net effect of the measures will be to take £6 billion of cash flow out of the industry over the next eight years and to produce an annual fall of about £2 billion in retained earnings, which will clearly have an impact on the cost of raising capital for oil companies through their share prices and gearing.
Historically, independent analysis has shown, for better or for worse, that tax more than the price of oil has driven North sea development and North sea investment. The measure will make the UK uncompetitive and unattractive. It will increase the UK marginal tax rate from 69.4 per cent. to 73.7 per cent. at a time when the industry has been doing extremely well in a mature environment. I congratulate the Department of Trade and Industry on the success of its pilot scheme. We are producing 85 per cent. of our primary needs.
The measure will put the future of the industry at risk, and many companies have indicated that they will rebalance their world activities. I shall deal later with the depressing figures that indicate that the proportional interest in investments offered since the Budget show an immediate downwards reaction.
Finally, the tax will apply to the 41 per cent. of production that constitutes gas. In the past three years, gas prices have been falling, not rising.
Let me deal with specific issues arising from the tax proposals. Not only are financing charges, as provided, not allowable against expenses, but as the charge is a special supplementary charge, it is unclear whether brought-forward losses could be offset against it. It is not a standard corporation tax charge. More fundamentally—I raised the issue on Second Reading—will the tax paid with the supplementary charge be creditable by non-UK parent companies receiving dividends from their UK subsidiaries under double taxation treaties against their tax liabilities elsewhere? If not, there is a significant risk that double taxation will be paid, particularly by US companies. If that is the case and if it is not changed, the UK will be saying goodbye to the very favourable double taxation treaty that we negotiated with the United States last year but for which, for reasons not explained, the Government have not yet put through the necessary legislation. Although that is a different issue, it would be interesting to know why.
On royalties, the Government have argued that a combination of the offer to negotiate and get rid of royalties, and capital allowances, would go quite a long way to offset the proposed increase in taxation. That is not the view of the industry. Indeed, many in the industry would argue that the abolition of royalties is not a particularly good idea as it does not encourage new developments, which have been exempt since 1982, and could give rise to windfall profits on old fields.
However, the Government have not given a commitment to abolish royalties—there is nothing in the Red Book to that end. Current royalty receipts are of the order of £500 million per annum. They are not allowable against petroleum revenue tax and corporation tax computations, and the independent assessment of the future saving up to 2005 is £120 million to £150 million per annum.
The Chief Secretary argued on Second Reading that the additional taxation would be entirely offset by first year allowances. The Wood Mackenzie figures that I quoted suggested that that is nonsense. They show an impact of £8 billion on profits, assuming stable oil prices between now and 2010, versus a deterioration of £6 billion in the cash flow position. That suggests that the Chief Secretary's claim is not correct.
Given that 6 per cent. of Scottish employment is in the industry, no wonder most, if not all, Scottish Members of Parliament are worried. Given the way in which the Chancellor usually protects his back-garden Scottish interests, I wonder whether he is fully aware of the likely impact. As the House may be aware, in the past 10 years the only two economies to introduce tax increases of comparable size have been Argentina and Venezuela.
In view of all the Government's claims about consultation before imposing major measures, the industry is rightly offended that there was no consultation on these proposals. They are ill-conceived and, as precedent shows, it is dangerous to think that Governments can merrily dip into profits every time oil prices rise. When oil prices fall, that is followed by a major decline in new investment. The long-term confidence and trust that has been built up over the past 20 years has been severely knocked. Because of its mature nature, the UK industry cannot afford to take risks with its outlook.
Amendments Nos. 2 and 22 propose a year's delay in the introduction of the charge. Other amendments deal with the rate of the charge and the treatment of financing costs. Amendments Nos. 2 and 22 seek to ameliorate the impact of measures which we believe are unwise and not in the national interest, and which will do more damage to an important industry and employer than they will bring benefit in terms of additional tax revenues.
This subject was vigorously debated in the Scottish Grand Committee yesterday, and I do not intend to repeat the contributions that some of us made there. None the less, the issue is vital and current enough for at least some of those arguments to be brought to the Committee of the whole House.
I want to try and sweep away some of the nonsense in the debate. It is not the case that Governments do not have the right to change oil taxes. For example—never mind 1993—one of the initial acts of the Thatcher Government in the early 1980s was dramatically to increase the tax regime for North sea oil. The previous Secretary of State for Energy was Tony Benn. Margaret Thatcher decided that a more vigorous taxation regime was necessary than had been decided by Anthony Wedgwood Benn. It was extraordinary. The Government's argument was that oil prices were high and they wanted to get some of that endowment into the Treasury. Similar arguments had been used for previous oil tax changes.
So oil tax changes do take place. What is significant and different about this oil tax change is that the industry and others were led to believe, after a consultation exercise following the 1997 election, that there would be a stable tax regime. It is true that the Government can argue that the Chancellor always reserved the right to change taxation. I have no doubt, because I have been through the record, that we will not be able to cite a ministerial statement, although there were plenty of Back-Bench statements, not from Mr. Doran, but from his hon. Friend Miss Begg, who triumphantly told us that lobbying by her and her colleagues—presumably, she included the hon. Member for Aberdeen, Central by implication—had succeeded in producing a stable tax regime in the North sea. So only last year, those hon. Members were claiming the credit for producing a stable tax regime. The same Members—and certainly the hon. Member for Aberdeen, Central—now welcome the massive change to that tax regime that is proposed.
After the Budget announcement, I know that Labour Members feel that they must loyally dragoon themselves behind the Chancellor. His power over Labour Members in Scotland means that they will not enhance their career prospects by trying to gainsay him. None the less, hon. Members representing areas in north-eastern Scotland and more widely have a clear constituency interest in terms of employment. They should at least want to know about the impact on jobs and investment before they unthinkingly line themselves up behind the Chancellor and vote at their party's call without thinking of voting for themselves. It would be unreasonable of constituents in the north-east of Scotland to have to expect anything else.
The second bit of nonsense in this debate is the Government's argument about the impact on jobs. I used to deal with field financing, so I recognise what can be done with the figures. The Government cannot take £1 billion in a full year out of the North sea industry and claim that it will benefit investment in the sector. I remember a debate for the Republican nomination that occurred a long time ago between George Bush senior and Ronald Reagan, in which Ronald Reagan advanced a similar argument, although it was on a different matter, and George Bush called it levitation economics. That is what the Government are engaged in. According to them, we can take £1 billion out of the industry not only without damaging it, but benefiting it. They are saying, "We are going to take £1 billion out for your benefit; we're from the Treasury and we're here to help you"—one of the great creative lies in life.
The measure will damage the industry; the only thing to be estimated is how much damage will be caused. The demeanour and body language of the Secretary of State for Scotland was yesterday even more vigorous than usual. I would say that it was defensive, and I am pretty certain from that alone that she found out about the proposed change in Cabinet on the day of the Budget announcement. She did not confirm that in the debate, but I detected that the measure was probably as much of a surprise to her as to the industry and the rest of us.
In the Scottish Grand Committee yesterday, the Secretary of State said that she thought that the measure would minimise the impact on jobs. That is an interesting phrase, because it concedes that there will be an impact on jobs. Will the Economic Secretary tell us how minimal that "minimal" is? Are we talking about 5,000 or 10,000 jobs? Or will 500 jobs be lost? The Secretary of State said that
"we should minimise impact on our jobs".—[Official Report, Scottish Grand Committee,
In order to make that statement, she must have had some sort of figure or quantity in mind. Surely the Economic Secretary will tell us that, before the Government undertook to make such a substantial change in oil taxation, they had at least taken into account the probable impact on jobs. If they had taken that impact into account and conducted an analysis, as was suggested to me by the Paymaster General, they must have arrived at some sort of projection.
Whatever else the Economic Secretary says, she must tell us what the figure is. How minimal is it? Is it 500, 5,000, 10,000 or more? If the Treasury cannot provide such a figure, it will, by introducing a short-term and unexpected tax change that is a reversal of what was expected only last year, stand accused of putting at risk a substantial number of jobs. I take that ill. Successive Chancellors have done well out of the North sea. Some £160 billion—£32,000 a head for every man, woman and child in Scotland—has come from the North sea in the past 20 years or so and gone straight into Treasury coffers. The percentage allocated directly to Scotland was zero.
So there was a huge windfall, and it continues; Mr. Flight was right to say that many positive things were happening in the North sea. Indeed, I listed a number of them at yesterday's sitting of the Scottish Grand Committee. They are reflected in the estimates of the Chancellor, who says that he is expecting another £32 billion out of the North sea in the next six years, which is £5,000 for every man, woman and child in Scotland. When the hon. Member for Arundel and South Downs speaks about the Chancellor feather-bedding Scotland—that was the implication of his remarks as I understood them—he should reflect on such figures and on how successive Chancellors have themselves been feather-bedded by that flow of revenue from the Scottish sector of the North sea. The expected £32 billion is double the amount produced in the past six years. As the Chancellor is receiving such substantial largesse from the North sea, I think that we are entitled to ask what analysis was conducted on the jobs and investment impact of the substantial tax change in question; and to ask how specific it was and why it was not published.
Many good things are happening in the North sea, including 21 new field developments last year and the discovery in the Buzzard field of the biggest accumulation of oil found for a generation—a huge development that might generate 400 million barrels. Unfortunately, it has been confirmed that some of the DTI management for that project will be based in London, not Aberdeen, although it would have been reasonable to assume that management for a field that is located to the north-east of Aberdeen would be based there. None the less, that is a huge accumulation of oil and there are many successful developments in the North sea.
There are, however, worrying signs for the future. As I pointed out to the Scottish Grand Committee, the number of wells currently being drilled is sharply down on the number only a few years ago. In 1996, 112 exploration and appraisal wells were drilled in the waters around Scotland. Last year, 51 were drilled—a decline of more than half in the past few years.
I had a discussion yesterday with the Minister for Industry and Energy about licensing. I pointed out that for the first time ever, as far as I can remember, the DTI did not issue a press release to announce take-up of this year's levy. I speculated that the reason for that might be that out of the 289 blocks offered, only 36—12 per cent.—were applied for. I had to gain that information from the trade press, as there has been no official DTI press release. The Minister said that I was being alarmist and scaremongering, and he told the Committee—the hon. Member for Aberdeen, Central will remember this—that we should not worry too much, because in last year's round the take-up was only 10 per cent. I have since looked at the figures for the 2000–01 round, which was the 19th. There were 44 blocks in all, but 12 were applied for; my arithmetic produces a take-up rate of 27 per cent.
I know that it is becoming commonplace for Labour Ministers to manage to muddle, mislead and misunderstand, but never to take responsibility for doing so. I shall derive some entertainment in the next few days from gaining from the Minister for Industry and Energy information on how the 10 per cent. mentioned yesterday in the Committee can become 27 per cent. when one looks at the figures. Even if the level was 10 per cent., it would still be a matter of huge concern to me and anybody else who is interested in the future of the industry that only 36 blocks out of 289 were taken up in the latest licensing round. That is not an issue for prolonged exchanges and parliamentary debate, but it is a matter of concern, as it tells us what will happen in the industry not in the next five or 10 years, but in next 15, 20 and 25 years. The tragedy is that all available evidence suggests that if the blocks were drilled, they would have a substantial success rate.
Perhaps the hon. Member for Aberdeen, Central will anticipate my next remarks. I seem to remember him saying yesterday that the success rate in the North sea was pretty low. I have also looked at that rate in the past five years. The success rate in drilling was 17 per cent. in 1996, but in 2001, the rate was 25 per cent. in terms of the finding costs and the success rates of drilling and appraisal in the North sea.
The figures that I quoted in yesterday's Scottish Grand Committee debate, which were published by Professor Alec Kemp three or four years ago, show a one in 14 success rate. I accept the hon. Gentleman's point that exploration has reduced. That is partly because the industry has become much more focused. It is not prepared to take the risks that it took in the early 1990s.
I hardly think that that supports the argument that the hon. Gentleman has been pursuing in the press in the north-east of Scotland, which is that the measure is somehow a boost to the industry. If he believes, as he seems to, that the discovery rate is very poor, surely that would be a reason for him to argue against his Front Benchers. In fact, the discovery rate is high. I got these figures from Professor Alec Kemp on Monday, which postdates the hon. Gentleman's information. I shall make a copy available to him. The success rates since 1996 have been 17 per cent., 18 per cent., 17 per cent., 38 per cent., 23 per cent. and, for last year, 25 per cent. Those are good success rates. Obviously, they are not the same as they were 20 years ago—one would not expect that—but for a mature province they are excellent.
We know from the figures that the number of exploration and appraisal wells is down—there has been a sharp reduction. We know—even the Government will concede this, whatever they say about individual field projections in economics—that such aspects of oilfield financing are financed out of cashflow. Unless there is an offsetting measure in the taxation regime, the measure will result in a further decline in exploration and appraisal drilling, and hence a further decline in employment in the North sea.
The purpose of amendment No. 33—
Before the hon. Gentleman moves off the subject, I have the same figures from Professor Kemp. I want to make two points. First, I have never once said publicly that the tax change will be a boost to the North sea, so I hope that he will not continue to say that.
Secondly, the point that I was trying to make earlier, which is made forcefully by Professor Kemp in his presentation and analysis of the figures, is that the oil industry has become much more risk-averse. That has nothing to do with this tax change: it is a direct consequence of the tax changes made in 1993, which Conservative Front-Bench Members seem to have forgotten. Nowadays, most drilling is satellite drilling around existing fields, rather than the wider exploration that used to take place in the early years of the oil industry. That change has nothing at all to do with, and is unlikely to be affected by, this tax change.
On the hon. Gentleman's first point, I saw a quote from him in The Press and Journal, a notable paper in north-east Scotland, which seemed to suggest that he regarded this—[Interruption.] I shall do this for the hon. Gentleman. I dare say that he intends to speak in the debate, and I shall arrange to have the quote available by the time he does so. We can then test whether he has been misrepresented by The Press and Journal. I doubt that.
At the very least, the hon. Gentleman has given the impression that these tax changes are nothing much to worry about. Perhaps he will concede that point. He is not responding. Perhaps we are making progress, and the force of our arguments over the past few days are finally convincing him that some of his constituents may have something substantial to worry about owing to the changes made in the Budget. That may be belated, but better that one sinner repenteth by recognising that the Budget might damage employment prospects in his and my constituencies, and in those of many other hon. Members. If the hon. Gentleman accepts the force of that argument, I hope that his vote will follow his conscience. Hon. Members may think that unlikely, but it happens occasionally, although it is almost as rare as catching a Minister telling the truth. Such things may not happen often these days but are none the less welcome when they do.
I have never argued that it is not the Government's right to make a tax change or that it is impossible to make such a change and not damage activity. There is an argument that producing fields in which the capital outlay took place a considerable time ago are making substantial and healthy profits. However, if the Government are to make such a tax change, it should be accompanied by three things. First, there should be proper consultation and proper notice, as the Government have promised us in relation to other tax changes over the past few years. Secondly, we should have an analysis to show the impact on jobs and investment, so that we can all identify how many of our constituents will be at risk and whether the "minimal" figure is 500 or 5,000.
The third factor is the most crucial, and I want to put to the Minister some of the points that I put to Ministers in the Grand Committee yesterday. Even within the framework of this tax change, it is possible to introduce other changes that would boost investment—for example, through a further uplift for exploration and appraisal drilling. That used to be done through petroleum revenue tax. That was a very high tax, but it did not damage activity because there was an encouraging and substantial uplift to allow for exploration and appraisal drilling. Many companies, even when they were facing a high tax regime, decided to keep on drilling because it was tax efficient. It would be helpful to have an uplift for exploration and appraisal drilling.
The hon. Gentleman suggests that before introducing tax increases we should have analysis and consultation. Perhaps that should start within his own party, because, as he will know, the fundamentalist wing of the Scottish National party argues consistently for increased taxes on oil in an independent Scotland. How does he square that circle?
SNP policy is clear. I have articulated it many times, as has the oil spokesperson. In a past life, the hon. Gentleman was councillor in a robust local authority in Scotland, and perhaps he carries some of those battles with him into the House of Commons. SNP policy is clearly spelled out in documents, and if he cares to look at them and restate his argument, I will respond to it. Other than that, I shall leave him to his historic battles in council chambers around Scotland.
It is possible to introduce other substantial changes to try to boost investment. I mentioned exploration and appraisal drilling and a further uplift. It might be possible to do something about field financing. Because the change will affect cash flow, in future more fields will be financed by specific field financing from financial institutions. The Liberals have tabled an amendment, which they may or may not wish to press to a vote, although I am not sure whether it would achieve what they want it to achieve. There is potential to relieve interest payments on field financing that will encourage the financing of field economics.
Conservative Members talked about the abolition of royalties. It would make a great deal more sense to abolish royalties for companies that are pursuing incremental investment in these fields. In other words, instead of people getting something for nothing, they should get something for something.
This is a substantial tax change. It is impossible to take £1 billion out of an industry without having a major impact on jobs and investment. If the Treasury gave more thought to the matter, it would be possible to make consequent changes that would encourage investment, drilling and exploration in field development, thereby sustaining jobs in the North sea. In the long term, that would be a good deal for the Treasury. The oil revenue outlook is bright for the next six years, but I understand that the Chancellor believes that he will be in power for generations to come. In generations to come, the amount of oil revenue that comes from the North sea will be decided by the exploration and appraisal drilling that takes place now. So even in the Chancellor's self-interest, there is a substantial argument for making those changes and ensuring that we keep the show on the road.
Above all, the people of Scotland, having seen so much flow for so long from the Scottish sector of the North sea to the London Treasury, are entitled to ask Treasury Ministers to produce an analysis of the impact on jobs and investment of this tax change. If that is not produced, and no further changes are made to boost exploration, appraisal and field development, Treasury Ministers, led by a Chancellor who represents a Scottish constituency, will stand accused of sacrificing Scottish jobs for a smash-and-grab raid to fill Treasury coffers.
As Mr. Salmond made clear, we had a vigorous debate yesterday in the Scottish Grand Committee, and I do not intend to repeat the points made there. He has made some substantial points, and I shall try to deal with some of them.
It is important to examine the amendments tabled by the Conservatives and the SNP. They would delay the tax for a year, and I understand the reasons for that. However, I was not clear from the speech of Mr. Flight whether the amendment was a probing amendment or a serious attempt to delay the tax. The latter entails serious dangers.
It is important to focus on a point that several hon. Members will raise today and that was made yesterday in the Scottish Grand Committee—the lack of warning that the oil industry received. I deliberately raised the 1993 Budget with the hon. Member for Arundel and South Downs because there was no warning of the tax changes that the then Chancellor announced. The industry suspected that some of the larger, more substantial companies had an inkling of the changes. It was even suggested that they had actively promoted them. However, one of their effects was removing petroleum revenue tax. That had direct consequences for the reliefs that were available to the industry for exploration and appraisal. The hon. Member for Banff and Buchan made that point. It is important, because that is when the difficulties in exploration and appraisal started. The industry has been contracting its efforts on that ever since.
In 1993, it was clear that substantial parts of the oil industry had no inkling of what was about to happen. I would argue strongly that the position has changed dramatically. In 1997, the new Chancellor announced that he would review oil taxation and he set out the terms for the review. As the hon. Member for Banff and Buchan made clear, I perceive the oil industry as extremely important in my constituency. It accounts for 6 per cent. of Scottish employment, but a much higher proportion in the north-east of Scotland where most of it is based. It is an important employer in my constituency.
The industry was well warned about the review. Like many other hon. Members, I lobbied strongly against it and any change in the taxation regime. I believed that that was important for one specific reason: to have a sustained period of low oil prices. There was a major problem, and I therefore believed that it was inappropriate to review the taxation at that time.
There is a fatal flaw in the logic of that argument. It implies that the hon. Gentleman has a crystal ball that tells him that we will have a sustained period of high oil prices. We are not considering a price-sensitive profit tax.
I do not accept that. The industry was going through severe difficulties; many jobs had been shed, and it was unable to cope with the changes in the review. With many colleagues from all parties, I argued and lobbied strongly. I am clear about the reason why the Chancellor dropped the review in 1998 and decided not to press ahead. I am clear about it not only because of private discussions with the Ministers who undertook the review but because of the public statements that were made at the time. A sustained period of low oil prices was an inappropriate time to introduce any substantial tax changes to North sea oil.
I shall not bore the House with figures; the Secretary of State for Scotland read them out in the Scottish Grand Committee yesterday, but the past three years have been a period of sustained high oil prices. The industry can therefore cope with changes.
To refresh the hon. Gentleman's memory, in 1997 the Chancellor announced that he would review oil taxation. I have a copy of the press notice, which stated that a consultative document would be issued and that people would have plenty of time to comment on it. If, after consultation in 1997, it was decided not to alter the taxation, why was no consultation document issued this time to allow the hon. Gentleman's amazing lobbying powers to come back into play? Where was the consultation?
The hon. Gentleman should hear me out. The brand new Government issued a consultation document; it was a different time in the industry. I am trying to make the point that the change this year should not have come as a surprise to the oil industry. It employs some of the most sophisticated lobbying techniques of any industry in this country. All of us who have an interest in the oil industry have been subjected to that lobbying. Its lobbying of Ministers is even more intense; we know its effectiveness. The signals were there for those who chose to look. Not least were the Chancellor's declared intention in 1997, the new circumstances that have pertained for three years, and a position whereby the returns on capital in the North sea were as high as 34 per cent. That is higher than in almost any other United Kingdom industry. The change should not therefore have surprised the oil industry.
Andersen, which was part of the big six but is perhaps now part of the big five and a half, issued a post-Budget bulletin. It boasts:
"A detailed report by Andersen Petroleum Services"— which is issued to major players in the industry—
That suggests that the oil industry was well aware that the change was likely to happen in the current financial year.
If the industry has such a sophisticated and effective lobbying operation, and it knew about the change before the Budget, why did it not lobby about it before the Budget?
Sir Robert Smith asked from a sedentary position whether I admitted that the change was a surprise. Of course I admit that because, as I said earlier, I believe that the oil industry fell asleep. The people who should have been in contact should have known about the change and the industry should have been prepared.
My hon. Friend Ann McKechin made an important point. The oil analysts do not necessarily mirror the views that have been expressed by some of the oil companies. It is no surprise that the industry opposes an increase in taxation. I would not have expected any less than its campaign. However, all the focus is on the 10 per cent. increase; the Opposition happily ignore the other side of the equation.
There has been a shift in taxation focus to profits. That will be effected when royalties are abolished, which I hope will happen soon. The 100 per cent. capital relief will change significantly the way in which work is done in the North sea. It will allow companies to get a return on their invested capital much more quickly.
The hon. Member for Banff and Buchan made a point about exploration and appraisal. We are not a million miles apart on that; perhaps our interpretation of the current position differs. There is a strong argument that the oil industry is being encouraged to focus on marginal drilling and enhancing existing fields. There is not a huge amount of activity. Buzzard field is an exception; much of the industry is concentrating its resources on the assets that it already has and on using existing infrastructure to develop.
In addition, we have seen a number of new companies coming into the field—the Talismans of this world, and companies such as Kerr McGee. Kerr McGee has been there for a long time, but it is one of the companies now operating in the older fields and building up a portfolio of assets in the smaller fields—the fields that the larger companies, such as the BPs and Shells of this world, will not touch because the returns on investment are not adequate.
The profile of the North sea is changing, and this Budget will accelerate that. Smaller companies such as Talisman are welcoming it, now that they have had a chance to look at it. They are welcoming the change in focus.
No, I cannot, because every field has its own individual profile. I, and some of the analysts I have spoken to, expect to see a change in the way money is spent in the North sea. There will be a much longer lead-in time before construction starts and money is spent on the kit that is necessary. Expenditure on that kit will be concentrated in a 12-month period so that returns can be made much more quickly.
That is what the analysts tell me. They believe that one of the consequences of the Budget will be a change in the investment profile of the North sea. That is good news for the North sea, and it is certainly good news for employment.
When the 1993 Budget came into effect, there were about 19,000 people working in the offshore oil and gas industry, on the drilling rigs, the stand-by vessels, and so on. The number fell to 17,000, which is where some people expected it to remain. The figure today is nearly 25,000, which is a sign of the change in the industry.
We all cried doom about the tax changes in 1993, but many other factors are at play in North sea investment. Tax clearly plays a part. Despite all the doom and gloom merchants, the fact remains that the North sea will still be the lowest-taxed area of any oil province anywhere in the world.
I am finding it quite difficult to understand the hon. Gentleman's position. Earlier, I suggested that he had said in the papers that this was a boost for the industry. My recollection is that the hon. Gentleman denied that. I have now found the quotation that I was looking for. The Aberdeen Evening Express of
"city Labour MP Frank Doran was predicting a boost for the industry.
'It should encourage development of smaller fields, especially by smaller companies,' he forecast."
Is he saying that, on balance, this provision is a boost for the industry? Is he—like the Secretary of State for Scotland—saying that it will have minimal impact, or, like us, that it will have a substantial impact? Which of those three positions, on balance, does he adopt?
I may have to accuse the hon. Gentleman of ignoring the second part of the Budget, which provides 100 per cent. capital relief. The quote that gave relates to that relief. It is a direct quote and I accept it. I am proud to repeat it here today. That capital relief will be a boost. The overall picture for many companies in the North sea will show an improved financial position. Yes, there will be losers, and they will, generally, be those with existing installations. The effect will be spread across a fairly wide field and, on the basis of all the companies' returns over the past three years, I believe that they can well afford to pay the tax, so I make no apologies for the comments that I made.
No, I have given way quite a lot, and other Members want to speak.
In summary, the amendments are simply a spoiling tactic. It was necessary to change the taxation position. The Chancellor delayed the changes from 1997, and, in my view, the industry should have been aware that they were coming. It was not difficult to see them coming, and it should not have been difficult to plan for them. The North sea has a very adaptable and innovative industry, and it will adapt to this situation. I accept that it would have preferred the tax changes not to be made, but many companies will benefit.
The long-term future of the North sea will not be damaged by the changes; indeed, I believe that we will see increased investment, particularly in the enhanced recovery techniques in existing fields because of the full capital reliefs, and in new projects. There is every incentive to make those investments, and there is nothing to stop oil companies investing in the North sea as opposed to in any other oil regime in the world.
I want to raise with my hon. Friend the Minister an issue arising from the proposed tax changes. I have received a letter from Kerr McGee North Sea, a company based in Aberdeen. It raises an issue that no other company has raised, and I would appreciate hearing my hon. Friend's views on it. Kerr McGee suggests that one of the consequences of the tax changes will be that the supplementary charge will not be creditable against US taxes. Kerr McGee is an American company, and it is concerned about double taxation. That would be a worry, and I hope that my hon. Friend will be able to reassure me that that would not be the position.
It is not often that I find myself putting my name alongside that of the leader of the Scottish nationalists on an early-day motion. Early-day motion 1237 states:
[That this House notes that the North Sea oil and gas industry supports six per cent. of the Scottish workforce and as such is vital to the Scottish economy; recognises that Scotland is competing against other potential investments around the world, acknowledges a marked 55 per cent. decline in exploration and appraisal since 1996; expresses its concern that the Chancellor announced a 10 per cent. supplementary charge on North Sea profits without any public economic impact assessment or formal industry consultation further notes that it contradicts the Chancellor's own policy of consultation for the Government to usher in changes to policies without public consultation; and calls on the Government to delay any changes to the fiscal regime until a full economic impact assessment can be conducted which looks at the current and future likely effects of a tax increase on employment, exploration and appraisal, and utilisation of UK pipeline infrastructure related to the North Sea.]
The motion was signed by Scottish nationalists, by Conservatives north and south of the border, and by representatives of Wales and Northern Ireland. It emphasises our concern about the impact of this measure on the oil industry in Scotland. This is not, however, an issue only about the oil industry in Scotland, or industry in Scotland. It is an issue for the entire United Kingdom. This is a fundamental, strategic industry for the whole United Kingdom, and if it suffers as a result of an ill-thought-out tax change, we will all suffer.
This measure is just another example of a lack of understanding in the Budget of the financial impact of tax increases on business. We have talked a great deal about the impact of the increase in employers' national insurance contributions. This is another example of money being taken out of business. There is no way credibly to argue that removing hundreds of millions of pounds from an industry will benefit it. That does not add up. If we take money away from somebody, they will have less money, not more.
Scotland can ill afford a drop in manufacturing investment or a drop in support for manufacturing industry at this time. At Scottish questions last week, we heard that employment in manufacturing industry in Scotland was at a low level of 281,000. There is no way in which taking this money out of Scottish manufacturing will increase that figure rather than reduce it. The Treasury Minister, who is not in his seat at the moment, argued earlier that the industry was positive about the steps being taken. I pinched myself when I heard that.
I have picked up some of the feedback that the industry has given since these measures were announced in the Budget. Let us start with the UK Offshore Operators Association, the trade association of the offshore oil and gas industry:
"UKOOA is surprised and concerned at the decision to introduce a 10 per cent. supplementary charge on North Sea profits."
"fears that this could undermine investor confidence in the long-term viability of the North Sea, the very thing that the Industry has been working with Government, through PILOT, to achieve."
I could be wrong, but that does not sound to me like a ringing endorsement of the Budget's tax changes.
Lord Browne, chief executive of BP, said:
"Taken together, those steps are likely to reduce investment and to hasten the decline of production. Their direct impact will be compounded by the fact that a change made in this way reduces confidence in the stability of the regime going forward and imposes an added element of risk on all future decisions."
That does not sound like a ringing endorsement of the tax changes from the industry, either. These measures are bound to have a practical and direct consequence on business decisions taken in the North sea, in the Scottish economy and in the economy throughout the United Kingdom.
On investment, Wood Mackenzie, the acknowledged industry leaders in the financial services sector, said:
"Overall, Brown's adjustments will be a blow to new UKCS entrants who have been acquiring assets unattractive to the major companies, thereby breathing new life into the North Sea. With some more marginal fields failing to be economic when taxed at 40%, several of which would have been developed, or had their life extended, could now be mothballed."
How is that a reflection of increased investment in the North sea?
There will also be an impact on suppliers—the manufacturing businesses in Scotland that produce equipment to support the oil industry. How can the removal of hundreds of millions of pounds from the industry make it more likely that those businesses will expand rather than contract? How can it make it more likely that oil companies will buy additional equipment, rather than making cuts when it comes to investment decisions?
May I reinforce a point that the hon. Gentleman made earlier? We should bear in mind that this change will affect not just manufacturing industry in Scotland but constituencies throughout the United Kingdom. There are businesses well away from the North sea that start the supply chain. It is the money invested in the North sea that pulls in their products. Many Members who do not think the oil industry is important to them will find that it is.
I share the hon. Gentleman's concern. My constituency, Epsom and Ewell, is quite a long way from Scotland, but I view this as very much a United Kingdom issue. As the hon. Gentleman says, there are firms throughout the country—consultancies, design companies, technology companies and manufacturing organisations—whose business will inevitably decline because the industry has less money to spend, because the Treasury has taken it. There is no other way of looking at this tax change.
IHS Energy Group Consultants has produced a table showing the tax take from oil in different countries, based on certain criteria. It is 88 per cent. in Norway, 70 per cent. in Canada, 75 per cent. in Australia, 80 per cent. in Angola, 65 per cent. in Brazil and 66 per cent. in the United States. The British figure has risen from 35 per cent. to 40 per cent.
The hon. Gentleman can quote all the figures he likes, but the fact remains that if £600 million is taken from an industry it has less to spend. That is basic 2 plus 2 arithmetic. Inevitably, companies operating in the North sea will have less money to spend on people, equipment, new designs, new investment and new exploration. It stands to reason. There is no escaping that reality. Moreover, our balance of payments will be affected.
The crucial point is that the marginal tax rate, which relates to new investment, will rise to about 75 per cent. The overall impact on the industry depends on that marginal rate.
That point speaks for itself.
Exports are bound to be affected. One of the problems experienced by many of our manufacturing firms results from the weakness of the euro in particular, which has led to a substantial imbalance in the currency markets and has put our manufacturers at a significant disadvantage. Every additional step taken by Government that worsens the financial position of domestic manufacturers is likely to result in equipment being bought from overseas. The firms that are investing will decide that they can save money by going to other countries—and they will have to save money, because they will have less disposable cash following the tax increase.
The consequence of all that is inescapable: there will be a cost to jobs. There is no way in which it will not feed through to the jobs market. The chief executive of the Aberdeen and Grampian chamber of commerce, in the constituency of Mr. Doran, has said:
"There is no doubt that there will be a knock on effect on jobs. These changes will not just affect the oil majors but the countless small businesses operating in the supply chain."
That is what the chief executive said. Members should not take that from me; they should take it from her.
The measure will affect jobs and the industry, and damage the Scottish economy. It is badly thought out and badly timed, and it deserves to be opposed.
During my 19 years as a Member of Parliament, I have been around this course rather more often than I would wish.
Let me, like others, recall what happened in 1993, when tax changes were introduced without consultation. Whatever the longer-term implications, the short-term consequences were immediate and dire. Rigs were stacked, people were laid off, and there was a serious downturn in activity. Wildcat exploration has never recovered from the tax change—and that certainly has long-term implications.
As I said earlier in an intervention on Mr. Flight, we should also remember what happened in the House when those changes were proposed. My party opposed them. It was the only party to do so, although I think the Scottish nationalists supported us when we forced a Division. In the Division Lobby, the then shadow Chancellor—the current Chancellor—rushed across to ask why I was forcing a Division. I said I was standing up for jobs and investment in the Scottish oil and gas industry. I accept that it is in fact the United Kingdom oil and gas industry, but it is heavily concentrated in the north-east. The right hon. Gentleman's response was "But when I am Chancellor, I will need that money. I am not going to support you."
I must tell Mr. Doran that two wrongs do not make a right. The hon. Member for Arundel and South Downs, on his own behalf if not on that of his party, suggested that the Conservatives might have learned something from that approach. Unfortunately, so have the Labour Government, to the detriment of the industry.
I am not surprised that the Chancellor has done this. He has been yearning to do it since the day he walked into No. 10—[Laughter.] The right hon. Gentleman does, in fact, live at No. 10 Downing street. I meant the day he walked into the Treasury, although of course he is longing to walk into No. 10 through the front door.
The point is that the Chancellor has always seen the industry as a milch cow to fund whatever programmes he has in mind. He has never seen it as an industry. It is surprising and disappointing that he has not, given that he is a Scottish Member.
I am fairly certain that when the Chancellor instituted the review he intended to review the tax and increase it. Thanks to effective lobbying by the industry, and indeed by the hon. Member for Aberdeen, Central and others—and, I accept, the background of a low oil price—he was persuaded that there was no justification for such an increase, and he did not proceed.
I think those in the industry, having initially feared the worst, emerged feeling that they had engaged in worthwhile consultation, and had had a real opportunity to explain to the Chancellor the complexities of the industry and the dynamics of taxation. They felt that an understanding had been reached—that the Chancellor would not change the tax regime in future without consultation. It is pretty clear, however, that the Chancellor was shedding crocodile tears, or donning a disguise. His initial instincts remained unchanged, and in this Budget he did what he would have liked to do in his first: he grabbed the money.
It is interesting to hear Labour Members who I suspect know in their heart of hearts that what we are saying is true trying to justify the position that they have acquired. It is all very well for the hon. Member for Aberdeen, Central to say that the capital uplift will in itself enable investments to go ahead. Of course we welcome the uplift, but for investment to take place companies must have the money. If that money has been creamed off in tax, there is less to invest, and there will be a consequent impact on the number of investments that take place with or without the uplift. I think the industry is conceding that across the board.
The most damaging effect, however, is the shattering of confidence. The industry felt that it had an understanding with the Government—that the Government recognised that it operated against a background of long-term horizons. It has to make calculations above oil prices that fluctuate a great deal. One thing it looks for from the Government is a degree of stability in the tax regime. I agree with Mr. Salmond that that does not mean never changing the regime. None of us is suggesting that. I have certainly not opposed every tax change proposed for the North sea; but I have vigorously opposed changes that have been applied without consultation and full assessment, and which have been damaging. There have been a number of such changes, and this change is in that category.
Yesterday, the Financial Secretary put on a fairly typical bravura performance when he appeared before the Scottish Grand Committee. Nevertheless, he let slip some pretty serious errors. He compared the performance of the Scottish economy to that of the Japanese economy, which was a particularly unfortunate comparison. He also accused those of us who expressed genuine concerns on behalf of the industry, businesses and our constituents of special pleading on behalf of one sector of the economy. That one sector of the economy accounts for about 20 per cent. of all fixed investment in the United Kingdom. Collectively, it spends £8 billion a year. It is a pretty important sector that spawns Britain's biggest company. We heard one or two full-blooded red socialist speeches from Labour Back Benchers—perhaps we will hear some more—about how we should squeeze these big capitalist corporations until the pips squeak. Doing so might warm the red blood in their veins, but they should recognise that, if we squeeze those corporations too hard, the investment will not flow, jobs will dry up and we will undermine the industry's long-term future. We need a clear strategy in terms of what we want out of the North sea in the next 10, 15 or 20 years. Those short-term changes would completely destroy the credibility of such a strategy.
The hon. Gentleman's party is well known for arguing that revenue raised from taxes should be invested in public services. He opposes these proposals, but how else does he suggest that tax revenue be raised to fund the public services that his party is glad to tell everybody they support?
That is a perfectly fair intervention, but I should point out that we are debating the Government's proposals. We had our own alternative Budget, and we set out our platform for how to raise the money. We were particularly in favour of increasing tax on very high earners—a proposal that old Labour also used to be keen on. We would have imposed a 50 per cent. tax on earnings over £100,000, which would have yielded substantially more than changes in oil tax.
The best way to raise taxes is a matter of judgment, and in our view this tax change is damaging to jobs, to investment, and to the long-term health of the economy. We are entitled to argue that as a perfectly reasonable debating point.
The hon. Gentleman is making a characteristically sensible speech. Given the naive anti-capitalist prejudices that still permeate the thinking of all too many Labour Members, would the hon. Gentleman care to comment on the enormous capital requirements of UK continental shelf projects, and the very long time scales over which returns on capital are achieved?
The hon. Gentleman knows perfectly well—this is the point of his question—that we are talking about field lives of 20 or 30 years, and sudden fluctuations that have to be averaged out over time. The industry has to make very fine judgments on whether to invest at all. In introducing further uncertainty into a business that is already uncertain, the danger is that financial planners, in particular, might conclude that is better to invest where the uncertainties are less. It is all very well talking about taxation regimes in, say, Angola, but what concerns the industry is cash flow, the likelihood of finding a field, and the cost and scale of production. When it considers those factors as a package, there are many more attractive prospects than the North sea. We must woo the industry and keep it here.
The issue is one of great concern. Although the hon. Member for Aberdeen, Central and I are in broad agreement, he is missing one point. It is fine to promote enhanced recovery, and to encourage companies to squeeze as much as possible out of the existing infrastructure, and I accept—with the qualifications that I have already identified—that the capital uplift makes a contribution in that regard. However, it is also important that the industry be encouraged to make wildcat wells in the interests of serendipity. Such exploration has declined to an alarming extent.
We support the amendment tabled by Conservative Members, and happily support the amendment in the name of the hon. Member for Banff and Buchan. It is not a wrecking amendment but a cooling-off amendment. It points out that the Government have introduced changes that have not been fully evaluated, and which could prove deeply damaging. It invites them to delay those changes, and to discuss with the industry not necessarily abandoning them, but whether other measures could be introduced on a case-by-case basis to ensure that the damage that we fear can be avoided. Such measures might involve a combination of capital uplifts to encourage more wildcat exploration wells, or even "serendipity" appraisal wells. People forget that many holes are drilled that prove dry. Looking for and producing oil is a very uncertain science. Such measures could also include additional help, in the form of innovative techniques, for companies that want to develop technology.
We do not expect the Government to abandon their proposals, although we can vote on that issue as well. The amendments invite the Government to wait for a year, consult in the light of their proposals, and before implementing them, establish on a field-by-field basis whether offsets can be found to minimise, reduce or preferably eliminate the potentially damaging effects. That seems to us a constructive engagement. I suggest to the Economic Secretary that that would also genuinely restore some of the confidence that has been lost. When I made that point before, she shook her head, but the Treasury needs to recognise that it has seriously damaged a relationship built over many years, in which the industry and the Government had a degree of confidence that they understood each other. The industry now feels that the Government do not understand, and that they are not prepared to accept what the industry regards not as special pleading, but as a genuine argument about how best to retain enough money to maintain investment, thereby maintaining the long-term future in the North sea that we want.
Professor Alec Kemp has said that, if these tax changes are implemented, the Government would yield an extra £3.7 billion from the North sea, even if the oil price fell to $15. In fact, I think he is wrong, because he is working on a flat-line presumption. Most people in the industry say that, if the oil price fell to $15 under such a regime, activity would drop, and so would revenue.
That brings me back to another somewhat ill-judged intervention by the Financial Secretary during yesterday's Scottish Grand Committee. He alluded to the whisky industry, and boasted that, for the fifth Budget in a row, there has been no increase in spirit duty. He suggested that that is a fine achievement, and given that I have several distilleries in my constituency, I have some sympathy for that view. However, what the Financial Secretary did not say was that the last time a Chancellor—the right hon. and learned Friend Mr. Clarke—increased such duty, he got less revenue the following year, because the increase had a negative impact.
We need an impact study, and the hon. Member for Banff and Buchan might also want such an assessment to point out the possible range of revenue implications for the Treasury. The forecast returns might be rather less than anticipated, because of the downward effect on activity.
Although the Economic Secretary is perfectly capable of making a robust defence of the Government's position, without qualification, I urge her not to do so. Instead, I urge her to accept the genuine worries that the tax could have on long-term planning, development and investment in the North sea. I urge her to listen to those of us who have monitored the industry for many years—in my case, I have been close to the industry for 30 years. On every occasion that I have specifically lobbied against changes that I perceive to be damaging, I have been proved right and the Government of the day have been proved wrong. Therefore, the Government might have to act the wrong way round: to take a decision and then consult is sometimes better than taking a decision and then ignoring the evidence.
In today's debate, it is essential that we have regard to the context of the current state of the oil and gas industry, both nationally and internationally. It has not been a focus of the debate, but oil and gas are finite and valuable resources and they should be viewed as national resources for the benefit of a nation's citizens rather than just an industrial commodity. The UK is no different in seeking to maximise the benefit of those resources while at the same time encouraging investment and growth.
As my hon. Friend Mr. Harris pointed out, the UK tax regime is favourable for the industry. For example, Norway, which operates adjoining fields in the North sea, has a tax take-up return of 88 per cent., so the increase to 40 per cent in the UK is more than reasonable. It should also be borne in mind that oil and gas producers have benefited in the Government's recent Budgets from a reduction in corporation tax, low interest rates and the introduction two years ago of roll-over relief. We must view this proposal in the general context of taxation in the past few years.
Much of our oil exploitation is carried out by some of the largest multinational companies in the world. BP alone produces 20 per cent. of our oil and gas. Given the huge wealth of those multinationals—bigger than the gross domestic product of many nations—it is perfectly fair and equitable for their tax burden to include a contribution to the health of the citizens whose natural resources they exploit to considerable profit.
Does the hon. Lady realise that less than 15 per cent. of BP's profits come from the North sea and that this tax will only apply to that area? As she said, it is a major international company that can choose to invest elsewhere if it does not wish to pay the tax.
The hon. Gentleman shows precisely why the tax increase will not have a substantial impact on BP's profitability or investment policy, as has been argued this afternoon. BP's decisions will have more to do with the return that it gets from its investments, the existing investments in the field and the security of supply, which contrasts with some other parts of the globe—as the hon. Gentleman is well aware.
As I have said, it is reasonable for tax policy to require oil and gas companies to contribute to the health of citizens. Let us not forget that with the worldwide increase in oil prices in recent years the profit levels from North sea exploitation have remained very high. Currently the UK continental shelf makes significantly higher profits than the rest of UK industry, with a pre-tax rate of return of 34.3 per cent. last year against a UK average of 12.2 per cent. Perhaps that is one of the reasons why in the last year BP has sought to justify an increase in the basic salary of its chief executive, Lord Browne, of 58 per cent., taking his salary to a staggering £3 million a year. Added to that, he has been awarded further benefits that bring his package up to £6.2 million. No sooner had Lord Browne secured his increase than the new executive chairman of Shell won an 82 per cent. pay rise, although that only took his salary to a very modest £1.59 million.
I am sure that Lord Browne's national insurance contributions will rise, because he is paid above the threshold.
The reaction of the oil companies is all too predictable. Their financial advisers were preparing detailed reports last autumn about the effect of this tax, so it is naive to say that they did not predict it. They were aware as far back as 1998 that the Government's review of the North sea fiscal scheme concluded that aspects were unsatisfactory and that one of the two main reforms identified was a supplementary charge on North sea profits. Given the rapid increase in profits in the past three years, the use of such an option should not have come as a total shock. The oil industry is cyclical in nature and is currently enjoying a boom time that gives support to the argument for higher taxation—indeed, one which was advanced by Mr. Salmond in earlier years. For the major companies such as BP and Shell, the UK only accounts for a small amount of their global trade—as Malcolm Bruce pointed out—and the lack of reaction in the stock market to the Budget announcements is, I believe, a good signal of how little the changes will affect those companies' profitability.
At the same time the Government are well aware of the need to preserve investment and employment. The PILOT initiative has been working successfully to maximise the potential of what are now mature fields in the industry—especially in fallow fields—and to retain our skills base. More than 70 licence holders are currently active on the UK continental shelf, which—according to the industry's own economic report in 2001—is a strong indication that despite its maturity it still contains a wide range of oil and gas companies. In fact, in today's edition of the Daily Record, the Shell company is advertising for yet more technicians in the North sea oil industry. The tax changes do not seem to be affecting that company's continued investment in the sector.
Encouraging new companies is likely to be the way forward in the new market emerging in the mature fields. That is why I welcome the Government's decision to provide a 100 per cent. first-year allowance for capital expenditure.
The new tax regime will certainly have both winners and losers. New investors will benefit the most, and in some cases their tax burden will be less. The relative newcomer Venture Productions was quoted in The Scotsman of
Oil taxation specialist Martin Kirkham is a KPMG senior manager. He has stated:
"The new companies are going to be the winners because they will get a higher rate of relief than they would have previously. People who are sitting on their assets and who are producing and not exploring or developing are likely to be the losers."
That is exactly the investment structure that should be followed in the industry.
The Government's proposals are sensible and well balanced. They will give us the necessary income to invest in our public services. At the same time, they will encourage investment in this important industrial sector.
I am pleased to be called to speak in the debate. I want to analyse the Government's proposal, and to speak specifically to the amendments. I have some sympathy with them, as they offer the opportunity to pause to reflect on the matter.
I have been interested by the Economic Secretary's body language in the debate. From time to time she has smiled, or shown that she does not agree with what is being said, but I do not sense that she feels an obligation to the Committee to justify and explain the Government's policy. I know how these things are done, and I suspect that the Oil Taxation Office will have provided a raft of arguments for her to use to justify her position. I do not expect her to admit that there may be merit in the argument of those who oppose the proposal.
However, it is time for a more forensic examination of the Government's use of language. The Red Book states that the changes will ensure
"a regime that raises a fair share of revenue and encourages long-term investment".
Will the Economic Secretary say what the word "fair" means? Will she say, in some detail, why the present regime is unfair, and why there is a need to raise more revenue from a sector that the Government believe has been successful? Will other industries in effect be hit by the windfall tax that the supplementary charge could be interpreted to be? That is the wider question, and it is why the amendments would either reduce or remove the supplementary charge. Others will be waiting in the wings to know the Government's exact intentions.
I am intrigued too by what the Red Book reveals about the research and development tax credit. The Government are putting forward the thesis that much economic activity can be stimulated by an expenditure of £400 million, but the Red Book seems to claim that removing £450 million in year two of the proposed regime will have no effect at all. The two arguments cannot be right.
We need to look carefully at the justification sustaining those Labour Members who have spoken against the amendments. A few years ago, the Government were willing not to alter the current North sea fiscal regime, but the Red Book now says that that regime
"fails to strike the right balance between promoting investment and taking a fair share of revenue".
On Second Reading I asked the Chief Secretary to the Treasury if he would be kind enough to provide an economic justification for the Government's position. I asked him if he would place in the Library of the House some form of business model that would provide a justification for the phrase "fair share". In its own way, the evidence that Mr. Flight kindly provided makes a case for the amendments. The covering letter talks about the need for the North sea fiscal regime to strike the right balance between stimulating investment and getting a fair return. I would like to know what "fair" means in this context. Let us look at the example. The word that shines forth from the Treasury's analysis is "hypothetical".
The Chief Secretary did not respond in the way that I had hoped. I thought that he would produce an analysis showing the overall investment position, the factors that would be taken into account by the oil industry in determining its investment and a review of the taxation regime. I thought that there would be some attempt to provide us with a business model of the North sea gas and oilfields to show that the amount that the Government want to take out by these tax measures would not have any impact on investment intentions.
In that context, I was intrigued by the remarks of Ann McKechin, most of which were predicated on an analysis built on the attitudes of BP and Shell. However, many of the representations that have been made to me have been from smaller oil companies. Many of them finance their investment opportunities in places such as the North sea oilfield and off the west coast of the United Kingdom, where my interest lies, by debt financing. They operate a very different financial regime; they are not the big oil barons of this world and this measure will have an impact on them because of the way in which they conduct their business.
Coming back to the Chief Secretary's example, the Government's justification, as published to date, is one hypothetical, arithmetical net present value calculation on one field using one set of assumptions. The real world of oil finance varies considerably. I want the Economic Secretary to describe in detail what the real world impact is rather than giving a hypothetical project justification. Although the Treasury may draw some comfort from the fact that it shows in net present value terms that under its proposed regime for that field, which invests £100 million, there is a gain in return, no sensitivity analysis has been made by making a marginal change to some of the variables. No analysis has been made of existing fields.
One of the problems with the measure is that it will be introduced at a given moment in time. We have no information from the Treasury about the rates of return for fields that are currently in production but which will, under clause 90, be affected on their present earnings by the arrival of the supplement. The amendment to reduce or postpone its introduction would enable us to look at that aspect.
The right hon. Gentleman is making an important point. Does he acknowledge that some companies made investments a few years ago for which they did not get an uplift because the forecast oil price was not met because the price collapsed? Only now are they getting the returns that they anticipated, just to find that their payback has been further cut by these proposed changes.
The hon. Gentleman makes the point that this is a variable business. I am aware that when any business is threatened by an increase in tax, it cries foul. Businesses can sometimes bear additional tax charges just as the citizen has to make provision for additional tax charges because nobody can predict what the Treasury's demands will be year on year. The oil business deals with long-term investments, and as Members on both sides of the Committee have said, people in the oil industry wanted a degree of stability in planning their forward investment strategy. However, they have now been hit by an element of instability.
I received a copy of a letter, which was sent to the Chancellor by the Non-Operators Forum on
"The taxation changes announced on 17th April give us a great deal of concern, particularly since we had been working extremely hard with officials and ministers in the Department of Trade and Industry towards improving the commercial environment in the North Sea to encourage further investment."
The letter also mentioned the PILOT forum—as have other Members who have spoken in the debate—which is also designed to improve extraction rates and new exploration in the North sea. The 17 companies in the Non-Operators Forum are at the lower end of the scale and they stressed the impact of the proposal, especially as it came on
The Government justify their position by arguing that new investment can be funded from cash flow, but there are two flaws in that argument. The first is that not all new investment will be so profitable in year one that all the 100 per cent. allowance can be used up. The Treasury's example assumed that a field is fully profitable in year one, but that might not be the case, so as profits build up in years two, three and four, that must adversely affect the net present value calculation. There is a flaw in the Treasury's argument.
There is also a problem for fields that are funded by borrowings. Currently, the clause would not permit the costs of extra borrowing to be offset against the new 10 per cent. charge. That is another failure in the argument. Faced with those problems the smaller oil companies—those with existing fields—would be harshly penalised. It might be true—as the hon. Member for Glasgow, Maryhill said—that a large, multinational company could, in theory, absorb the effects of the charges on some of their activities. However, as has been pointed out, they do not currently exploit the North sea and the offshore continental shelf for the very reasons given by Mr. Doran.
The debate has been strongly focused on oil, but I should also like to hear the Economic Secretary's justification for the proposals as regards gas. Gas prices are considerably lower than they have been for some time, and it is likely that there will be significant effects on gas exploration.
We need to reiterate the questions about the costs of the proposals. The amendments correctly call for the reappraisal, justification or reduction of the costs. Professor Kemp's work has been much quoted, so I feel justified in referring to it. He has carried out some sensitivity analysis of the effects of the measure. Even assuming an oil price of $15 a barrel, he shows that, cumulatively, until 2010, there would be a yield of £3.7 billion from the North sea. A price of $25—perhaps rather high on the scale—would mean that the yield was £9.6 billion. A price of $20 would give an amount of £6.5 billion. Those are serious amounts.
The Chancellor's analysis in the Red Book covers only the next three financial years. It seems to me that the Treasury must have decided that the measure would not bite this year and would have only a small effect next year. However, given that it will really start to bite only in year three and that the oil industry looks to the long term, we have completely dodged an analysis of the full-scale effect of the proposal on the long-term investment opportunities of the industry—[Interruption.] The Economic Secretary shakes her head. I hope that she can offer a justifiable argument that such considerations would not have an impact, given the fact that oil fields are developed over 10, 15 or 20 years.
May I draw the right hon. Gentleman's attention away from the Economic Secretary's body language for a second? Is he aware that the Wood Mackenzie analysis shows that, after the fifth year, the full-year effect, once it has worked through at the current oil price, will be more than £1 billion a year?
The hon. Gentleman, who speaks with great authority and knowledge on this subject, makes a very important additional point.
One very interesting thing is the number of different measures that can be used to determine rates of return. I should like to ask the Economic Secretary why the Chief Secretary used a net present value calculation based on a 10 per cent. discount rate when he wrote to me and other hon. Members, whereas the Paymaster General chose an altogether different calculation based on an IHS Energy Group analysis using a 12.5 per cent discount rate to justify her position on Second Reading.
Interestingly, in justifying taxation regimes for different oilfields, the Inland Revenue uses the very same analysis as that used by the Paymaster General on Second Reading. However, if I understand the analysis correctly, the Inland Revenue advised the United Kingdom Offshore Operators Association that the marginal tax rate in the United Kingdom would be 73.75 per cent. under the current proposals, but that, in fact, for places such as the Gulf of Mexico and Angola deep-water fields the respective rate would be at 60 per cent. and 71 per cent. Those figures are relevant because they illustrate the fact that we are talking about an international and dynamic oil investment regime, which the proposals could well disrupt in the long term.
I also support the amendments that argue that this measure be postponed because of certain accounting impacts. Again, I should be grateful to the Economic Secretary if she would comment on those effects. Obviously, the first amount of the current tax charge would affect profitability, as has been said, on the 10 per cent. supplementary rate, but I am interested to know whether the Treasury has taken into account the balance sheet effect of the fact that deferred taxes will have to be revalued. That will obviously affect the profitability and future position of many companies.
I should be interested to know whether the Economic Secretary thinks that those accounting implications will affect the ability of those companies to raise funds for their future investment plans. The Government do not seem to have fully considered the effect of those implications. It is easy to cry foul when any extra increase is imposed, but, in the light of the arguments adduced so far, it is up to the Treasury meticulously to argue a case for imposing extra taxation on the industry against the background of the critical appraisal that has been made so far in the debate.
There can be no doubt that the key issue is what effect these oil and gas tax changes, especially the one proposed in clause 90, will have on investment. Investment is all about the future; we cannot have such a good future if we invest less. I, too, should like to know what assessment of the tax changes' impact on investment leads the Treasury to conclude that the changes represent the right balance between the nation's taking the proper share of its asset, which we would want to do, and securing and stimulating investment for the future.
What assumptions has the Treasury made about the impact on investment in the figures that it has produced so far? For example, we have all seen the Red Book figures for the net tax take from the industry to the public purse in the forthcoming years. Do those figures assume the same level of investment as that assumed before the tax changes were proposed, or do they assume a reduced level of investment? Has the Treasury discounted the figures in the light of that? That important issue needs to be clarified.
Many hon. Members have referred to the work carried out by Professor Kemp. The interesting aspect of Professor Kemp's work is that, while the Red Book looks only at the years up to 2006, Professor Kemp looks beyond that. He comes out with some staggering figures of up to £1 billion a year. Altogether, between now and 2010, Professor Kemp says that the net tax take from the industry will be £6 billion. Does the Treasury really believe that we can take £6 billion out of the industry and avoid having an adverse effect on it? I find that difficult to believe, as there will be less money available to invest. That must have an impact on where multinational companies direct their investments around the world. Whatever we think of oil companies, they do direct money around the world, and we must face that real-world situation and act accordingly.
All the assumptions made by the Opposition, which my hon. Friend may also be making, are that, somehow, North sea money is ring-fenced. In fact, profits from the North sea do not stay in the North sea—they go to Dallas, Houston, San Francisco or wherever the company's headquarters are. Exactly the same factor applies to investment decisions: they are made on the basis of the attractiveness of the regime and the likely return. We must not operate on the basis that £6 billion is coming out of the industry, because it is not. There will be an impact on the attractiveness of the area, but not to the degree suggested by my hon. Friend.
I thank my hon. Friend. I was not making that assumption—quite the reverse. I was saying that a managing director of the part of an international company that resides in this country must argue, whether in Houston or elsewhere in the world, as to what slice of the global investment will come to this country each year. I have a letter from a managing director of an international company with a portfolio here—I shall not name the individual—who says, when making that case at the company's worldwide headquarters, that
"It will be harder for us to attract capital investment into the UK".
The fact that the money is not ring-fenced is part of the difficulty.
Another point is the signal that is sent out. As the oil price cannot be predicted, it is necessary for as many of the other factors as possible to be stable. If we have a tax regime that can change around rapidly, that will be taken into account by an industry with very long-term investment.
It is not possible to ring-fence investment in an international market, but investment can be locked in if consequential tax changes are made. So far in this debate, exploration, appraisal and additional uplift, financing charges for field development, more tax relief and more uplift for incremental development have all been mentioned. All those measures should be included in the Treasury's analysis—which we do not have—of the impact of possible changes. Those suggestions do not even seem to have been considered.
I agree in the sense that the key to the future is the amount of exploration and development that can be stimulated at any one time. If that dries up, the future looks bleak. It is therefore important to send out the signals that will encourage more of that activity, not less.
To return to the Red Book figures, they are lower than those that Professor Kemp predicts for the immediate years up to 2006. I therefore wonder, again, whether the Treasury has done some discounting. Has it estimated what can safely be taken out of the industry without damaging investment? If so, as we reach those years, if the tax revenue is greater than the Red Book predicts, will it be prepared to adjust that tax, for example, by reconsidering whether financing charges should be made deductible on a 10 per cent. basis? At the moment, the proposal is that they should not. I would like an answer to that.
Other impact assessments should be considered. What will be the impact on the 20th licensing round? What will be the impact on the PILOT targets? Those targets are Government policy, because they have been agreed between the Government and the industry. However, I have seen nothing about them. What will be the impact on the PILOT organisation itself? I have a letter from someone who writes:
"I have expended a great deal of time and effort in developing measures to stimulate greater exploration activity on the UKCS . . . under PILOT. I, like others, now find it very difficult to see where this initiative goes next."
That will be the reaction of a number of people.
What will be the impact on the amount of indigenous energy resources that are recovered in future years? Are we accelerating to the point at which we shall have to start importing oil and gas? Have we considered the effect on the balance of payments if that day is hastened forward?
I wish to make a point that is relevant to amendments Nos. 2 and 22. One of the perceived unfairnesses with the changes relates to people who have made recent investments as a result of the collaborative PILOT atmosphere in which the Government encouraged people to invest in fields in which they might not otherwise have invested. Those people will not now receive the benefit of the 100 per cent. capital allowances, but they will pay the tax from
I also feel for those companies that have shown commitment to the UK by having a large percentage of their portfolios here. They will be hit much harder than the companies that my hon. Friend Mr. Doran mentioned, which have large portfolios around the world. We must be careful that we do not punish those who have shown the greatest commitment to the country by investing in the UK continental shelf.
Does my hon. Friend believe that a pre-tax profit of 34.3 per cent. in 2001 was an inadequate return on the investment that companies made in the North sea? If you do not, what level do you believe would be an adequate return?
I accept what my hon. Friend says. That is a generous return. However, when the oil price is $10 a barrel, the return is nowhere near that figure. It is difficult to link the tax to the oil price, because one cannot predict the oil price. I am arguing that we should ensure that we get the full investment. The longer we keep the industry going, the longer we shall receive the benefits.
I want to say a little about royalties. A tax change in terms of the supplementary charge will come in straight away and the Government have made it clear that they want to abolish the royalty. However, there will be a consultation period and the worry is that there could be up to a year's gap between the two things taking place. The industry has told me that it believes that the consultation could be carried out in one month, so when does the Treasury intend to begin the consultation? Will it commit to a short consultation period and can we have a firm date as soon as possible for the abolition of the royalty? Will the Treasury consider whether it is possible to carry out the consultation in one month, because it is important, if we are to attract new investment, that people know soon when the royalty will be abolished? It strikes me that no one will invest until they know when the royalty is to be abolished. If we are trying to attract investment, we do not want to wait too long, so it is important to have those commitments on royalty.
Hon. Members have made international comparisons and highlighted different tax regimes around the world, but tax rates cannot be considered in isolation. What matters to investors is the overall expected return, which takes into account the cost of finding oil and gas and the chances of finding them. That cost varies around the world. A fair assessment of how attractive we are in the international investment game takes into account development cost and the field size, which gives an idea of how many years and how many millions of barrels will be produced for the initial investment. That is related to the field's maturity. When we add up those considerations, it is clear that the North sea is not especially attractive in an international context. We must be careful that we do not make it more unattractive.
We must also ensure that we compare like with like. Some of the figures that have been bandied around are for standard developments. We can only compare deep-water developments with deep-water developments. Perhaps the easiest comparison to make is with Norway, because we are both dipping in the same area. Norway has similar unit costs of $8 or so a barrel and a similar tax regime: Norway's is 78 per cent.; ours is increasing to a marginal rate of about 74 per cent. The difference is that the fields in the Norwegian sector are 100 million-barrel fields, whereas the fields that we are developing are 25 million to 30 million-barrel fields. It is clearly less attractive to invest in smaller fields.
Although Norway will face the same challenge as us, its fields are not in the same state of maturity and it is doing fine out of larger fields. When those start to run out and it is considering developing smaller fields, it will face the same problems as us.
Like Mr. Salmond, many of my arguments and concerns were voiced on Second Reading, in the Budget debate and in the Scottish Grand Committee—[Interruption.] The problem is that the Financial Secretary made his statement in the Grand Committee and then left. If he left this debate before the hon. Member for Banff and Buchan finished his speech, he will have missed the important point that came out of yesterday's Grand Committee, in which one member of the Cabinet recognised that there will be an impact on jobs. Given Cabinet collective responsibility, one would assume that the Government hold the same general analysis. If there is to be an impact on jobs, it behoves the Government to say what that might be.
The right hon. Lady did not have to. She said:
"My assessment of the jobs impact is that if we link the supplemental tax on profits to the first-year allowances and the abolition of royalties, we should minimise impact on our jobs."—[Official Report, Scottish Grand Committee,
I suppose that, arguably, she might have been saying that the abolition of royalties and the first-year allowances are designed to make more job losses, which would support the hon. Gentleman's way of looking at the issue. Clearly, however, she recognised that the tax on its own will have a major impact on jobs and that the Government hope to limit the damage by introducing other measures.
The Secretary of State was clearly saying that there will be a negative impact as a result of the measures. The question is the scale of that impact; she tried to play it down, but some of us are worried that it could be significant.
We are not; we are reflecting our constituents' concerns. Some of them have already experienced such an impact, when the tax changes alluded to by my hon. Friend Malcolm Bruce were introduced. One of them came to my surgery in 1997, after the Chancellor threatened to do something similar, and said that he did not want what happened to him, his business and all the people he employed the first time round to be repeated under the present Government. Some of us have been concerned ever since; our constituents who have worked in the industry for a long time, understand how it works and know what has happened, want us to impress their anxieties on the Committee. We are doing so not because we are doom merchants but because we are success merchants—we want to promote the wider benefits of the industry.
When the Financial Secretary dismissed the industry as just one sector—[Interruption.] The Financial Secretary may care to remember what he said.
The Financial Secretary dismissed those of us who expressed concern about the oil industry for promoting just one sector of industry. However, the oil industry is not only a major sector for employment and investment but is of strategic importance, as it gives this country the luxury of our own energy supply on our doorstep. The Minister for Industry and Energy is worried that we will lose that supply in the long run—hence the report by the performance and innovation unit on energy supplies.
The Treasury and the Department of Trade and Industry need to be more joined up, which was the point of the PILOT initiative and the taskforce. Those who accuse us of being doom merchants may not have heard the praise that we have heaped on the Government in the past few years for the taskforce's achievements. The Financial Secretary did not attend previous sittings of the Scottish Grand Committees and did not hear that praise—[Interruption.] No, there were benefits, as we have seen, in signing up to the commitments in PILOT; the taskforce had a positive outcome in bringing together the Treasury, the DTI and the industry. Unfortunately, the Treasury has chosen not to learn the lessons of that, and we are now facing a surprise consequence for the industry.
Mr. Blizzard made an extremely important point that comparisons must not be hypothetical. Mr. Jack made an equally important point that Treasury analysis has been based on hypothetical analysis. People who make investment decisions base them not on hypotheses but on real possibilities. Comparisons between fields must take account of the fact that our fields are smaller now, and we need a regime that recognises that. There are larger fields elsewhere, where returns and the risk-reward ratio are better, so the country must maintain attractiveness for the sake of the tax regime.
The amendments on the timing of the tax are useful because they make the point, as others have said, that the Government's proposals are out of phase. The royalties are supposed to be the upside of the change, but we do not know when they will be sorted out. It would be far better to postpone the tax. Indeed, if analysis proves that it will have a negative impact, the Government should not merely postpone it; they should withdraw it. There should be a chance to sort out royalties and introduce proposals on them as soon as possible. An impact assessment should be made; we need far more substantial Treasury data in the Library than the two sides of A4 produced so far.
The Government are committed to consultation. Mr. Doran said that the industry was asleep, but communication is a two-way process. If the Government wanted genuine consultation, they should have woken the industry up first, thus negating the element of surprise that causes long-term damage. No one knows what the Government's intentions are, whether the Chancellor is just trying it on this year, and what the tax regime will be in the future.
I repeat what was said in the Grand Committee, as it is relevant to the assessment of the impact of the tax. Labour Members, trying to straddle a compromise between recognising the concerns that will be evident in their constituencies, and their desire not to upset their colleagues on the Front Bench too much—because the Chancellor has made his statement and as Back Benchers they do not want to cross him—come up with the strange argument that the price is high at the moment, so it is okay to impose the tax now.
However, there is no undertaking that the tax will go away if the price drops. The tax, according to the Chancellor, is there to stay. It is in his Red Book for several years to come. Some in the industry have been privately getting the message that when the price falls, they can lobby the Government for a lower tax regime. That is no way to make a planning horizon for investment. It provides no sense of stability to tell the industry, "Come back and lobby us for a tax cut and we might see what we can do." In order to have the confidence to invest, people need to know in advance what the tax regime will be.
We need a return to such stability. The amendments provide the chance for a breathing space.
Is not the problem the fact that, in every other sector of the economy, the Chancellor has been telling us how important it is to provide a good business tax regime and why he has cut corporation tax? If that is the right way to promote investment in the economy, why is one sector singled out and told that it is to be boosted by being taxed harder than any other? The logic is contradictory, to say the least.
That is a worrying sign for other businesses, and there is a knock-on effect for other business decisions. If this is the way that the Government treat the successful oil industry, how will they treat the others?
Is the hon. Gentleman aware that yesterday, a Standing Committee on statutory instruments passed the Offshore Chemicals Regulations 2002, which will add a burden of a further £1 million a year for the oil industry simply to apply for permits under the new regulations?
I thank the hon. Gentleman for bringing that to the attention of the House. It is not only such burdens of regulation, but the relationship with the regulator, the access charges into the network and other charges that make the UK an expensive place to operate. There is also the worry about gas balance, and so on. It is a dangerous time for the Treasury to change the tax system, when other regulatory impacts put additional concerns on to the industry.
It is important to emphasise the long-term nature of the industry. Yes, in one year there may be a higher rate of return, but in another year it may make a loss. The price of oil goes up and down. In the early 1980s, the price of oil was about $70 a barrel at present-day values. It is way down on that now, in real terms, and it could go down again. It is up to the Government in Saudi Arabia what price the world pays for oil.
The hon. Gentleman is surely off on a tangent. The tax is profit-related, so if profits go down, the tax goes down. That answers exactly the point that he is making.
But the tax still takes more money out than before it was put on, so it makes the UK less attractive to investors. At least there is agreement on both sides of the House that taking more money out of the industry means that that makes it less attractive.
I am explaining to those who pick out of thin air one statistic to justify the tax, that the industry looks at the return on its investment over the lifetime of the field. The bad years are paid for by the good years. If the tax comes on by surprise in the good years, investors will not take the risk of doing anything for the bad years. That damages the long-term profitability and attractiveness of the North sea and the rate of return for future generations. It fails to get every last drop of gas and oil out of the North sea, which would maximise our security of supply, the Treasury's take in the long term, and the benefits for future generations from an asset on our own doorstep.
I have detected scepticism in some parts of the Committee, on the Opposition Benches and the Lib Dem Benches, from the Scottish National party spokesman and even on my own side, about the change in the tax regime for North sea oil. I have also heard genuine concerns about the effect on jobs and investment in the North sea. I shall deal with those concerns head on and in some detail.
The reform before us is a good reform. It is a principled reform. It is a reform for the long term which promotes investment in marginal fields and, in doing so, raises substantial revenue for the Exchequer—revenue that will help put the NHS back on a sustainable long-term financial footing, as a service that will remain free at the point of need. The Opposition refuse to commit themselves to our tax proposals and to a comprehensive national health service that is free at the point of use. In doing so, they are breaking a consensus that has existed for the past 50 years. I note that they are arguing that we should delay the introduction of the 10 per cent. supplementary charge on profits, but not implementation of the other important and very generous part of the package: full and immediate relief for North sea capital spending as it is incurred and the abolition of royalties, subject to consultation on timing.
My hon. Friend will be aware that the Liberals tabled an amendment—it was discussed yesterday—that would have increased income tax rates from 22 per cent. to 23 per cent, but are asking today for a reduction in tax on big business. Three years ago, the Scottish National party was also calling for a 1p tax increase, but today it is calling for a cut in tax on big business. Will she comment on what that suggests about the priorities of those two parties?
Thank you, Mr. Gale. I shall not pursue the issue, but my hon. Friend makes a pertinent point: the Opposition want to cut taxes and slash investment, while we are committed to putting the needs of our people first.
The oil and gas industry has suggested that the measures will have a damaging impact on investment. Perhaps that is not so surprising—no industry likes paying more tax—but it is clear that oil companies are generating excess profits, and ours is the only major oil-exporting economy that does not have a special regime to reflect that.
I am very pleased that the right hon. Gentleman brings me to the point of defining an excess profit. Since the tax changes made by the Conservative Government in 1993 and the abolition of petroleum revenue tax, the rate of return in the oil industry has risen from 10.5 per cent. to 34 per cent. last year. By comparison, other non-financial industries made an average rate of return of 11 per cent. last year. That difference is not due only to temporarily high oil prices. In fact, the North sea's rate of return was higher than that of other industries in every one of the past nine years. That was the case even in 1998, when oil prices fell sharply.
Back in 1993, we warned of a genuine risk that the oil taxation regime would fail in its objectives if North sea production held up better than was expected or oil prices rose. Our warnings have been borne out. We have been closely monitoring the position since 1998. It is abundantly clear that the regime is not securing a fair deal for the nation from this national resource, and the changes introduced in the Bill will remedy that for the future. At the same time, we fully recognise that the UK tax regime needs to be competitive. We have listened to industry, and the package that we are introducing, including the generous 100 per cent. relief for capital expenditure, focuses on investment. Companies that invest in the North sea will receive full and immediate relief against any tax liability, while those which do not do so will rightly pay a higher share of corporation tax, together with a supplementary charge.
In future, therefore, the Government will take a much greater share of the risk of investing in the future of the North sea. It is right that, as a consequence, the nation should also take a higher share of the profits of that investment.
Would I be right in thinking that, under the tax changes, somebody using an existing and long-standing gas infrastructure such as the FLAGS—far-north liquids and associated gas system—line to St. Fergus will be charged tax at 70 per cent. of tariff income, somebody building a new pipeline to Bacton will be taxed at 40 per cent. in corporation tax plus the additional 10 per cent., but somebody taking a gas line from the same fields to Zeebrugge and transporting through the interconnector to Bacton will be taxed at 30 per cent.? Why is the Economic Secretary trying to encourage people with regard to Zeebrugge and Bacton, but not St. Fergus?
I shall deal in detail with our analysis of the situation in due course. The typical Government tax take as a proportion of pre-tax net present value for fields that have been developed after 1993 is currently only 35 per cent., but will rise to 40 per cent. after the changes have been made. That is much lower than in most other countries, and the UK tax regime will therefore remain highly competitive. I shall turn to the detail of our analysis in due course, as I promised. On that basis, and on that of the industry's own figures, the UK regime is more favourable than that of Canada or the Gulf of Mexico.
The oil industry sometimes emphasises the attractiveness of other international locations for investments, and it is absolutely right that it should try to convince the Government of the merits of as low as possible a taxation regime in this country. However, in a recent article in the Financial Times, Lee Raymond, chairman and chief executive of Exxon Mobil, said:
"I have often said that the best thing that Exxon Mobil could have done after it drilled its first well in the Gulf was to never drill another again."
He was talking about Mexico. The tax regime is one, but only one, factor in decision making. Other important elements are political stability, proximity to markets and the Government's overall approach.
Mr. Salmond, among others, questioned how the changes can raise significant sums from the oil industry, yet have no impact on investment and jobs. I intend to deal with that point in some detail. The changes have been carefully designed. They have two elements—the supplementary charge and the 100 per cent. investment allowance. The investment allowance means, even with the supplementary charge, that companies investing in new projects will have higher post-tax rates of return than under previous rules. In net present value terms, the benefit of the 100 per cent. allowance outweighs the additional tax for marginal projects. It is the effect on marginal projects that determines the effect on investment, and they will be encouraged by the change. Of course, the increased tax reduces the net present value of more profitable fields, as it should, but those are the fields that are likely to go ahead in any case. Overall, the impact on investment and jobs should be positive rather than, as the hon. Member for Banff and Buchan suggested, negative.
In that case, can the Economic Secretary tell us why the Secretary of State for Scotland tried to minimise the impact in the Scottish Grand Committee yesterday? Why was the effect minimal and negative yesterday, according to a Cabinet Minister, but positive, according to the Economic Secretary, today?
I have been explaining how carefully these tax measures have been designed to promote investment in North sea oil. I want to quote some slightly more objective analysts who have considered the question. Tony Wood, the Royal Bank of Scotland's senior economist, says:
"Although significant, these changes are unlikely to adversely affect the operating environment for companies within the UK. Our view is that there is quite a strong demand to acquire assets in the UK, so we don't think it will hit activity because it will not hit costs but be sliced off profits."
I understand that he was looking at the overall long-term effect of our tax changes. If the right hon. Gentleman wants to write to me to make a specific point, I will of course consider it.
Indeva Energy Consultants, which has been working on designing fiscal regimes for oil taxation in other jurisdictions, states that
"the UK fiscal regime remains attractive in global terms".
My hon. Friend has covered the supplementary charge and the 100 per cent. capital allowances. On royalty, can I press her to give a commitment to undertake the consultation on royalty abolition straight away and over a short period, so that it is possible to secure the abolition of royalty during the passage of the Bill rather than having to wait for a future Finance Bill?
I understand my hon. Friend's anxiety for prompt consultation, but I do not want to speculate about its results or the timing of the royalty's abolition. However, we are committed to prompt progress, and the Department of Trade and Industry has said that it will effect that. We want to get the changes and their timing right.
I want to consider the analysis that the Treasury has undertaken in making the tax changes. I want to put on record the analysis and the criteria that we have used in designing them. A full analysis was made of reform's effect on investment. We examined the impact on all investment, exploration and appraisal, development projects that had already commenced, probable and possible developments on new fields that had already been discovered, and incremental developments of fields already in production. Let me consider each in turn.
On exploration and appraisal, companies are known to use the expected monetary value approach to exploration investment decisions. That is sound economic rationale. Using that method, we found that the rate of return on future exploration is likely to be improved by the tax change. That is because, in most cases, saving exploration and appraisal costs that arise from the higher rate of relief outweighs the loss of the expected development net present value from subsequent finds, thanks to the new 100 per cent. relief.
Our research on development projects that have already commenced, with the costs already sunk, suggests that it is unlikely that any project will become uneconomic, and we do not expect any loss of investment.
I thought that I would place on the record our exact conduct of the analysis and the criteria that we used. I hope that my hon. Friend will be satisfied by what I am about to say.
I must make some progress on setting out the analysis. If, at the end of my comments, the right hon. Gentleman still wishes to make a point, I shall take his intervention.
We conducted an analytical exercise on new fields, using empirical data. We used companies' projections of output capital and operating expenditure. Of course, we use the data on real fields. We examined 108 new fields that will potentially commence development in the next five years. That information is commercially sensitive and we cannot put it in the public domain. Clearly, we have the advantage of being able to use the data.
We applied all the various investment criteria that companies use to establish whether projects will proceed. We used the long-term oil and gas prices that companies typically use: $17 to $20 per barrel of oil. We did not use recent oil prices. We also worked on the basis of 18p per therm for gas. We applied a safety check to ascertain that a lower hurdle rate of return would be achieved if oil prices were low.
We cross-checked that the quantity of new field investment that the industry planned according to its estimates was consistent with the required thresholds that we used. For projects to proceed, all the test thresholds had to be met. As an additional safeguard, we modelled more and less stringent tests and took the average effect on investment that the different assumptions produced.
We also considered incremental investment. It is generally expected that the spread of internal rate of return and net present value of incremental projects are broadly similar to those of new fields. We were therefore able to interpolate from the new field data.
The work concluded that the overall impact on North sea investment and jobs was likely to be positive. I hope that hon. Members will accept that we undertook the work thoroughly and responsibly, using real data and projects to which commentators have not been privy.
I thank the Economic Secretary for her kindness. Given all her work, which is genuinely interesting and impressive, why cannot the data and the methodology be put into the public domain on an anonymised basis? She prayed in aid her summary of it, and we should therefore be able to examine the calculations on an anonymised basis.
I have been advised that that is not possible for reasons of commercial confidentiality. I have set out in the fullest possible way the analysis that we have conducted.
I want to turn to some of the other points raised in today's debate.
Given the time, I must make some progress. I have been very generous in giving way so far.
Mr. Flight asked why the measure applied to gas as well as to oil. Gas, like oil, is a scarce national resource that often generates high rates of return. The special tax regime applied to the North sea has always applied to gas production as well as to oil production, and there is no reason to change that.
Hon. Members have pointed out that gas prices currently appear to be low. I would respond that there is a wide variety of gas prices, depending on when and where the gas is delivered. The profits to be made from gas will obviously depend on the average price over the year. The current market price for a year's supply of gas is 20p per therm. In April 1999, it was 11p per therm, so I do not accept the suggestion that gas prices are particularly low at the moment.
The hon. Member for Arundel and South Downs argued that the changes amounted, in some respects, to retrospective taxation. I do not accept that. No profits arising before
My hon. Friend Mr. Blizzard said, in his interesting and thoughtful contribution, that the Government had compared tax takes with those of other countries without taking it into account that field sizes are much smaller and costs much higher in the United Kingdom than elsewhere. I would like to put on record our response to that point. To take an example, let us suppose that, instead of comparing similar-sized fields, we consider a smaller field—say, a 25 million-barrel oilfield in the United Kingdom, with unit costs 50 per cent. higher than average. In such a field, the tax take will not rise under the proposed changes; it will fall from 45 per cent. to 40 per cent. in present value terms. Helping projects in a weaker economic position such as those—there are many in the United Kingdom—is the precise point of the package that we are putting forward today.
My hon. Friend Mr. Doran raised the concern that had been pointed out to him about whether the supplementary charge would be creditable under double taxation treaties. We believe that the supplementary charge is substantially similar to corporation tax, and that it should be creditable under most double taxation agreements. Ultimately, of course, that will be a matter for our treaty partners. I would be interested to hear from the industry if this matter is of particular concern. We shall certainly be able to take the issue up with the United States authorities if that proves necessary.
The hon. Member for Arundel and South Downs asked whether losses could be offset. The supplementary charge applies from
The right hon. Member for Fylde made a point about new North sea entrants having no corporation tax against which to use the new allowance. The first-year allowances are a tax relief, and a feature of any relief is that it can be used to offset tax only when there is a taxable capacity. These allowances, as I have just explained, will not be lost if a company has insufficient taxable profit to use the allowance against; they can be carried forward and used against taxable profits made in later years.
The right hon. Gentleman also mentioned the impact on companies' balance sheets and the impact of the deferred tax reserve. I accept that there will be some impact on companies' balance sheets, but because these are one-off provisions, they should be interpreted as such by the stock market. In fact, we have seen only a modest effect on share prices, and I would suggest that this is not going to be a substantial problem.
Sir Robert Smith, among others, questioned whether the Government had considered future energy supply issues. Of course, our objective is to ensure that the full economic potential of the North sea is derived for the nation. The investment incentives provided by the new first-year allowance will ensure that. These measures are also particularly helpful in promoting the continuing life of mature fields.
For example, a typical investment project to extend production in an older field that is paying petroleum revenue tax yielding a pre-tax rate of return of 20 per cent. has until now offered the investor a rate of only about 15 per cent. after tax. In future, thanks to the first-year tax allowance, the rate of return will be 20 per cent. after tax, the same as the pre-tax rate. If in future we decide to abolish royalty, that will have an additional impact on investment. We are committed to abolition, subject to consultation on the timing.
Members on both sides of the Committee mentioned the important and constructive work done by PILOT with the industry. That work is indeed very helpful. Much of it has focused on encouraging investment, and it has informed our approach to tax reform. We share the industry's desire to maximise the economic benefit to the United Kingdom of its oil and gas reserves, and provide incentives for the industry. We have learned from the work with PILOT that none of the tax changes will undermine that co-operation. We look forward to the furthering of PILOT's valuable Government-industry initiatives.
Members on both sides of the Committee also mentioned consultation. In 1998, during the last Parliament, the Government proposed to consult on the choice between two options for tax reform—the extension of petroleum revenue tax and a supplementary charge on profits. That made sense at the time, but in due course, in an environment of low oil prices, it no longer made sense to proceed with any change. Four years on, the proposal to reintroduce PRT is unrealistic. It would require companies to rebuild records on income and expenditure in all fields that had come onstream since 1993. Given that oil companies may have changed hands, that would be administratively very difficult—a bureaucratic nightmare.
As far as I know, no one in the industry has called for the reintroduction of PRT. We have opted for a simple, streamlined tax reform that promotes investment over the long term. We will of course continue to work with and listen to the industry as we implement the changes, and, as I have said, we are consulting on the timing of the abolition of royalty.
No speaker so far has given a single example of an economic project that would be prevented from proceeding as a result of these changes. As I explained, that is because the upfront costs of projects to investors will be significantly reduced by the new tax relief, and marginal projects will be encouraged.
The new tax regime is right. It is firmly based on sound analysis. There is no point in delaying its introduction. I urge the Committee to reject the amendments.
I shall not detain the Committee for long. We have had an excellent debate, in which Members on both sides—particularly those who know the industry—have presented their arguments extremely well.
I congratulate the Economic Secretary on responding to a number of points in some detail, although I do not think she fully answered the basic question about why the tax measures proposed in their net form would, allegedly, encourage investment rather than—as the industry claims—reducing it. It is ridiculous to argue that an extra £6 billion in tax will be good for, and welcomed by, an industry, and will enable it to increase its activities.
As for the fundamental issue of consultation, if the Government have such a good case to sell—unfortunately the Economic Secretary could not make it available to Members, for various reasons—there is all the more justification for our amendment. The Government should sit down with the industry, and persuade it that what is being done is reasonable and will not damage it.
The point about PILOT sums it up. I think the Economic Secretary deliberately misunderstood what I said. People were enticed by PILOT into committing themselves to new fields—twice as many as in the previous year—on the understanding that the tax regime would remain stable. However, no sooner have they committed than a third increase in tax is imposed on the fruits of those investments. Of course they feel that the provision is retroactive; they feel that the Government have deliberately set them up. It is not surprising, therefore, that a strong feeling of ill will exists.
The amendment would ensure the future of the industry and we want to press it to a vote. If the Government's case is correct, it is right that the industry should be able to consult properly.
The next amendment due for discussion, Mr. Gale, was to be amendment No. 3. However, given the amount of time that the Committee spent on the previous group of amendments, we do not want to put amendment No. 3 to the vote. It was designed as an alternative to the previous amendment, and would have halved the rate of the tax. It would have provided an opportunity to establish the correctness of the Opposition's argument that there is a risk to investment, especially given the outlook for oil prices and the nature of the UK industry. As we will have a chance to vote on other amendments, and on whether the clause should stand part of the Bill, I shall not move amendment No. 3.
The problem dealt with by the amendment was alluded to earlier in the debate.
The first matter on which we wish to probe the Economic Secretary is why the Government argue that the costs of financing developments should be excluded from the calculation. I am sure that the Minister is aware that the presumption that all oilfield developments are financed as equity is a long way from the truth. Many companies, especially smaller ones, finance their development by borrowing. That is a legitimate part of the cost of developing the fields, and if it is not allowed it will substantially alter the profile, the rate of return and even the viability of the developments. The Economic Secretary must explain why that should be the case.
Let me anticipate a possible answer. The hon. Lady may say that, using such pieces of information, companies could present a case that amounts to a spurious tax relief. The counter argument is that there is also a real cost. The relationship between the oil and gas industry and the Government is quite intimate. Despite the problems that have been alluded to in recent debates and the breakdown of confidence and trust, the reality is that relatively small companies deal daily with the Treasury and the Department of Trade and Industry. It seems perfectly within the ability and capacity of the Government and the industry to work out a formula that achieves a fair and proper balance. Indeed, the Economic Secretary has been keen to address the question of fairness.
When the corporation tax rate is running at 30 per cent., financing charges are deductible—but not, apparently, against the extra 10 per cent. of a windfall tax. It has been put to us that in some cases the debt finance could amount to 70 per cent. of the project cost. Clearly, it is a significant factor, and simply to discount it could lead to considerable difficulties and destroy the viability of some projects.
It has been suggested that some of the smaller companies are having difficulties highlighting the problem that the Government's proposals present, because if they make a public indication of the difficulties imposed it could have an adverse effect on their share price or, if they are not floated, on the financing that they wish to secure. Therefore, to some extent, they feel unable to speak out as forcefully as they might wish.
The point about United States companies has already been made. If this is not allowable, they could effectively be caught twice as it may not be a legitimate charge or tax. However, the Economic Secretary has indicated that the Government intend to address that issue.
The reality is that for the very companies and projects that the Government claim they wish to encourage, the costs are real and are financed from external sources. I suggest that if the Government feel uncomfortable about opening up total allowance, they could agree on a notional allowance. They could accept that borrowing and debt finance are legitimate and negotiate a deal on which both parties could agree. The Minister will acknowledge that that is not abnormal practice; it has been done in many other sectors.
I hope that the Minister will accept that the amendment, which may not be perfectly phrased, is designed to address what is perceived by companies in the industry as a real problem. If it is not addressed, it will seriously undermine the very objective that the Government claim to be pursuing—namely, to encourage small companies to develop some of the more innovative fields that they do not have the equity finance internally to develop but can develop in partnership with financial companies. I hope that the Economic Secretary will accept that this is a serious and real issue to which the industry needs answers.
I want to emphasise the point made by Malcolm Bruce. The presence of small companies working in the North sea province is most important; they are the key to making the most of the mature stage of its development.
As we know, finance charges form a major part of the exposure of small companies. My hon. Friend the Economic Secretary made it clear that much study has been devoted to examining individual fields. I hope that we can identify the companies and modify the measure to address their problems. We do not want to put off such companies; we want to attract them.
We heard earlier that smaller, new entrant companies would not necessarily be able to benefit fully from the 100 per cent. capital allowances, as they have no tax against which to offset them. We should consider the matter seriously and try to find a way of allowing financing costs to be offset against the supplementary charge for the smaller companies, which hold the key to the future investment and success in the North sea that we all want.
Several ideas were put to the Economic Secretary earlier. She did not deal with them at the time, but the debate on these amendments will give her the opportunity to do so.
It was argued that some relief for financing purposes would encourage development. The Economic Secretary has already heard the figures for exploration and appraisal drilling in the North sea, which are a matter of huge concern. The figures went down by more than 50 per cent. over the past five years, despite the fact that the success rate—25 per cent.—is good. That must be a substantial argument for some additional uplift for exploration and appraisal drilling. I am sure that the hon. Lady will agree that the future of the province in 10 to 20 years will depend on the exploration or appraisal drilling that is being carried out—or not—at present.
It was also argued that there should be some additional benefit for incremental investments. Those are positive ideas to modify the impact of the tax changes.
The hon. Lady told us that the tax changes would have a positive impact. I am sure that she wants to listen to these points, as she will soon be replying to them. She cited a mysterious analysis, which has been produced but cannot be published. In fact, it is so secret that it was not available to the Secretary of State for Scotland when she spoke yesterday about minimising the impact of the changes—she thought that they would have a negative effect.
Why is the analysis so secret that it remains in the Treasury? Have its benefits been shared with other Ministers? If so, would not the correct way forward be to publish the analysis, hold genuine consultations and debate, and then decide what to do about the taxation regime? The Government say that they have taken that course in respect of other taxation changes, so as this matter is of such importance they should adopt it in this case.
If the Economic Secretary is correct and the tax changes are so positive, the Government would attract massive support for their position during that debate. However, if we are correct in suspecting that £1 billion a year cannot be taken from the North sea industry to any beneficial effect, the hon. Lady will have a great deal to worry about in that debate.
I have a question for the hon. Lady about the financing costs. Am I right to believe that, under current taxation proposals, if an oil company chooses to transport gas through the FLAGS system to St. Fergus, it will be taxed at 70 per cent.; if it goes to Bacton, it will be taxed at 40 per cent.; and if it goes to Zeebrugge—which, as she knows, is in the Netherlands—it will be taxed at 30 per cent? Is that the current situation? If so, can she justify it? How will it benefit the Scottish economy, the English economy and the economy of the Netherlands?
Are the Government trying to encourage companies to bypass Scotland—even to bypass Bacton—to go to Zeebrugge and then transport their gas through the interconnector? It is a simple point; the hon. Lady can either confirm or refute it. If she confirms it, no doubt she will be able to give us an explanation.
We have had an interesting debate on a matter of enormous importance to many of our constituents. The Economic Secretary will forgive me when I say that I was not persuaded by a secret analysis that cannot be published or discussed, but that somehow shows that the industry will benefit from taking so much money out of it.
If it is true that the tax changes will have a positive impact, why were they withdrawn when the oil price was low? Surely if the changes were positive, the Economic Secretary should have introduced them when the oil price was low in order to boost the industry. The oil industry knows and workers in the industry know that she is engaged in levitation economics. It is simply impossible to take out so much without people suffering as a result, and we should have a debate and consultation to find out how many jobs will be lost.
Mr. Salmond makes the valid point that the two sides of A4 placed in the Library do not provide hon. Members with a substantial reassurance of the foundation of the Treasury's analysis. There must be some greater analysis that can be placed in the Library without breaching confidentiality.
The analysis presented in the table that we have betrays an assumption based on equity financing. Has any analysis been conducted based on debt financing? We understand that that there can be up to 70 per cent. debt financing, especially for smaller companies.
On ensuring that the right debts are attributed to the right income so that the Treasury gets its share, the briefing that we have all received from the industry suggests that the Oil Taxation Office already has sufficient powers to audit allowable charges and various methods to protect against excessive debt, which are outlined in the OTO ring-fence corporation tax manual. Consequently, the industry does not believe that there is any reason to disallow this measure.
A point was made earlier about Kerr McGee, which has also written to me, and I have dealt with the company before. The argument seems to be that, because of the specific measure that we seek to delete under the amendment, the United States authorities do not recognise this tax as being allowable for double taxation relief. Although the Economic Secretary will approach the Americans, I am sure that the United States will not necessarily change its tax regime, so it might be more sensible to try to accommodate financing costs in handling and assessing this tax. I understand that France may similarly treat the tax as not being allowable for double taxation relief because of the financing charges.
I should like the Economic Secretary to address those points, especially the concern that we all feel about the need for far greater openness and clarity so that the Treasury's analysis is put in the public domain to reassure our constituents, because we are concerned about their jobs and future investment.
I do not think that, in response to some of these debates, I could have been more open and transparent than I have been this evening. I should like to concentrate on the amendments on financing costs, which we have not had an opportunity to discuss so far tonight, rather than to reopen previous debates, which I covered in substantial detail earlier this evening. However, perhaps I should start by answering the point about pipelines made by Mr. Salmond, who speaks for the Scottish National party.
I freely admit that different pipelines have different tax treatments. That is due to changes made by the previous Conservative Government. I admit that the FLAGS pipeline is taxed at a higher rate, but full tax relief is available on the cost of its construction—also at a higher rate. The comparisons are not simple; these are complicated reforms.
I do not want to reopen previous debates; I have clearly made the case for the changes before us tonight. I should like to turn to the amendment on financing costs and consider whether such costs should be taken into account in calculating the profits base for the supplementary charge. If we were to take account of those costs, it would allow companies to manipulate their borrowing to minimise the effect of the charge. [Interruption.] There is some scepticism among those on the Liberal Democrat Front Bench, but I put it to Sir Robert Smith and other hon. Members that oil companies have access to sophisticated tax planning advice.
One need not be a tax planner to realise that financing costs have to be disallowed if the supplementary charge is to work effectively; otherwise it would clearly be in companies' interests to arrange their affairs so that all their North sea activities were funded by borrowing, for which they could claim relief against a 40 per cent. tax rate, while their other activities—taxed at 30 per cent.—were funded by capital. I shall expand on those comments as I progress.
If we allowed financing costs to reduce the profits subject to the supplementary charge we would have to increase the rate of the charge to ensure that the nation received a fair share of the economic rent derived from the North sea. I cannot say what that increased rate might be; it would depend on how far individual companies were able or chose to arrange their affairs to reduce the impact of a 10 per cent. rate. Clearly, however, raising the rate would penalise those companies without the scope to manipulate their borrowings. A complete disallowance of financing costs for the supplementary charge is much fairer.
I understand the points made by Malcolm Bruce, my hon. Friend Mr. Blizzard and the hon. Member for Banff and Buchan that debt relief for financing costs might be more of a burden for some smaller companies. An effective measure is needed, however, to prevent erosion of the tax base. It would not be feasible for us to try to differentiate one type of company from another. We are trying to simplify the oil taxation regime.
I shall continue my argument for a moment.
Companies will still be able to offset 75 per cent. of their North sea borrowing against tax, and with the 100 per cent. tax relief for capital expenditure, the package should still encourage investment by small and large companies.
Some people who are concerned about this issue have suggested alternatives. One is to try to apportion all the financing costs of a group between North sea and non-North sea activities rather than deny costs altogether. There would not be a case, however, to apportion those costs purely for the supplementary charge and not for corporation tax generally. It has not been suggested to me or my colleagues that companies would want such a rule to apportion financing costs.
One aspect that I raised was that, in order for the supplementary charge, should it go ahead, to count for double taxation relief, it would be necessary to allow financing costs. It would be a disaster if it were not allowable, particularly for United States companies. As a practical matter, therefore, the Government may be forced to use a regime that permits financing costs to be deductible in some way.
I said earlier in the debate that we listened to the industry and whether it had concerns about the double taxation treaty and the interpretation of it by our treaty partners. We remain committed to listening to those concerns. If there are real issues, we shall take them up with the United States authorities, or, if more general concerns are expressed, we shall deal with it in other ways. I would not want to rule that out altogether. We have opted, however, for simplicity and for a measure that will avoid tax evasion. What we have done is fair and simple. I have not yet heard a real call from the industry for an alternative. If I do, however, I shall listen to it. We must introduce an effective and simple regime for the future, which will generate investment, have a positive impact on jobs and raise a fair share of revenue for the future.
Will the Economic Secretary make sure that her colleagues who are no longer in the Chamber, but who were earlier praying in aid the fact that the changes would benefit smaller companies the most, read what she has said? As financing charges are being excluded, the smaller companies, which rely on borrowing, will suffer more under this part of the clause.
I do not accept that. Although I accept that small companies may have a particular issue with financing costs, I do not accept that the Budget is in any way less good for small companies than it is for larger companies. The hon. Gentleman must also take into account all the other changes for small companies that we have introduced in the Budget, including the reduction in the corporation tax rate.
Overall, small companies will not be particularly disadvantaged by the change. However, I have been open with the Committee and said that there may be issues involved. If the industry has concerns, we will listen to them. We are committed to working with the industry to get the supplementary charge recognised under double taxation treaties. If there are concerns, we will act on them if possible.
I think that the Economic Secretary has now conceded the point on differential taxation for pipelines. She may blame the Tories for the outrageous 70 per cent. tax on FLAGS at St. Fergus, but the differential between Bacton and Zeebrugge is created by this Budget. Now that it has been drawn to her attention, will she, in the interests of fairness and creating a level playing field, undertake to do something about not just the Bacton-Zeebrugge differential but the tax on tariff income going through the FLAGS line at St. Fergus?
I have dealt in detail with the specific point that the hon. Gentleman raises. If he wishes to raise other issues with me, I can deal with them in writing.
I think that I have made the point fairly. We need to raise a fair share of revenue from North sea oil and introduce a system of taxation that is simple, transparent and will promote investment and jobs over the longer term.
I am grateful that the Economic Secretary has acknowledged that there is a problem that she is willing to address. However, I am disappointed by the way in which she dismisses a real and serious concern that will materially affect small companies.
I make no apology for using the UKOOA brief in this context, but we are told that 70 per cent. of a project's development funding could come from debt finance. To make no allowance for that would clearly have a devastating effect on some projects. Indeed, it would make them completely non-viable or, at least, non-viable for those companies that have to finance the projects in that way. In those circumstances, it is strange that the Economic Secretary regards her proposals as fair. They are fair for the large companies that can finance the projects from equity finance.
I accept the Economic Secretary's remarks that there is a worry that companies will change their method of financing to qualify for the tax relief. However, if the Oil Taxation Office has the power—on the basis of the detailed analysis that she gave in the previous debate, the Treasury claims to understand how oilfield financing operates—it should be possible to reach a conclusion that would allow at least some of the costs to be calculated.
Although I welcome the fact that the Economic Secretary has acknowledged that there might be a problem and that, if the industry can persuade her, the Government might adjust the scheme, the fact that she is not minded to do so means that the amendment is necessary. I ask the Committee to support it.
Question accordingly negatived.
Amendment proposed: No. 33, page 65, line 17, at end add—
'(11) This section shall come into force on such day as the Treasury may by order made by statutory instrument appoint, but no such order shall be made until an economic impact assessment has been made of the effect of the changes on activity and employment in the oil industry in the North Sea.'.—[Mr. Salmond.]
Question put, That the amendment be made:—
The Committee divided: Ayes 155, Noes 272.
Question accordingly negatived.
The Temporary Chairman, being of the opinion that the principle of the clause and any matters arising thereon had been adequately discussed in the course of debate on the amendments proposed thereto, forthwith put the Question, pursuant to Standing Order No. 68, That the clause stand part of the Bill:—
The Committee divided: Ayes 265, Noes 154.