The Economy

Part of Council Tax Rebate – in the House of Commons at 6:40 pm on 31st March 2009.

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Photo of Robert Smith Robert Smith Shadow Deputy Leader of the House of Commons, Opposition Whip (Commons) 6:40 pm, 31st March 2009

I pay tribute to Mrs. McGuire for highlighting the importance of small businesses to the economies of our constituencies, and I echo what she said about their frustration that the banks do not always seem to understand what schemes are in place and how they can be best delivered. There is also the general frustration felt by our constituents when they see the big—global—sums going into the banks and then how little seems to be coming out the other end. The banks must be encouraged to recognise the importance of small businesses to our economy.

I want to raise a specific constituency issue that is of major importance to the UK economy too: the future of the oil and gas industry, which has been a great success story for the UK economy. The Treasury has a vital role to play, and now, in the run-up to the Budget, the timing could not be better to reinforce to the Treasury how important the industry is to the country. I should declare some of my interests as registered in the Register of Members' Interests. The most relevant of them are shareholdings in Shell, an oil and gas company, and a visit to the Offshore Northern Seas conference and exhibition in Stavanger, funded by oil and gas companies.

Let me first, however, address some of the general issues that have come up in the debate. I echo the view of my hon. Friend Dr. Cable that the economic stimulus of the VAT cut was untargeted. Many Members on both sides of the House have argued that a more targeted approach in other areas of the economy might have led to a more direct benefit. On behalf of another industry in the constituency, the distilling industry, I should add the concern that although the VAT decrease is temporary, the spirits increases will be permanent, and that sends a signal to overseas markets that such discrimination against these products can take place. In the run-up to the Budget, I urge the Government to look again at the approach to alcohol taxes and VAT.

We as a country should celebrate the oil and gas industry as a major achievement, and welcome its successes. A third of the Government's corporation tax comes from the industry, and there are 500,000 jobs in it. It has also been a major part of providing a secure energy supply to this country, and has helped to contribute to our cut in CO2 emissions through the use of a lot of gas in energy generation in this country. We need to build on that strength. Oil and gas is not a lame-duck industry; it faces major challenges at present, but it has a strong future.

Oil and gas is one of those industries where, even for those who do not believe that the Government and industry should be too closely involved with each other, it is inevitable that there will be a major involvement, because the oil and gas under our seas belong to the nation, but we do not have the skills and wherewithal to get them out of the ground without using private industry. Therefore, there will inevitably be a strong relationship between Government and industry if we are to achieve the maximum benefit for the UK economy.

Some of the challenges that the industry is facing are background challenges, of which the Treasury was, I think, beginning to be aware even before the current credit crisis. The maturity of the North sea province is one of the challenges: a lot of the infrastructure is quite old, and the finds are much smaller and therefore more expensive to produce, and they rely on the existing platforms and pipelines still being in place to make it economic to produce them. Therefore, there is an increase in costs in a globally competitive market, and the challenge to take forward investment when faced with much higher input costs.

Then, of course, the oil price dropped and the credit crisis hit. Some of the big companies—ExxonMobil, Shell, BP—have their own cash flow and are not necessarily directly hit by the credit crisis, but the maturity of the UK market makes the credit crisis more serious, because many of the innovations and new explorations in the North sea are coming from smaller companies that do not have the cash flow to make the investment.

It is also a matter of great concern that the two major banks that were providing a lot of the liquidity in the North sea were the Royal Bank of Scotland and HBOS. With their tightening up of lending, there is a credit problem, and the drying up of the equity markets also causes a credit problem. In the short term, therefore, the industry faces a challenge. What is needed is not a bail-out, but investment incentives and a better sharing of the risks and rewards between the Government and industry.

The Budget offers an opportunity to provide that. The Government had already been engaged in considerable dialogue with the industry on tax incentives to invest even before this crisis hit, and they have come up with a proposal for a value allowance to encourage greater investment in new fields—smaller fields and high temperature, high pressure fields, and fields west of Shetland where there is more of a challenge and even greater investment costs. The Government must make sure that when they introduce that allowance in the Budget it is of a serious enough scale actually to encourage new investment.

The Government also need to extend the scope of what they are doing to existing infrastructure. Without the existing pipelines, processing plants and platforms still being in place, the new fields into which they hope to attract investment will not be economic, so they need to extend the tax encouragement to incremental developments on those existing platforms in order to make those platforms worth keeping in place for longer and keep the infrastructure available for the new investment.

Another issue the Treasury needs to look at is the cash-flow crisis, because it can play a part where the banks are failing. Exploration gets tax relief. For existing players with existing income, that tax relief comes up front, but for new entrants the Government could bring forward the tax relief, pay that up front, and then reclaim it over the life of the field as production comes in. If they can trigger a greater interest west of Shetland, it will be a real morale boost to see a new province opening up with new finds.

The industry itself has an important role to play, and any Government working with the industry need to emphasise to the industry that it must learn the lessons of previous downturns and keep the skills as far as possible, and not make people redundant. So far, there have been strong signs that it has learned that lesson, but we need to reinforce it. People do not come back to an industry in the upturn if they have been turned away in the downturn. The industry also needs to reinforce its own code of conduct in the supply chain by making sure that those who are cash-rich at present settle their bills quickly, because if the supply chain is not kept operating efficiently and effectively during the downturn, it will not be there again for the upturn.

The reward for the Government if they get the incentives right and get us through the crisis is more oil and gas coming out of the ground in the future, more income to the Treasury in tax returns, and—this is the great jewel in the crown for the UK economy that has come out of the North sea—the exports, such as the skills we now send around the world and that bring money back into this country, to the benefit of our balance of payments. That is especially the case in sub-sea engineering; a great lead has been shown by British expertise in the North sea, from bases in Aberdeen and the rest of the country, and that is now being applied internationally and globally.

While manufacturing is being challenged in many parts of the economy, the North sea oil and gas industry is providing major investment in, and stimulus to, manufacturing. Many constituents in the north-east of Scotland still do not realise how substantial a manufacturing base we have on the back of that industry.

That industry has other contributions to make to the future of UK energy in terms of the low-carbon economy, because the skills learned there can be applied to carbon sequestration, so the Government need to make sure that the incentives for taking forward carbon sequestration are well developed. The expertise learned in the sub-sea engineering sector, which I have mentioned, cuts across into the engineering needed for deep-sea offshore wind developments and for tidal and marine developments for the future.

This is not a lame-duck industry; it is a major part of the UK economy and it is facing a challenge at the moment. With the right handling by the Treasury and the right announcements in the Budget, that challenge can take us forward to a very exciting future where we can see and get rewards—where both the Government and the industry get more. Any oil and gas left in the ground will pay no tax and provide no jobs, and will not contribute in any way to our security of energy supply, so the real message to the Chancellor is to get it right in the Budget. We are at a crossroads; we have bounced back from previous downturns because there was a less mature province and there were still big finds to tempt people back in, but if we do not handle this downturn right, we will not get the benefit of the recovery because we will not have the infrastructure in place to secure that benefit. I urge the Chancellor to make a dramatic move in the Budget to see us through this crisis to a great future—

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