Blended oil

Question proposed, That the clause stand part of the Bill.

Clause 84 and schedule 39 refer to blended oil. For the benefit of newcomers to the oil debate, I shall explain briefly the three basic elements in the North sea fiscal regime. The first is petroleum revenue tax; the second, corporation tax which, as we know, is ring-fenced in the case of the North sea; and the third, the supplementary charge. PRT, which is at the heart of schedule 39, applies only to the older, larger fields at a rate of 50 per cent. of net income. It applies to specific fields given development consent before 1993. A number of allowances and reliefs apply. In practice, most pre-1993 fields do not pay it. Where they do, however, it generates considerable revenue.

While schedule 39 is about PRT, it is important when considering it to understand the effects of the other two parts of oil taxation operating in the North sea. Corporation tax applies to companies’ upstream oil and gas profits within the North sea ring fence at a rate of 30 per cent. The ring fence prevents companies off-setting losses in other downstream parts of their businesses against their upstream profits. This is an area affected, as we saw, by the previous clause on capital allowances, although decommissioning issues are also prevalent with PRT.

The supplementary charge applies, as its name suggests, as a supplement to corporation tax. When it was introduced in 2002 it was levied as an additional 10 per cent. charge on ring-fenced profits and was increased to 20 per cent. in 2006. As Members will already have calculated, this means there is a marginal rate of 50 per cent. on most fields, rising to approximately 75 per cent. on fields subject to PRT. These rates are high and, as the Government acknowledge, may be too high to attract future investment in fields where oil is difficult to extract. We will come in a later clause to consider the widening of the North sea oil regime to provide an incentive for areas such as high-pressure and high-temperature oil fields.

With that brief exposition of the three main areas, I will turn to schedule 39 itself. Oil from different fields commonly shares a pipeline back to the shore, despite the fields falling under different ownership, and it is then sold after blending in the pipe. Brent crude is itself a blend. There is an obvious need for tax purposes to establish the relative strengths in the blend and from  which fields the oil came, as it is the companies that face the tax. In the case of PRT, the field of origin determines whether PRT is applicable, so it is vitally important to sort out that blend. As I said, co-mingling occurs when hydrocarbon from one field is mixed with hydrocarbon from another during transportation to the UK or its first port of discharge; and the hydrocarbon is then sold on as a blend.

When we look at our smĂśrgĂĽsbord of crude oil blends, including Brent, Forties, Flotta, Wytch Farm, Beryl, Maureen and Triton—the last three being co-mingled and lifted off-shore—the number of contributing fields in each varies from two constituents in the case of the simplest blends, such as Wytch Farm and Wareham, to more than 20 in the case of Brent, which from August 1990 also incorporated the Ninian system, and more than 30 in the Forties field. Similarly, a number of co-mingled gas systems—separate from oil—exist, usually named by reference to the pipeline or the terminal, such as SAGE, CATS, FLAGS and LOGS. There is even one named after a part of the country—Easington. I think there is only one.

Section 63 of the Finance Act 1987 gave statutory effect to the arrangement that has been used in the past for determining the taxation on those blends or co-minglements. All participators in fields contributing to a blend of oil were required to furnish details of the method of allocation by 1 August 1987, or if later, within 30 days of making the first allocation under that method. In other words, companies have to report how the blend works. Failure to comply with that requirement incurs a penalty of up to £500 per participator, with a subsequent daily penalty after the failure has been declared by the court or commissioners. Any change in the method of allocation requires details of the revised method to be notified within the same 30-day time scale. What is important is that much of that arrangement will be abolished, and I am pointing out the convenience of its abolition. I have printed out a copy of the Government’s guidance under the Finance Act 1987 on exactly what must be done prior to the creation of a blend or a reporting of the changes to a blend.

The proposals in schedule 39 simplify the rules on allocation and drop the requirement that routine changes be backed up by extensive documentation sent to HMRC. The reform has been welcomed by the industry, and will reduce the compliance work load that companies face. The Government’s criteria for reform, as set out in the consultation document “Supporting investment”, fall under seven broad headings: promote investment and production, ensure a fair return for the UK taxpayer, be non-distortionary, be equitable, improve stability, be sustainable and, most importantly, reduce the administrative burden. In that abbreviated form it is difficult to disagree with the criteria. The fuller explanations are more substantive, but we find no issue with those criteria.

Whether those seven aims have been pursued as rigorously as they might have been in the Finance Bill in general is open to debate. Schedule 39, besides being equitable in the sense of not disproportionately affecting any one section of companies, mainly lays claim to meeting the last criterion—a reduction in the administrative burden. The explanation of the criterion in annex B of the “Supporting investment” document reads:

“Any changes to the fiscal regime should not increase the administrative burden on companies involved in the North Sea, either by increasing the complexity of the current regime, or through adding to the reporting requirements. Government should also actively look to reduce the administrative burden where possible.”

It seems that by simplifying the blended regime perhaps as far as reasonably possible, the Government will at least have modestly reduced, in this one area, the administrative burden facing the oil and gas sector.

It is a pleasure to serve under your chairmanship this afternoon, Mr. Atkinson. I am sure that members of the Committee will have enjoyed the dilation on the structure of taxation in the oil and gas industry given by the hon. Member for Hammersmith and Fulham, and his comments on blended oil and the bureaucracy that has been involved in the system to date. I note that he welcomes the measures in clause 84 and schedule 39. They have been subject to discussions with the industry, and I think that there is consensus on the approach that we have adopted. This is a useful simplification measure and I am glad that it is widely supported.

Question put and agreed to.

Clause 84 accordingly ordered to stand part of the Bill.

Schedule 39 agreed to.