Clause 86

Finance Bill – in a Public Bill Committee at 3:15 pm on 18th June 2009.

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Oil assets put to other uses

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

Photo of Greg Hands Greg Hands Shadow Minister (Treasury)

Thank you, Mr. Atkinson, for your guidance on our amendments to schedule 40. I assume that it will be convenient to discuss schedule 41 at the same time as the clause. The issue addressed by schedule 41 is another aspect of the problem that I raised in relation to clause 83 and schedule 38. Because of its size the relief on decommissioning costs assumes such importance that it can override all other considerations when a field is nearing the end of its life.

One of those considerations is the potential to adapt the infrastructure already in place to use fields for gas storage, carbon capture or wind power. Having taken oil or gas out, it is possible to pump gas or the carbon emissions from an onshore power station back in. That is the basis of carbon capture and storage. But that requires leaving the pipes and all the other related infrastructure in place. Companies are under a legal obligation, as we explored on clause 83 and schedule 38, to remove all that infrastructure from the seabed when it is deactivated. As the legislation stood, had they allowed a change of use, companies would have had great difficulty in recouping the decommissioning costs later, which is the basis of the measure today.

As the Government’s November paper found,

“Industry argue that effective access to decommissioning relief is a critical issue when considering the economics of a change of use project, and that the current treatment is extremely likely to result in a change of use activity not going ahead where it utilised existing infrastructure that was expected to have a substantial decommissioning cost.”

In other words, we are looking at tax relief for decommissioning infrastructure and at whether we want to encourage its use for other purposes, such as carbon capture and storage, wind power and so on.

Carbon capture or schemes involving power generation do not fall within the North sea ring fence. Equally, there are clear potential benefits from allowing infrastructure to be reused. Schedule 41 represents the Government’s view following many years examining the problems of and opportunities for change of use. We welcome it, even though it has been a long time coming. Many changes are still theoretical and we are a long way from seeing North sea carbon capture projects or some of the other uses under discussion. However, measures that enable such projects to be at least considered are welcome.

The debate provides an opportunity to put three important questions to the Minister, which may assume greater significance if decommissioning begins to be postponed. First, what level have Government liabilities for relief for decommissioning reached? Secondly, how are the liabilities likely to be distributed over future years and decades? Thirdly, are they included in the Government’s accounts or are they another example of off-balance sheet liabilities, like PFI projects and public sector pensions? Those questions are important. I am not entirely clear how the future liabilities are dealt with on the Government’s balance sheet.

Many of the current potential change of use projects are at best marginal economically, and the potentially significant tax charges that could have arisen on implementation of the projects were a major disincentive to companies even starting to evaluate such projects, so the changes appear to move us in the right direction.

The Opposition value all efforts to make CCS and alternative energy generation more attractive through the tax regime. The changes remove a barrier, but they do not, in themselves, ensure that these important industry developments take place. Nevertheless, we welcome the provisions, but I await the Minister’s explanation of where future liabilities are accounted for.

Photo of Ian Pearson Ian Pearson Economic Secretary, HM Treasury 3:30 pm, 18th June 2009

I am glad that the official Opposition welcome clause 86 and schedule 41. Their purpose is to remove tax barriers to the reuse for other activities of oil and gas infrastructure. I shall briefly go into detail on the schedule. It removes potential tax barriers where oil and gas production assets are reused for so-called “change of use” projects, particularly, as the hon. Gentleman noted, carbon capture and storage, gas storage and wind power generation.

The schedule has three main effects. First, it ensures that a petroleum revenue tax charge does not arise when a PRT asset is subsequently used for another purpose. Under current legislation, when a PRT asset is used for an activity unrelated to oil production, a portion of the PRT relief given for the cost of the asset is clawed back. That could entail a significant tax charge for the company  in question and may deter it from embarking on change of use projects. The schedule removes the possibility of such a tax charge. It has been welcomed by the industry as well as by the hon. Gentleman.

Secondly, the schedule will ensure that profits from change of use projects that reuse PRT assets are not liable to pay PRT. Again, the existing rules state that income derived from PRT assets is liable for PRT no matter how the asset is used. However, change of use profits are clearly beyond the intended scope of the PRT regime, which was designed primarily to capture the super-profits from oil and gas production. Consequently, the schedule will remove such income from the scope of PRT.

Finally, the schedule will ensure that companies that embark upon a change of use project can still gain access to the same tax relief for the cost of decommissioning infrastructure that they would have had at the end of oil and gas production. Again, that will remove the existing perverse incentive to decommission infrastructure, rather than to reuse it, which is an objective we support.

The Government believe that the UK will gain major benefits from the removal of the barriers to change of use projects. As I have mentioned, such projects can make a significant contribution to reducing carbon emissions and to ensuring that the UK has a secure energy supply. As the hon. Gentleman will be aware from today’s statement in the House on climate impact projections, there is a need to continue the drive to develop a low-carbon economy in the UK. We should ensure that, where appropriate, the tax system provides sufficient incentives for things that are public policy goods and removes perverse incentives not to do such things. That is widely accepted as the right thing to do.

It is important to recognise that such projects have the potential to bring investment and employment to the North sea long after the production of oil and gas has ceased. In addition, the deferral of the decommissioning of oil and gas infrastructure by companies will benefit the UK by deferring the point at which the Exchequer must give tax relief for decommissioning expenditure. Given the economic circumstances, that will benefit Government overall.

The clause will ensure that when a company is faced with whether to decommission depleted oil and gas infrastructure or reuse it for a change of use project, it will not be deterred from engaging in activities that could be beneficial to the company and to the UK as a whole. That is why I believe it should stand part of the Bill.

The hon. Member for Hammersmith and Fulham mentioned decommissioning costs. Those are currently estimated at £20 billion. Tax relief could lead to the Government effectively paying 50 per cent. of that. The time scale will depend on how and when the assets are decommissioned. That will depend on a range of variables, such as the prevailing oil price.

I am not currently able to advise the hon. Gentleman on accounting practices, but am more than happy to write to him with the detail.

Photo of Greg Hands Greg Hands Shadow Minister (Treasury)

I must say I am surprised that the Minister is unable to tell us what is the accounting practice for this potential liability of up to £10 billion. That sounds  like rather a large amount of money to be unaccountable. Is he sure that he is unable to provide us with more certainty about where it is placed?

Photo of Ian Pearson Ian Pearson Economic Secretary, HM Treasury

I am at this stage, but the hon. Gentleman has raised a valid point. I am happy to write to him and Committee members with further information on that.

Clause 86 and schedule 41 are important and I urge hon. Members to support them.

Question put and agreed to.

Clause 86accordingly ordered to stand part of the Bill.

Schedule 41 agreed to.