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Clause 89

Finance Bill – in a Public Bill Committee at 3:45 pm on 18th June 2009.

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Supplementary charge: reduction for certain new oil fields

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

Photo of Greg Hands Greg Hands Shadow Minister (Treasury)

This clause probably contains the most important changes to the North sea oil and gas regime in part 6 of the Bill, and I expect that we will want to press amendment 267 in due course.

Clause 89 refers to schedule 44. The other clauses and schedules that we have discussed so far either represent relatively small changes or seek to create conditions in which it is easier for new investment to take place. Schedule 44, however, is the only part of the Government’s package that attempts to offer direct incentives to invest, and it is therefore worth recalling what the Government have said about the need for incentives. In their document, “Supporting investment: a consultation on the North Sea fiscal regime” they described the UK continental shelf as

“facing increasing challenges due to its nature as a maturing basin. The easy to recover hydrocarbons have been exploited and the remaining opportunities are, increasingly, either smaller in size or require the use of cutting edge technologies to enable extraction. One result of this is that many potential projects have become commercially marginal and unable to compete with other projects around the globe. These challenges are exacerbated by the current uncertainty over future oil prices and the high cost levels faced within the North Sea.”

Schedule 44 is the Government’s attempt to answer that commercial marginality and struggle for capital expenditure. We see it as a fairly limited attempt to address the problem.

Oil and Gas UK was formed by and represents the industry, and has met with both the Chancellor of the Exchequer and the Prime Minister. I am not sure how many Exchequer Secretaries it has had the pleasure of meeting in recent days—as we know, there have been three in the past nine days. I am not exactly sure who it has had the chance to meet with on that front. Nevertheless, at various times Oil and Gas UK has met with the Government to discuss the future of the North sea. In its public response to the Budget—three Exchequer Secretaries ago—it said:

“Oil and Gas UK members have voiced their deep concern to us at what has been left undone by the 2009 Budget. In the current climate, the package of measures will have limited impact on the UKCS’s economics, will have little effect on the UK’s competitiveness and attractiveness to investment and will not lead to any significant increase in activity....The consequences of the failure to act decisively could be severe. Current economic circumstances are already placing industry work programmes under extreme pressure. The fiscal measures announced in April may help a small number of projects but will not reverse the significant decline in capital investment forecast by Oil & Gas UK — to around £3 billion by 2010.”

That is a fairly damning indictment of Government policy from the industry, at least in relation to the 2009 Budget, especially given the warmth of some of their other comments in relation to the actual consultation process. The industry was very open and supportive of the Government’s willingness to consult, but it has turned out to be extremely disappointed by the result of the consultation.

Oil and Gas UK does not stop there. Its response continues:

“Under-investment at this stage in the mature UKCS life risks fatally undermining the government's stated goal of maximising the recovery of the UK’s remaining oil and gas reserves. Without new injection of oil and gas from the development of outlying satellite fields, key offshore infrastructure hubs will risk seeing their decommissioning being brought forward...Once these strategic platforms and their pipelines are removed, it is unlikely that they will ever be replaced and the means to recover the estimated remaining oil and gas reserves of up to 20-25 billion barrels...will be lost.”

Again, that is a damning indictment of the Government’s approach from UK Oil and Gas. It is clear that the industry does not—I see that we are joined by the new Exchequer Secretary to the Treasury, the hon. Member for Portsmouth, North. I should start off by welcoming her to her new position as today’s Exchequer Secretary. I look forward to a number—or a panoply, or smĂśrgĂĽsbord of debates on different issues to come.

The industry does not see the new field allowance that the Government are proposing as the answer and certainly not in its current form. We have some sympathy with the argument put forward by the industry.

The Government’s proposals in schedule 38 will create an allowance against the supplementary charge—in other words, the 20 per cent. charge, which was increased from 10 per cent., that is applied to ring-fenced profits as a supplement to corporation tax. That brings the overall marginal tax rate on new fields to 50 per cent. As we know, the new allowance will apply to three kinds of fields; small fields, ultra-heavy oil fields and high-pressure, high-temperature fields.

The small fields that the Government talk about will have to be very small and the allowance is set relatively low. We do not intend to debate those at great length today. As a result of this measure, the industry expects  only one or two more fields to have been brought into development than would otherwise have been the case in the short to medium term. The small-field change is not a particularly significant change in the legislation.

We touched on the question of ultra-heavy oil earlier. If you turned a cup full of heavy oil upside down, it would not come out; it is that heavy. There are huge technical problems to be surmounted before ultra-heavy oil can begin to be properly exploited, although there is plenty to be had if this can be done.

The category of high-pressure, high-temperature fields has left the industry feeling aggrieved. This is a consistent view across the major players whom I have met with in recent weeks. BP, for example, describes the field allowance as being of negligible impact. None of their HPHT discoveries would qualify for the new allowance. Only one HPHT discovery, across the whole of the UK continental shelf, is thought to meet the Government’s combined temperature and pressure criteria, and that is the Jackdaw field owned by British Gas. This would cover only one new field. Of course, that is only looking at fields which have been discovered to date—others may be found. I understand that a combined temperature and pressure rule, which the Opposition seek to amend here, is not a good way to get people to look for these HPHT fields, as there is no consistent relationship between high temperature and high pressure.

Nor, I am told, is a high-pressure, low-temperature or a low-pressure, high- temperature field any easier to handle than a high-pressure, high-temperature field. In other words, removing one of the two areas of difficulty and having it either high- pressure or high-temperature does not necessarily make it any easier to exploit.

Oil and Gas UK have written to the Treasury to make six points on behalf of the industry as a whole. First, the ultra-HPHT target is too tightly defined to deliver the required benefit. Secondly, the ultra-HPHT target does not mark the break from subsea to platform-based development. Thirdly, other HPHT fields face similar development costs to ultra-HPHT fields. Fourthly, the requirement to meet both ultra-high temperature and ultra-high pressure is simply too onerous. Fifthly, both ultra-HPHT pressure and temperature limits are set too high. Sixthly, with modifications, the field allowance still has the potential to influence HPHT exploration activity. So Oil and Gas UK are looking for modifications.

Our amendment seeks to relax the requirement in schedule 44 to meet both the pressure and the temperature criteria at the same time, so that only one of the two needs to be met. It must be either high pressure or high temperature. This would help to reduce the random, lottery-winner nature of the clause as it stands, and do more for exploration. Even this amendment would still bring only a handful of known but undeveloped fields within the scope of the allowance. It is not an extremely radical approach. We just believe that what is brought in under the schedule should be widened a little to try to encourage more exploration. I am sure that we all agree that that is of huge importance to this country and to our tax intake.

When the Chancellor announced the field allowance during the Budget speech on 22 April, he believed that it would encourage the development of the equivalent of  about 2 billion barrels. As the clause stands, the Chancellor’s claim looks wholly implausible. It is open to the Government to talk to the industry and revisit the limits once the Finance Bill has gone through the House. That is fair enough.

Ian Pearsonindicated assent.

Photo of Greg Hands Greg Hands Shadow Minister (Treasury) 4:00 pm, 18th June 2009

I see the Economic Secretary nodding. The limits are open to adjustment by statutory instrument. In fact, any of the definitions of small oil field, ultra heavy oil field or ultra high-pressure, high-temperature field set out in paragraphs 20 to 23, and also the total field allowance levels specified by paragraph 24, can be amended by statutory order. That is made clear in paragraph 17.

It is worth pointing out that no costs are incurred either by our amendment, or by lowering the limits. There is some difficulty in trying to understand the fiscal implications. There is just an unquantifiable loss of revenue from fields that may have been developed anyway to be balanced against an unquantifiable increase in revenue from fields where exploration and development would not have occurred without it. We are looking at hypothetical revenue and allowances against it. I will listen with interest to the Minister’s view of this balance and where it lies. At the moment the proposals seem far too restrictive.

As I said when opening my remarks, when it comes to providing new incentives for fresh investment, schedule 44 is the Government’s only current answer. Hence it is worth noting the two policy areas it has left untouched. The first is also a geographical area—the west of Shetland area. In our debate on an earlier clause, I said that we would be returning to that geographical area later.

As I mentioned earlier, the UKCS is far more extensive than the North sea. There is also the Atlantic, where there is oil too. Even old North sea hands seem to become rather white at the knuckles when they describe the weather conditions west of Shetland and some of the other difficulties involved in working in that environment, with its deep water and atrocious weather. However, the rewards would be substantial and the Government have failed to do anything in the Bill that would make the exploitation of that area more likely.

The Government have established a joint west of Shetland taskforce with industry representatives and I would be grateful for news of any progress that that taskforce has made when the Minister—whichever Minister it is—responds to the debate.

There is a second, wider problem. The Government are only talking about providing incentives for new fields. There are no incentives for existing fields and no such incentives appear to be under consideration. Where fields are still going strong, by definition no incentives are required. However, fields nearing the end of their life are a different matter and a significant and increasing number of fields are in that category. I return to my earlier point that we are now just under two thirds of the way through the proven oil and gas reserves that are under the North sea.

Encouraged by the Government, smaller companies have already come in and are specialising in the different operating challenges that such fields—the ones nearing the end of their lives—present. Those companies possess  a readiness and willingness to invest at that end-life stage. To take just one example, Talisman Energy now operates in 23 different fields, which is a higher number than for any other group on the UKCS. Therefore, although it is a relatively smaller and newer entrant to the sector, Talisman Energy operates in more fields than any of the existing big players.

However, the changed financial background against which companies have to operate will make it difficult to mop up all the remaining oil and gas. I would appreciate it if the Minister explained the Government’s approach to encouraging companies to invest in existing fields, as there is nothing in the clause—in fact, there is nothing in the entire Bill—to help those companies.

To conclude, clause 89 is the most important clause in the Bill in terms of the considerations about North sea oil. The industry welcomes the existence of the new field allowance, which is designed to help the exploitation of small fields and fields that are difficult to reach. Schedule 44, in so far as it goes, is also welcomed by the industry, but nobody thinks that it goes very far. Our amendment to schedule 44 would take it a little bit further by removing one of the lottery elements, in other words the fact that a field has to qualify for both “high pressure” and “high temperature” to qualify for the relief. Our amendment would remove that lottery element.

I hope that the Minister, in responding to the debate, will explore the possibility of going further still in this area, or at least offer some better explanations as to why the Government are unwilling to do so. While the days of plenty in the North sea are starting to fade, there is the prospect of more adventurous and still more profitable activity for decades to come. Whatever that may entail, what we know for certain is that one new field, which is what we are talking about here with schedule 44, simply will not cut the mustard. Unless we hear some convincing arguments from the Minister, we will therefore seek to put amendment 267 to the vote.

Photo of Ian Pearson Ian Pearson Economic Secretary, HM Treasury

Clause 89 introduces a new field allowance into the North sea fiscal regime, which will have the effect of reducing the profits liable to supplementary charge for certain categories of new field that have development concerns, on or after 22 April 2009.

The Government believe that the measure can play a significant role in ensuring that the North sea meets its full potential. We estimate that it could lead to the production of an additional 2 billion barrels of oil and gas, which might otherwise have been left in the ground. That will be of major benefit, ensuring that the UKCS continues to be a significant industrial success, with the employment skills and technological benefits that that success brings. Furthermore, it will benefit the UK more widely, by helping to secure the UK’s energy supply.

A number of stakeholders have warmly welcomed the measure. For instance, Oil & Gas UK, in commenting on the overall package of measures, said:

“We acknowledge this demonstration of the Government’s commitment to the future of this industry in the UK. The measures announced today are a positive step for those companies trying to develop small and challenging fields in this mature, high cost province.”

The Oil and Gas Independents’ Association said:

“Today’s announcement by the Chancellor will assist both small and large independent companies to continue their activities...the OGIA believes this is an important first step in making the UKCS fiscal regime competitive.”

So there is broad support for clause 89 and schedule 44.

Amendment 267 on the face of it seems relatively simple. It would change one of the qualifying criteria for an oilfield to receive the new field allowance from needing to be both ultra-high pressure and ultra-high temperature to needing to be either ultra-high pressure or ultra-high temperature. The hon. Gentleman went into some detail in explaining it. I assume the amendment has been introduced to increase the number of existing fields that are eligible for that allowance. The hon. Gentleman suggested that the Government’s measure is very limited. We certainly want to maximise the potential benefits to the UK of the Government’s policy proposals in this area.

The requirement for a field to be both ultra-high pressure and ultra-high temperature was decided upon following extensive consultation with a broad range of stakeholders. It is intended to provide significant support for investment whether in exploration, appraisal or development of some of the most technologically challenging and demanding reservoirs in the North sea. In the course of those discussions, the clear impression given to Government was that these challenges occurred when both criteria were found in a reservoir, not just one. Reservoirs with both extremely high pressures and temperatures need most support. Equally, given the size of the incentive on offer, the criteria are also carefully targeted at those developments that most need it and would not go to developments that would proceed regardless. We believe this approach is necessary to provide maximum value for money for UK taxpayers. On the basis of the evidence presented to us, to relax those criteria, as proposed in the amendment, would run the risk of giving support to fields that do not face the degree of challenge that this allowance was intended to support, at a potentially significant cost to the Exchequer, while providing little extra benefit to the UK. Therefore, while I understand what the hon. Gentleman is seeking to achieve, I cannot recommend that the Committee accept the amendment.

The hon. Gentleman asked a number of specific questions to which I shall briefly respond. Regarding the number of fields eligible for the field allowance, it is impossible to estimate the number able to claim. It will depend on the number of discoveries made by companies in the coming years. One benefit of the allowance will be to encourage companies to increase their exploration activities. It is the increase in reserves that is important, rather than the number of fields. We believe that there are around 2 billion barrels of untapped reserves that the allowance will help to recover. Professor Alexander Kemp of the university of Aberdeen estimates that 40-plus new small fields will be brought into development. That is just one estimate. The 2 billion figure includes not only existing discoveries but a range of prospects from fields that the incentive will influence now, through to discoveries and prospects that the incentive will help support in further exploration and appraisal drilling. The figure of 700 million barrels that has been quoted is a conservative estimate of the potential impact over the  next 20 or so years. The final number could be much higher. Overall, the intention of these incentives is to increase activity in these challenging areas.

The proposed definitions of fields eligible for the allowance have been arrived at following in-depth consultations and discussions with a range of industry stakeholders as well as technical experts at the Department for Energy and Climate Change. They have been designed to ensure that the allowance is targeted on the areas that are most in need of support to limit the dead-weight cost to the taxpayer.

Let me make it clear to the hon. Gentleman that we are still committed to further dialogue with stakeholders. If there is a convincing case, the secondary powers in the legislation, to which he referred, will allow the Government to take appropriate action once the full and correct analysis has been undertaken.

The hon. Gentleman asked a specific question about the west of Shetland. The taskforce has made significant progress, leading to Total oil’s announcement in the new year of its intention to take forward the development of the Lagan tarmac field with its partners. That will include the vital gas pipeline to open up the west of Shetland.

The hon. Gentleman asked about existing fields. The Government considered a range of options on encouraging investment in the North sea in the run-up to the Budget. Industry stakeholders gave their views on many of the options. In our view, a satisfactory case has not been made to date for an incentive that could be introduced to encourage investments in existing fields while providing value for money for the UK taxpayer. However, we recognise the importance of existing fields to the future of the North sea, which he mentioned. We are happy to have further discussions with stakeholders on how support could be given to investment in existing fields. Today’s proposals do not cover existing fields.

I hope that I have answered the hon. Gentleman’s questions and that he will not press his amendment to a vote.

Photo of Peter Atkinson Peter Atkinson Conservative, Hexham

Before we come to the amendment, we must deal with the clause.

Question put and agreed to.

Clause 89 accordingly ordered to stand part of the Bill.