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Clause 89

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

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Photo of Greg Hands Greg Hands Shadow Minister (Treasury) 3:45 pm, 18th June 2009

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.