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Clause 89

Part of Finance Bill – in a Public Bill Committee at 4:00 pm on 18th June 2009.

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Photo of Ian Pearson Ian Pearson Economic Secretary, HM Treasury 4:00 pm, 18th June 2009

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.