Clause 63 - Reduction of supplementary charge for certain new oil fields

Finance (No. 3) Bill – in a Public Bill Committee at 4:45 pm on 7th June 2011.

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

Photo of David Hanson David Hanson Shadow Minister (Treasury)

The clause deals with the reduction of supplementary charge for certain new oilfields and makes two changes to the field allowance legislation. The first change amends the time at which the initial licensee is to hold a field allowance. Where a production income occurs in the same accounting period as that in which development authorisation is given, the change enables the field allowance to be activated in that period.

The second change amends the definition of “new oil field” for the purposes of the field allowance. That will enable certain previously decommissioned fields to be treated as new oilfields for field allowance purposes. Both changes have retrospective effect as from the introduction of the field allowance legislation.

New field allowances were introduced by the previous Labour Government as a means of encouraging the development of certain types of oilfield that could prove marginal due to tax costs. They did that by exempting a portion of income from the fields from supplementary charge, which means that they pay only 30% corporation tax.

The allowances were previously allowed only for fields that were given development consent by the Department of Energy and Climate Change after 22 April 2009. However, that could prevent fields that were given development consent but then decommissioned from being recommissioned, as they would still have to pay a supplementary charge due to their development date being before April 2009.

The clause states that if all the field’s assets have been decommissioned, the approval date before the decommissioning will be ignored, which effectively means that the date of DECC approving the field is the one that should be taken for determination if the allowance is available. The measure is sensible and encourages all the fields to be redeveloped with new technology. However, if we consider the clause in connection with clause 7, which we discussed on the Floor of the House, we see that there are linkages between the effects of both clauses. Both deal with the issue of the supplementary charge. Will the Minister update us and tell us what progress she is making in her discussions with the oil and the gas industries about the supplementary charge in the legislation overall?

Following those discussions, Centrica, which is the parent company of British Gas, last week decided against reopening one of the largest gas fields following the Government’s decision, under clauses 63 and 7 of the Bill, to raise taxes on production. The firm now says that it will buy in cheaper from abroad. The energy field concerned is the South Morecambe gas field, which is one of the three largest production areas that make up the offshore Liverpool-Morecambe Bay gas field. Recent concerns about the opening of the field are linked to the measures in the Bill.

This week, my hon. Friend the Member for Barrow and Furness (John Woodcock) raised that concern in the local area. Centrica’s decision not to reopen the field 20 miles off the coast of Barrow, following scheduled annual maintenance, was announced on Friday 3 June. The reasons given were that the new supplementary charge proposals—of which clauses 63 and 7, which we have considered, are part—mean that the field is now  not productive for Centrica to keep open. My hon. Friend has indicated that, as well as the loss of gas production, some 200 jobs are at risk, which is a matter for discussion with Centrica. He says that it is alarming that the proposals before us have led to such concerns.

Initially, will the Minister update us on the discussions that she has had not only about clause 63, but about the supplementary charge generally? On Second Reading, we tabled an amendment that asked the Chancellor to produce, before the end of September, an assessment of the impact of the supplementary charge on business investment and growth, and on the long-term sustainability of oil and gas exploration. On the UK North sea facilities, Centrica’s chairman, Sir Roger Carr, has said that

“it’s probable that these changes will affect our plans to invest in the UK North Sea, which will have an impact on jobs and North Sea investment”.

There have also been recent discussions about the impact of the changes on North sea development, and since our debates on the supplementary charge, the chairman of the CBI has written to the Government urging them to reconsider moves relating to the charge. As those matters are linked, it would be helpful if the Minister updated us.

There have been issues about consultation on the supplementary charge regime, and again, we made such points in Committee on the Floor of the House. My hon. Friend the Member for Bristol East stated that consultation on the proposals has been slim. On the Government’s plans, we need transparency about the proposals that are being brought forward. Oilfields are long-term investments that require long-term certainty and stability. The industry has said to me that it believes that the value of investments in the UK oil and gas industry has fallen by a staggering 24% as a result of the 2011 Budget, and that point relates to the proposals in clauses 63 and 7. The Minister needs to examine the long-term potential for the industry, and the long-term investment in it.

Since discussing clause 7—this is linked to clause 63, Mr Hood, because both concern the supplementary charge regime—the Treasury Committee has said:

“The decision to increase the supplementary oil and gas levy by 12% without warning, less than a year after the Government had undertaken to provide a ‘stable’ tax regime… may weaken the Government’s credibility in seeking to establish a stable tax regime in this and other areas.”

Our good friends at the Chartered Institute of Taxation, who have provided a lot of briefings to the Committee, have also said that

“the last minute and precipitate change in Oil tax rates”

—for the supplementary charge—

“for an industry that is particularly dependent on long-term planning seems wrong”.

My initial points to the Minister are on clause 63, therefore, but they are coloured by clause 7. Where are we in relation to her discussions with the industry on these matters? There is concern from such august bodies as Aberdeen university to suggest that, over the next three decades, the Government’s changes introduced through the Bill could slash oil and gas investment in the UK by some £30 billion. Production could be reduced by up to a quarter, leaving the UK more reliant on imported oil and gas. That is important because only today in my constituency, ScottishPower—[Interruption.]

Photo of Jimmy Hood Jimmy Hood Labour, Lanark and Hamilton East 5:00 pm, 7th June 2011

Order. I am listening intently to the right hon. Gentleman and I am hearing a murmur from the Government Back Benches that is putting me off. If the Chair can hear the murmur, I am sure that other Members are unable to listen as closely to the right hon. Gentleman as they should. I ask hon. Members to stop murmuring and to pay attention to the right hon. Gentleman.

Photo of David Hanson David Hanson Shadow Minister (Treasury)

Thank you, Mr Hood. The point I was making is that these are important issues because the worry that has been expressed to me from organisations ranging from the CBI to the Treasury Committee and Centrica itself is that the measures in the clause and in clause 7, which we considered on the Floor of the House, are detrimental to investment in the oil and gas industry over the long term.

Not two hours ago, ScottishPower announced a 19% increase this August in the cost of gas to my constituents. It is a quite a significant company now. It operates not just in Scotland, but supplies people throughout north Wales, the north-west and other areas. If the measures in clauses 63 and 7 are leading to a lack of investment in the oil and gas industry in the North sea, and with Centrica’s announcement only last week about the Morecambe Bay gas field, the potential is there for gas prices to rise even further from what are already appalling prices.

Photo of Justine Greening Justine Greening The Economic Secretary to the Treasury

I want to understand what point the right hon. Gentleman is making. Is his hypothesis that the higher the gas price goes, the less likely companies in the UK are to want to invest in gas reserves in the UK continental shelf? That seems to be slightly counter-intuitive. Most people would have thought that the more valuable UK gas reserves became, the more likely they were to be worth taking out of the ground.

Photo of David Hanson David Hanson Shadow Minister (Treasury)

The point I am making is that only today it has been announced that gas prices in my constituency will rise by 19%. The headline in the North - West Evening Mail last week was, “Gas production halted at field after tax increase”. If production is taken out, that could cause the price to rise still further or lead us to consider importing gas in the future.

Photo of Justine Greening Justine Greening The Economic Secretary to the Treasury

Again, is the right hon. Gentleman’s hypothesis that it would be wrong for Centrica to raise prices because of increased gas prices worldwide when it had gas it could access at a much cheaper cost to pass on to its consumers right on its doorstep in the South Morecambe field? Is that his argument?

Photo of David Hanson David Hanson Shadow Minister (Treasury)

The argument I am making is that we face oil and gas companies throughout the United Kingdom saying that the measures in clauses 7 and 63 could lead to extra costs for them. In the case of the Morecambe Bay field, that will lead to the loss of production because Centrica does not feel that it is beneficial for it to develop that field due to the taxation. We already face higher gas prices—for example, the 19% rise announced today by ScottishPower—so my worry is that companies will invest less in oil and gas production because of the changes in the Bill relating to the supplementary charge, which puts at risk some of the future development that could match capacity to help to meet those particular needs.

Photo of Ian Murray Ian Murray Labour, Edinburgh South

My right hon. Friend highlights the point of the Bill: the measures in clause 7 and in clause 63 are against jobs and growth because of the lack of production. Is that not another example of the Government’s obsession with clearing the deficit without thinking about jobs and growth?

Photo of David Hanson David Hanson Shadow Minister (Treasury)

My hon. Friend makes a valuable point. He knows the impact that the Bill’s proposals will have in Scotland in particular. Some of the issues were dealt with under clause 7, but they are linked to clause 63, and my aim is to get from the Minister her assessment, some six or seven weeks since we first discussed the matter on the Floor of the House, of progress in the discussions on the issue of supplementary charge as it affects clauses 63 and 7. She has had meetings with the oil and gas companies, and discussions are ongoing, but I want to get from her a flavour of where we are on such matters.

The issues that have been put to me—relating to clauses 63 and 7, and other matters to do with supplementary charge—are the lack of consultation and the surprise and shock of the measures being proposed in such a way in the Budget. The proposals, the lack of discussion and their short-term nature potentially hamper investment in what should be an industry of the future for Scotland and for the United Kingdom—that is, investment in maximising our gas and oil reserves, in particular in the North sea but not exclusively so.

Photo of Pamela Nash Pamela Nash Labour, Airdrie and Shotts

Does my right hon. Friend agree that in not consulting with the industry the Government have taken a rushed and damaging decision? The damage has been compounded by them not consulting adequately with the industry, and the faith of the oil industry in the Government is now in tatters, as shown by the Centrica decision.

Photo of David Hanson David Hanson Shadow Minister (Treasury)

I am grateful to my hon. Friend for that intervention. She knows, from her perspective in Scotland, of the potentially damaging impact of the proposals. I repeat, because the issue is current, that gas production was halted at that field only last week, following the tax increase. My hon. Friend the Member for Barrow and Furness is concerned not only about jobs, but about the industry. The report from Centrica says:

“We welcome the ongoing dialogue that the government is having with industry around the damaging impact the increased tax levels has on North Sea gas security and investment.”

Supplementary charge is the key to the clause, in relation to our discussions on reopening fields, and key to the issues discussed under clause 7. I would welcome an update from the Minister, so that we do not read only in the paper that Centrica is having ongoing discussions, and so that we know what the Minister is doing and what is her assessment of where we are on such issues.

That will suffice for the moment. I await the Minister’s response.

Photo of Justine Greening Justine Greening The Economic Secretary to the Treasury

The clause makes two changes to the field allowance legislation that applies to oil and gas production companies. The changes were those requested by the industry and, as I am sure the right hon. Gentleman  is aware, they fit with a couple of other clauses. They will ensure that the existing legislation operates appropriately.

Before I go on to discuss in a little more detail what clause 63 does, I shall respond to some of the points made by the right hon. Gentleman. We have to return to the background to the rise in supplementary charge. As a Government, we were faced with some large rises in fuel duty proposed by the outgoing Labour Government. We had to decide whether it was right for those duties to rise, as proposed by the previous Government.

We felt that the cost of living was a hugely important issue for people in this country and that the impact of the rise in the oil price as it fed through to the price of petrol at the pumps was serious. With the limited fiscal means available to us, we wanted to do what we could to alleviate the tough and damaging effect on the economy recognised by a range of stakeholders, including the CBI. The pressure was on not only households with motorists, who were finding it hard to cope with the price of petrol, but companies, many of which had fuel as one of their key costs and relied on hauliers to get goods to where they needed to be to sell. We were determined to ensure that we did what we could in the Budget to support motorists and ensure that motoring remained affordable, and, in doing so, to introduce a package that had broader support for the economy—but of course, that had to be paid for. We felt that the most effective way to do so was to raise tax from the one sector of the economy that was doing well from the high oil price. That, of course, was the oil industry.

Labour Members may feel that we did not get it right and that it would have been better to leave the oil industry to make significant extra profits and leave the motorists and hauliers across the country to face the higher fuel duty rises proposed. We took a different view, and wanted to see what we could do to support motorists and hauliers. Far from bringing forward the fuel duty rises that were proposed, we managed a fuel duty cut.

Photo of Bill Esterson Bill Esterson Labour, Sefton Central 5:15 pm, 7th June 2011

The Minister makes some good points about the importance of supporting small businesses and motorists generally on the cost of fuel. Does she therefore agree that we should reverse the VAT rise, which has increased the cost of filling up a 50-litre tank by £1.35?

Photo of Justine Greening Justine Greening The Economic Secretary to the Treasury

I do not want to stray too far from the topic or I will be out of order, but the hon. Gentleman must be aware that VAT had to rise because the outgoing Labour Government left us with a huge fiscal deficit, and we all know that the previous Labour Chancellor proposed the rise too. Labour’s attitude had been to ignore it; our attitude has been to try to deal with the structural deficit. In fact, only yesterday the International Monetary Fund backed our plan, which shows that the country is on the right track. The shadow Chancellor may ignore those reports, but they show that we are on the right track.

Clearly, we want to ensure that we do what we can to support the oil and gas industry. Clause 63 addresses two matters on fuel allowances that the industry raised.  By removing some income from the scope of the supplementary charge, the field allowance provides an incentive to invest in certain types of new fields. [Interruption.]

Photo of Jimmy Hood Jimmy Hood Labour, Lanark and Hamilton East

Order. The hon. Gentleman must not read papers in Committee.

Photo of Ian Mearns Ian Mearns Labour, Gateshead

I was not reading the paper, Mr Hood, I—

Photo of Justine Greening Justine Greening The Economic Secretary to the Treasury

Thank you, Mr Hood. The first matter is in respect of fields that have been decommissioned. A company may decide that such a field should be redeveloped, which we would very much welcome. From a policy perspective there is no reason to treat such a field differently from a new field. It is appropriate that the field allowance should be available in such cases, but because the field is not “new” within the terms of the legislation, no allowance is available. We want to address that problem.

The second matter is in respect of the accounting period for which the field allowance is first able to reduce taxable profits. The allowance cannot currently reduce profits until the accounting period following that in which the development of the field is authorised. The delay in obtaining the benefit of the allowance is unintended and inappropriate, particularly if a company develops a field quickly, because it can find that the benefit of the allowances is unavailable until the following accounting period. We want to address that problem.

The clause makes two changes. First, it treats a field of which all the assets have previously been decommissioned as a new field, therefore such a field will potentially be eligible for the field allowance. Secondly, it enables the field allowance to reduce taxable profits for the accounting period in which the development of the field is authorised. We published the draft clause back in December, and we discussed it previously with industry advisers. No comments have been received.

Broader discussions with the industry are ongoing. It is probably not wise for me to give a running commentary on those discussions because it would not be helpful to the industry.

The right hon. Member for Delyn mentioned Centrica and its decision on the South Morecambe field. It is not unusual for Centrica not to reopen the south Morecambe field in the summer. The 2010 Centrica accounts show that the field reopened later in the year in 2010 when the gas price increased, so it is quite possible that that approach will be taken this year. The right hon. Gentleman is right to flag up concerns about jobs, and Centrica has confirmed that no job losses will result from the commercial decision to shut the South Morecambe field temporarily.

More broadly, the analysis, which was carried out not only by Wood Mackenzie, but by Professor Kemp at Aberdeen university, shows that the tax increase on the supplementary charge is likely to have only a small impact—a reduction of about 2%—on projects and new fields. Understandably, investment is driven by movement in the oil price or companies’ screening hurdles, which can have far more effect. Nevertheless, as we pledged in the Budget, we are working with the  industry to address the marginal fields that have been impacted. We are looking at how we can use field allowances and the broader oil and gas tax regime to ensure that those marginal investments still go ahead.

Having addressed the points raised by the Committee, and having given some explanation of what clause 63 will do—the clause brings forward changes that have been requested by the industry—I move that the clause stand part of the Bill.

Photo of David Hanson David Hanson Shadow Minister (Treasury)

I accept what the Minister has said. The new measure is sensible and encourages the redevelopment of older fields with new technology. It also enables the allowance to be claimed in the accounting period in which the field is authorised, which means that the legislation will now work as intended. I am happy with that.

The clause mentions the supplementary charge, and I wanted to stray slightly by asking the Minister for an update on her discussions with the oil and gas companies on the supplementary charge proposals as a whole. I fear that I have not got much further, but I have received an update of sorts that said, “We are in discussions.” That does not tell me anything more than I have read in the paper. I would like a little more from the Minister on what those discussions have meant, because she will be aware that there has been considerable concern in the oil and gas industry about the impact of the supplementary charge proposals as a whole on the potential for investment, the potential for developing new fields, the potential for extending existing fields and the potential for reopening fields that are currently not being utilised to the full. The latest briefing that I have been provided with raises issues such as trust, employment, security of energy supply, exploration of new reserves and wider energy sector tax revenues, all of which are important.

I would like to press the Minister a tad more. As part of the supplementary charge issue generally—the words “supplementary charge” are in clause 63—will the Minister give an indication of when she expects to complete any discussions with oil and gas companies? What mechanism will she have to report back to the House on any outcomes from those discussions, not only on their welcoming of clause 63, but on their engagement with the Minister on clause 7? It is important that the Minister gives us some indication of what the outcome of those discussions is likely to be. I accept that a running commentary is not always helpful, but before we leave this clause, it would be useful to have an indication of the time scale involved, and know when the Minister will report back and whether the measures in clause 63 will be impacted on by the wider discussions with industry about clause 7.

Photo of Justine Greening Justine Greening The Economic Secretary to the Treasury

In response to the right hon. Gentleman’s further questions, he will be aware that we have talked to industry about a number of issues. One issue that is important to industry, for example, concerns certainty about decommissioning relief, and a working group has been established to look at that. As we made clear at the time of the Budget, we are also looking at field allowances and clause 63 seeks to make those work more effectively. As the right hon. Gentleman will know, the nature of the UK continental shelf means that there  is an increasing challenge in the new fields that companies are looking at, whether they are of tight gas or heavy oil. There are a number of technical challenges, and the field allowance regime was brought in to provide a more nuanced tax regime to help unlock those additional opportunities. We are in the business of talking to the oil and gas industry about how to ensure that field allowances work more effectively.

The right hon. Gentleman will be aware that we have had extensive discussions with Centrica about the impact on gas. I have already said in Parliament that Treasury officials went to Centrica’s offices to talk on its home turf about its views on the increase in supplementary charges. It is probably not for me but for the Chancellor to talk about what measures—if any—will come through and when. The usual time frame for announcing such measures is the Budget, so it is probably not wise for me to go any further than that today. I reassure the right hon. Gentleman that we are working with industry and making progress on issues such as decommissioning relief. Over the coming months, no doubt he will hear more of the results of those discussions.

Photo of David Hanson David Hanson Shadow Minister (Treasury)

I fear that I am not much further on, but I understand the Minister’s perspective and why she is not able to give a running commentary on those matters. I felt it was important to try to get at least some indication as to whether the talks she is having will influence the Bill, as opposed to a future Budget. The Bill has not yet completed its passage through the House of Commons, and it remains to be considered on Report. Following her initial announcement and discussion on Second Reading, the consideration in Committee of clause 7, and of clause 63 today, does the Minister anticipate any further proposals being examined and brought back for consideration pending Royal Assent, not in a subsequent Budget in 2012 but in the Bill? I thought that the Minister might follow up on her discussions and have some news for us on the concerns that have been raised by many Labour Members—and elsewhere—about the potential impact of the whole package of clauses 63 and 7. It appears that we shall have to wait for a future Budget, which in itself provides an indication of the response to the consultation that is being undertaken. With those comments—I fear that “head” and “brick wall” are words that go together on this matter—I shall sit down and wait for a future discussion.

Question put and agreed to.

Clause 63 accordingly ordered to stand part of the Bill.