Finance (No. 2) Bill – in a Public Bill Committee at 2:15 pm on 13th May 2014.
With this it will be convenient to discuss the following:
That schedule 11 be the Eleventh schedule to the Bill.
Amendment 22, in clause 65, page 55, line 36, at end insert—
‘(1) The Chancellor of the Exchequer shall, within three months of Royal Assent, undertake a review of the impact of the creation of the onshore allowance introduced under this section.
(2) The report referred to in subsection (1) above must in particular examine—
(a) the estimated total loss of tax revenue to the Treasury in the next 10 financial years;
(b) the impact on onshore oil and gas exploration and field development in the next 10 years; and
(c) the differential impact on individual shale fields.
(3) The Chancellor of the Exchequer must publish the report of the review and lay the report before the House.’.
Clause 65 stand part.
That schedule 12 be the Twelfth schedule to the Bill.
Clause 64 and schedule 11 amend the Corporation Tax Act 2010 to extend from six to 10 the number of accounting periods for which a company can claim ring fence expenditure supplement in relation to qualifying expenditure or losses from onshore oil and gas activity. As the oil and gas trade is subject to high start-up costs and a relatively lengthy period of likely unprofitability, the supplement currently allows both onshore and offshore companies operating inside the oil and gas ring fence to lift their ring fence losses—or, in the period before their trading, their qualifying pre-commencement expenditure —by 10% for up to six accounting periods to maintain their time value until they can be offset against future profits. Clause 64 and schedule 11 extend the ring fence period to up to 10 accounting periods, but only for onshore activity because, to quote the tax information impact note:
“The early development of projects for shale gas and other onshore hydrocarbons is expected to have longer payback periods than offshore hydrocarbon projects and to be dominated by companies which do not have existing ring fence profits against which to set their expenditure. Extending the number of accounting periods for which these companies can claim RFES allows them to maintain the value of their expenditure for longer to recognise the extended period before they are able to utilise those amounts.”
The Government have said that they expect the measure to support companies involved in the exploration and appraisal of onshore oil and gas projects. However, the tax information impact note makes it clear that it is expected to have nil Exchequer impact over the period 2013-14 to 2018-19, and states:
“Only a small number of UK businesses will be affected by the measure. This measure is expected to have a negligible impact on these businesses.”
It would be helpful if the Minister indicated the number of businesses that will benefit from the measure and how many jobs may be created or supported as a direct result of its introduction, given that HMRC believes it will have a negligible impact. I am sure that it will have undertaken an assessment of that impact, however negligible.
I turn to amendment 22 and clause 65. The Government intend the clause to support the onshore oil and gas industry through the exploration phase and into development. If exploration establishes the commercial viability of the UK’s onshore oil and gas resources, there could be significant longer-term increases in domestic production of hydrocarbons, which would increase energy security, create jobs and bring benefits to the UK supply chain. Clause 65 and schedule 12 will replace existing field allowances for onshore oil and gas projects with a new onshore allowance, which will exempt a portion of profits made from such projects from the supplementary charge.
As Committee members will know, in addition to the ring-fenced corporation tax, which is set at 30% for profits of more than £1.5 million, oil and gas companies are subject to an additional tax—a supplementary charge—on adjusted ring-fenced profits, which is set at 32%. Field allowances provide relief by reducing the amount of adjusted profits on which the supplementary charge is due for both onshore and offshore oil and gas projects that meet certain conditions, thereby significantly reducing the effective tax rate on that portion of eligible onshore projects from 62% to 30%.
Before I outline the Opposition’s significant concerns about the measure and speak to amendment 22, I want to give the context of our wider position on onshore gas projects, or shale gas exploration and extraction through hydraulic fracturing—more commonly known as fracking. The Opposition’s approach to shale gas is to foster a mature debate, adhere to our climate change commitments and ensure that fracking takes place only in a robust and appropriate regulatory environment that provides safeguards for local communities, with local consent after legitimate environmental concerns have been properly addressed. Gas has a role to play, alongside renewables, nuclear, and carbon capture and storage, in the future balanced energy mix, which should be as low carbon as possible without endangering our energy security.
With 80% of homes reliant on gas for heating and in the context of declining North sea production, shale gas may have a positive impact on our energy security. However, we have been clear that shale gas cannot come at the expense of our long-term climate change commitments. Indeed, the Opposition have pledged that a future Labour Government would introduce a 2030 decarbonisation target as soon as possible after coming to office, committing the Government to a target for the effective decarbonisation of the power generation sector and setting out the long-term direction of Government policy.
Does the hon. Lady accept that shale gas could make a contribution to decarbonisation, because gas produces half the amount of carbon dioxide as other fossil fuels such as petrol, diesel and coal?
I will come to those points. I have made clear that we accept that gas has a role to play as part of a balanced energy mix, but the benefits of fracking have been somewhat overstated. I will explain why that is our position. A future Labour Government would ensure that the development of shale gas in the UK went hand in hand with support for carbon capture and storage projects, which we believe to be the key to a long-term future of fossil fuels as part of our energy mix.
Can the hon. Lady name more than two successful carbon capture and storage projects in the world today?
That is the very point we are debating. There has to be support for carbon capture and storage if we are going to realise the benefits.
I wonder whether the nation, and indeed the world, would be further forward were it not for the fact that when the coalition came to office it cancelled the carbon capture and storage power projects that were on the stocks prior to the election.
I thank my hon. Friend, because as we debate these clauses it is important that we put into context some of the concerns surrounding shale gas exploration.
I am grateful to the hon. Lady for giving way again. She has been very kind. She said that the development of shale gas, which is an issue of energy security, must go hand in hand with the green agenda. She suggested carbon capture and storage as a way forward. What further expenditure does she believe is necessary to build the carbon capture and storage environment in the UK?
I believe you would rule me out of order, Mr Caton, if we were to turn this into a debate on carbon capture and storage. The Labour party has clearly set out that we believe there needs to be a balanced approach to the energy debate. That stands in contrast to the coalition’s approach to energy, particularly that of the Conservatives, who appear—this is backed up by the rather frantic contribution from Conservative Members today—to have settled on fracking as a panacea to all our energy concerns, whether energy security or ever-increasing domestic and business energy bills. That has led to Ministers repeatedly overstating the potential benefits of a new and relatively untested technology and, of course, the measure introduced by clause 65.
Can the hon. Lady tell the Committee where this technology has been “untested”?
Catherine McKinnell rose—
The Minister mentions the US. I will explain why we are concerned about direct comparisons with the US, which seem to contribute to the overstating of the Government’s position.
Shale gas is simply not the cheap, abundant, immediately available silver bullet that the Government would like it to be and often suggest it is.
I thank the hon. Lady for giving way; she is being most generous and I will try not to be too frenetic or overly excitable. Has she seen the report from the other place on this subject, which was produced by a cross-party group? It was very supportive and said that we should move faster on this issue.
I thank the hon. Gentleman for his non-frantic contribution to the debate. I have seen the report that he refers to. I do not want the Committee to misunderstand the argument that we are putting forward, because we have said that we welcome fracking as part of the solution to a mixed and balanced energy security for this country. However, we wish to highlight our concerns about the Government’s approach on this issue.
The Minister of State, Department of Energy and Climate Change, the right hon. Member for Sevenoaks (Michael Fallon), has spoken about some 20 to 40 exploration wells being drilled in the UK in the next two to three years. Many industry commentators indicate that we are likely to see just one to two wells at most by the end of this year. Indeed, an Ernst and Young report commissioned by the United Kingdom Onshore Operators Group, which was published just last month and for which the Energy Minister provided the foreword, made it clear that this is no imminent revolution, with shale gas production unlikely to get going until 2020 and peak production not expected to be reached until a decade from now, in 2024. The EY report also stated:
“It is not yet possible to make any forecast of potential recovery rates”, because although we know that the gas is in the ground, we do not know how much of it is extractable. Shale gas is, therefore, a significant unknown and not a certain proposition.
The hon. Lady says that shale gas is “a significant unknown”. Does she not think that her amendment will only make it even more difficult to extract shale gas and explore for it, and therefore make it even more unknown? It seems that she supports shale gas on the one hand and yet does not support it on the other.
No, I do not agree, because our view is that there needs to be a balanced debate that is fully informed, and we will take a reasonable, rational and honest approach to it. Our amendment seeks to assist the Government in that end.
Of course, the Government have been particularly keen to emphasise the jobs potential created by shale gas exploration and production. The Opposition welcome the development of highly skilled employment. However, we are again concerned about the over-optimistic promises being made by Ministers. Just in January, the Prime Minister predicted that shale gas would develop some 74,000 jobs, citing a May 2013 study by the Institute of Directors that was funded by the firm Cuadrilla. However, an independent strategic environmental assessment undertaken by AMEC and commissioned by the Department of Energy and Climate Change concluded that the next licensing round for shale gas could deliver
“16,000-32,000 full time equivalent…positions” in the peak development phase,
“including direct, indirect and induced jobs”.
Even if the Government extended their model to include the current licence sites, the job creation estimate would still be 10,000 to 25,000 fewer than the figures predicted by the Prime Minister.
Of course, the over-optimism does not stop there. We all know the Government are desperately keen to find an answer to the ever-increasing domestic and business energy crisis, and little wonder after household energy bills have increased by more than £300 since 2010, while a typical small business has seen its energy bills rise by more than £13,000 in the same period. So we have repeatedly heard the Prime Minister, Chancellor and Energy Minister propagating one of the most pervasive myths about fracking, namely that it will deliver significantly cheaper bills. Indeed, the tax and information impact note for clauses 64 and 65 suggests that any increase in shale gas production resulting from those measures would contribute to the security of the UK’s energy supply and has the potential to lower bills for households and businesses.
I was going to explain, but if the hon. Gentleman would like to intervene before that, he can do so.
I thank the hon. Lady. The point is that a lot of our energy is from resources outside this country and is part of the global market, where this country cannot control price fluctuations. When energy is home-grown, this country is much more able to control price fluctuations, particularly if that energy is bountiful, because that helps to drive down the cost. Surely hard-working people and their families deserve to have lower electricity, gas and energy bills.
Indeed, but the concern is that the Government’s analysis is based on experience in the USA, which has seen lower bills as a result of fracking. The Government make a simplistic extrapolation from the US experience, which is just not valid in the UK context. Lower prices for domestic consumers and businesses in the US have in part been because the US is not able to export gas. As supply increases in a closed market, the cost correspondingly decreases. In contrast, the UK is well connected to the European gas network and any cost-reducing benefits of an increase in supply will be shared with the rest of the continent, dissipating the impact, particularly as extra-European demand for gas is likely to increase.
Could it be a coincidence that we see certain energy companies moving away from offshore wind projects and hydro projects towards fracking, which they see as an easier and cheaper opportunity to make a quick buck? Fracking has been encouraged in the tax system, which has led to the companies putting aside all other green projects.
There is a real worry that if we put all our eggs in one basket and believe that fracking is the silver bullet to solve many of our concerns about the cost and supply of energy, we will, to our detriment, not have a broader, more balanced approach to renewable energy production and other forms of energy production along with fracked gas.
I am listening carefully to what the hon. Lady is saying. So far, I have not heard her mention energy security. Is she comfortable with the fact that her party’s potential Government would rely on gas supplies through Ukraine for longer than would be the case under the current Government’s policy?
I have very much mentioned energy security, and it is one reason why the Government support the moves towards fracking, where it is in the correct, safe and properly considered method.
To return to the point I was making about the Government’s over-optimism, the geography of the two countries is completely different and makes exploration less likely in the UK. Many areas of the US where production takes place are largely deserted. Despite what the Chancellor’s father-in-law, Lord Howell, might like to think about the “desolate” north-east or north-west—whichever it is—the UK is a much more densely populated environment. That will affect the exploration and extraction permissions that local authorities grant.
I do not claim to be an expert on fracking, but I do know that when Lord Howell described the “desolate” north-east as an appropriate place for fracking, he could not have been more wrong. Both geographically and geologically, the north-east is regarded as a low-yield area. I think that he meant the north-west, and corrected himself the next day by saying that his comments about the “desolate” north-east should have been about the north-west. It is worth making that point for the record.
My hon. Friend makes an important point, because there are significant geological distinctions that make the UK very different from the US. UK shale is also considered to be thicker than that in the US, which makes extraction harder.
If Lord Howell meant to refer to the north-west, does that mean that there is a strong possibility that there will be fracking in his son-in-law’s constituency of Tatton?
My hon. Friend raises an important prospect. I have a map of the part of the UK that seems to be the most likely given its potential yield. It does not seem to be broken down by constituency, but it is worth a closer look.
Nicholas Riley of the British Geological Survey commented that
“faulting and changes in the rock type both vertically and horizontally” mean that the fuel pools are more separated in the UK. The US Energy Information Agency explained that that is why the UK’s
“drilling and completion costs for shale wells are substantially higher” than in north America. In other words, believing that the US experience of fracking, including lower energy bills, can simply be replicated in this country is misguided. That view is shared by many experts, including Lord Stern, the author of the review on the financial implications of climate change and the chair of the Grantham research institute on climate change and the environment at the London School of Economics. He commented:
“It's a bit odd to say you know that it will bring the price of gas down. That doesn’t look like sound economics to me. It’s baseless economics.”
I am grateful to the hon. Lady for giving way again; she is being very generous. She mentioned the British Geological Survey. Is she aware that when it gave evidence to the Energy and Climate Change Committee it made it clear that the 15% extraction rate of the total pool of shale gas that may be available to us in the UK could give us 60 years’ worth of gas supply? Does that not conflict with the points that she is making in relation to her concerns about shale gas?
The point is that there is a lot of conflicting information out there and a lot of uncertainty surrounding it. That is the reason for the amendment. To give a tax relief without a greater level of understanding of what the potential yields, implications and geological consequences of fracking might be is a questionable approach.
I am grateful to the hon. Lady. I promise it will be my last intervention, unless I hear something else that requires an intervention. She has mentioned her amendment and she said earlier that there is an expectation that there will be minimal exploration drilling in the next year or two, and therefore minimal extraction. Why is it necessary to undertake an examination of the estimated total loss of tax revenue to the Treasury when, by her own admission in her earlier remarks, such revenue will be negligible, if she is right?
That is very much the purpose of the amendment. We need to look at exactly why the Government are giving a tax incentive when their own tax information and impact note states that its impact will be negligible. The Government need to answer that question. Our amendment asks for an estimated total of the tax revenue that is due to be lost over the next 10 years, and it asks about the impact on exploration, because there does not seem to be any assessment of what the impact on exploration will be and what impact it will have on field development over the next 10 years. We want a little more transparency from the Government in relation to the potential impacts.
I can see that Government Back Benchers are interested in the subject. I am sure they would support greater transparency from the Government as to what their intentions are and what their assessments are of the impact of the tax incentive that is being granted in the Bill.
I have proposals in my constituency for underground coal gasification, and shale and underground gas exploration. The hon. Lady supports underground coal gasification in her area in her constituency. It is important that we look at working cross-party on how to bring forward these new technologies on a bipartisan basis, rather than going on about how it is bad because we want to keep the green vote. There is a real issue about energy security in this land, and the Labour party should be more constructive and more embracing of how we deal with these issues for the long-term future of our whole nation.
I think the hon. Gentleman is sincere in his comments but cynical about what the Opposition are putting forward. We are putting forward concerns that are held up and down the country by members of the public about the level of uncertainty and unknowns on this subject. All we are asking for is a bit of transparency and proper assessment of the impacts that these changes will have.
I return to those experts who agree that it is not possible to extrapolate the US experience and apply it to the UK and get the same results. Bloomberg New Energy Finance stated:
“Exploitation of the UK’s significant shale gas resources is unlikely to result in low natural gas prices. The cost of shale gas extraction in the UK is likely to be significantly higher than in the US, and the rate of exploitation insufficient to offset the decline in conventional gas production, meaning market prices will continue to be set by imported gas.”
DECC’s own chief scientific adviser Professor David MacKay concluded:
“Because the UK is well connected to the Western European gas market, the effect of UK shale gas production on gas prices is likely to be small.”
So despite all the serious concerns that I have outlined about the Government’s over-optimism about the benefits of fracking, the Chancellor decided to offer, through clause 65, a very generous tax concession to shale gas operators, in the mistaken belief that fracking offers the answers to all of our energy problems. It would appear that Government Back Benchers share his absolute belief.
Although the Minister might argue that such tax incentives are required to stimulate the new market dealing with a number of unknowns, such as size, recoverability of resources and the regulatory framework, the Opposition strongly believe that it is precisely those issues, including environmental and safety concerns, that need to be clarified before there is any consideration of advantageous tax treatment for this sector.
As my hon. Friend the Member for Rutherglen and Hamilton West (Tom Greatrex) commented in his capacity as shadow Energy Minister,
“Announcing community benefits and tax breaks before we know how much shale gas is actually recoverable, or before anyone even has a licence to extract it, is typical of a Government that seems prepared to accept fracking at any cost.”
The Opposition simply do not accept that any substantive case has been made for the type of blanket tax break being offered by clause 65, especially when there remain such unknowns about the commercial viability of fracking in the UK context. Marginal field allowances granted for offshore activity in the North sea are an exception rather than the rule, and are given on the basis of commercial viability in relation to specific fields where conditions mean that costs are higher than in other fields.
The generous and blanket tax reduction being proposed by clause 65 is quite different. In that context amendment 22 calls on the Chancellor to undertake a proper review of the likely impact of the measures introduced by clause 65. It is an entirely reasonable amendment and one that all Committee members should be prepared and keen to support, as we believe that it is only right to be fully aware of the likely impact of this generous, blanket tax break for the shale gas sector;
If the Minister is not prepared to back the amendment, the Committee would benefit from her addressing some of the issues that have been raised. Although the tax information and impact note suggests clause 65 will have a net Exchequer impact of £45 million between now and 2018-19, could the Minister estimate the total loss of tax revenue to the Treasury in the next 10 financial years as a result of this measure? What specific impact does she expect clause 65 to have on onshore oil and gas exploration, in terms of increased investment and activity?
Does she, like the Energy Minister, expect to see between 20 and 40 exploration wells being drilled in the UK in the next two to three years? Could she clarify how many jobs the Government currently expect to be created as result of the shale gas industry? Could she outline the evidence base for the claims repeatedly made by the Prime Minister, Chancellor and Energy Minister that fracking in the UK will lead to lower energy prices for domestic and business consumers?
Given that the blanket measure apparently came as a complete surprise to the industry on its announcement, could the Minister confirm what representations the Government received, and from whom, for this measure to be introduced? Finally, in this context, will the Minister comment on the likely impact on the shale gas sector of not proceeding with the clause?
It is a pleasure to serve under your chairmanship again, Mr Caton. We are discussing a tax cut for a particularly contentious and challenged method of gas extraction. Because the Government are slashing in half the tax that the energy industry would pay, it may look on the surface as though they are saying that it may frack at any cost.
My previous intervention was about the impact on green industries and green generation. The public are aware of opportunities to produce energy other than fracking up and down the country, if indeed that is allowed to take place: we have been made aware that there will be no extraction in certain areas. Two such green projects in my area have been shelved by energy companies, because—it is no coincidence—they are now looking to fracking as a cheaper alternative to get into the energy market. One project for wind energy off Tiree, which Scottish Power had expressed interest in and for which it was looking at obtaining a licence, has been shelved. The construction of such offshore wind generators would have brought many jobs to my constituency. Some hydro projects have now also been shelved. Again, it is significant that that those decisions came at such a time.
The public remain unconvinced that fracking is a way forward. We have absolutely no idea, and the Government cannot say with any certainty, how much gas down there will be recoverable through this process and, as my hon. Friend the Member for Newcastle upon Tyne North said, we do not even know if anyone has a licence for that, yet the Government seem happy to halve the tax to encourage companies to step forward. Only when the public have confidence that the environmental issues have been looked at and when they have some idea of the amount of gas that can be extracted will they move towards supporting this method of energy retrieval. There are real dangers for the other, green industries from fracking.
In a nutshell, I had the pleasure last Friday of visiting Rettig, a large manufacturer of radiators in my constituency that took over Myson. It is one of the largest manufacturers of radiators in the country. From the horse’s mouth, the managing director—without me prompting him at all—told me that, from his perspective, the Government’s green deal has been an unmitigated failure.
I agree wholeheartedly that the Government’s green deal has been an absolute disaster. The uptake figures further emphasise that. We do not want to sacrifice the other, green industries by giving this massive tax cut to promote and encourage fracking. It is wrong that this industry should be given a pre-emptive tax cut. We ask for our amendment to be supported.
It is a pleasure to serve under your chairmanship again, Mr Caton. My hon. Friend the Member for Newcastle upon Tyne North said that Labour’s proposed amendment is reasonable and I entirely agree. In fact, I would go further. The amendment is not only reasonable, but essential for the future of our energy infrastructure. We heard a lot in the run up to the previous general election about the Conservative party changing its persona and somehow embracing the green agenda. However, the truth will out. The Prime Minister was reported as saying to his advisers last year that they needed to get rid of “the green crap.”
This measure is an example of the Prime Minister’s wishes being brought to fruition. It is also important, for the record, to acknowledge that in the Budget the Chancellor did his level best to ensure that investment in the green renewable energy sector was all but eliminated, and that is regrettable. The Committee heard various flurried interventions from Government Members about their concern for energy security. If they were genuinely concerned about energy security, surely they would have protested about a proposal from the Chancellor that effectively kills off a meaningful future for the renewable energy sector?
I would hate to think that the hon. Gentleman’s statements were not based on facts, so I thought I would read a fact out. Is he aware of a written ministerial statement yesterday confirming that in December 2013, consent was given for more onshore wind farms with more megawattage—I do not really agree with this, but alas, this is the case—than in any previous month in the United Kingdom?
It is interesting that the hon. Gentleman is trying to rescue his party’s reputation, which is torn and tattered. It is widely reported that experts in the field are saying that the UK is virtually a no-go area for investment in the renewable sector due to the Government’s approach to the whole issue. If Government Members were genuinely concerned about energy security, they would be doing more to promote the renewable energy sector, not, for example, completely undermining solar energy by chopping and changing the feed-in tariff regime.
If the hon. Gentleman is concerned about there being an appetite for solar power, he should visit Wiltshire, where there are numerous applications under way. Why would any energy company be interested in raising finance to invest in new electricity generating capacity when a prospective Government are committed to freezing the company’s prices and preventing it deriving a return on that investment?
There speaks a Liberal Democrat who is clearly under the control of his Conservative masters. Opposition Members will never defend the interests of big corporate concerns that are ripping off consumers. I am proud of the future Labour Government’s commitment to freezing energy prices. Hard-pressed consumers are being ripped off by the energy utilities in the United Kingdom. It is instructive and interesting to hear a Liberal Democrat stand up for the big six energy companies which are blatantly ripping off the British consumer.
Does my hon. Friend agree with Lord Lawson, who told The Times that Britain “doesn’t have an energy policy” at all? The Times in its editorial said:
“the coalition energy policy is a tangle of regulations, subsidies and incentives. There is delay in investment, driving up prices over the long term and making blackouts a real possibility by as soon as next year.”
I am grateful to my hon. Friend—I could not have put it better myself.
In response to the comment that the Labour party was somehow trying to shore up its green flank, Government Members should be aware that Labour’s record on the environment is second to none. I remind the Committee that the Climate Change Act 2008 was introduced by a Labour Government. I must take exception when Government Members refer to their concerns about energy security not only because of the manner in which they are undermining renewable energy in this country, but because it was a Conservative Government who decimated the coal industry in this country—[Interruption.] Government Members may laugh, but there are hundreds of years of coal reserves under our feet. It is no coincidence that when this coalition came to power, it cancelled—[Interruption.]
Order. I need to be able to hear the speakers. We should return to the clause and amendments that are under discussion.
I will, Mr Caton, but, to finish my point, it is no coincidence that the coalition cancelled the four demonstration carbon capture and storage projects that were on the stocks prior to the election.
My other point on energy security is that 50 million tonnes of coal were imported into the United Kingdom last year, so coal is clearly still an important part of the mix. If we are genuinely and seriously concerned about energy security, which we should be, in particular given events in Ukraine, we need to consider all the available options and not rush headlong into a potential environmental catastrophe by giving tax breaks to the fracking industry—one wonders about the hidden agenda there—while undermining carbon capture and storage and the UK’s renewable energy sector.
I am grateful to my hon. Friend for giving way. Short-term energy security is also important, because, as he points out, we hope that the gas supply from Ukraine is not in jeopardy, but we just do not know. Of course, much of the coal that we import into places such as the port of Tyne—coal is being taken to Newcastle—also comes from Ukraine.
My hon. Friend is absolutely right.
In conclusion, it is essential that the amendment 22 is passed. We should not be rushing, using taxpayers’ money, to encourage an industry that focuses on something that might not even be extractable, as my hon. Friend the Member for Inverclyde has suggested. There are also environmental concerns, not least in relation to carbon emissions—notwithstanding the fact that the carbon emissions are somewhat less than those from coal power generation. If we are serious about a decarbonised economy, we cannot be putting too many eggs—can we?—in the fracking basket. While it may be part of the mix, we need to consider supporting and encouraging the renewable energy sector.
I thank the hon. Gentleman for giving way, because my point is relevant to the debate and the Bill. Given his concerns about hydraulic fracturing, am I right to interpret from his remarks about coal that he would rather the UK burn more coal—more UK coal—for electricity than develop hydraulic fracturing to extract gas? Is that his position?
My position is this. First and foremost, we should seek to expand the UK’s renewable energy capacity. Secondly, I think there is a potential role for fracking, but a lot more research needs to be done before we start to give these big tax handouts to exploit this unproven technology in the UK. Coal could form part of the mix—particularly when, as I said, we imported 50 million tonnes of coal last year. What are we doing? There is potentially a role for coal, but we need to invest in carbon capture and storage to ensure that we have clean coal technology and do not exacerbate the environmental implications.
The most important thing is to ensure that we decarbonise our economy. That means investing in renewable, but also reducing the demand for energy, and not by undoing and undermining our industry, but by reducing the demand through better energy efficiency measures. That would mean a massive investment in energy efficiency, home insulation and more efficient measures in industry as well. That would not only be environmentally beneficial, but would generate hundreds of thousands of much needed, highly skilled jobs in our country. That would help to create an economic virtuous circle, because those people would obviously pay tax and national insurance, creating demand in the economy, so everyone would benefit.
The hon. Gentleman is very generous in giving way, as well being very entertaining. He made the point that the expansion of the green renewable economy is important. Is he aware that today wind power generates 538 MW of capacity? That is 1.5% of our national needs. If he so keen on a massive expansion in our green economy, how much does he think we need to generate?
It is not just about wind turbines. I have already made the point that it is about reducing the demand and looking at a range of different areas of renewable technology. Solar plays a part, as does geothermal. There is a host of different areas that could be looked at. I do not want to put a figure on it, but I know it needs to increase. It is vital for the future of humanity and the long-term economic interests of the UK. I very much endorse and support the amendment of my hon. Friend the Member for Newcastle upon Tyne North.
It is a pleasure to serve under your chairmanship, Mr Caton. I will be brief because I do not want to detain the Committee. I wanted to follow the hon. Member for Derby North because I am not convinced that he is the one for picking winners in any argument. At the weekend he was praising the Venezuelan Government for being so wonderfully democratically elected—interesting—and celebrating Hugo Chavez’s legacy. This is a country that is rationing not just food and water, but electricity. Listening to the hon. Gentleman, I tend to think that he would be very pleased for the UK to go down that track.
It is interesting to hear how the Opposition have framed the debate today. In the political environment we live in, we all know that the Greens are chomping at their heels. While Government Members might have our own issues, it is fairly obvious that, for the Opposition, pandering to the Greens is the big deal to try to shore up their core vote at the moment. This amendment is definitely part of that. It is fascinating that the party of miners is now against mining. What a full circle the Opposition have made.
Does the hon. Gentleman think that when Governor Schwarzenegger was in power in California, he was right to pursue a target of a million solar-powered homes, a hydrogen highway and also to reduce carbon—[ Interruption. ] That was really unhelpful. I was trying to make my point and the hon. Member for Tamworth has just ruined it.
Just for the record, my hon. Friend the Member for Tamworth said that we cannot make comparisons with America in this debate. We probably cannot make true comparisons with America, but it is worth looking to America to see what has gone on. On the extraction of shale gas, America did not sign up to its Kyoto targets, but it has hit them, not because it is doing anything dramatic with renewables, but because it has switched its energy production from mainly coal to mainly shale gas. If we want to go greener in the medium term, shale is obviously the way forward.
I understand how the hon. Member for Newcastle upon Tyne North couched her argument, and fair enough, but I do not think the reason for the amendment is the one she stated. Rather, it is to try to put off investment in shale, which is particularly bad for our economy. I hope she will not press the amendment, because we have to invest in this technology. It has been proven to be a game changer. Indeed, I am quite convinced that one reason why President Putin is involved in Ukraine as we speak is the Crimean shale ban and his concerns about Poland and Ukraine becoming energy-efficient in the future.
The hon. Gentleman misreads the Opposition’s amendment. We are asking the Government to look at the potential impact and implications of the change. The amendment would in no way prevent the exploration that clause 65 looks to encourage.
Forgive me, but I listened to the hon. Lady’s speech, as well as reading the amendment, and it was the words in her speech that gave that impression. Realistically, if we want to have energy security and a sensible energy policy, we have to include shale gas. Why not invest in it? One concern she raised was that environmental and other concerns need to be addressed beforehand. If the Government had done that before wind turbines, she could have looked at amplitude modulation and the public health problems associated with wind, or the economic consequences of siting wind turbines close to people’s homes and what that does to individuals. However, the Government chose not to do that; indeed, they have over-subsidised onshore wind to a huge extent, but that is a different argument. I just think it is unwise for the Opposition to go down this particular track, unless of course they are worried about their green fringe.
I thank all hon. Members for entering into this debate. I will set out the reasons why I disagree with what the hon. Member for Newcastle upon Tyne North said, but I thank her for at least waking the Committee up. There is no doubt that energy policy has got Members in all parts of the Committee interested in what we are saying, whereas some of the other, perhaps more exciting clauses have not had that impact.
Clause 64 and schedule 11—which aroused less excitement among hon. Members—make changes to support the early development of onshore oil and gas projects. The change will extend from six to 10 months the number of accounting periods for which a company can claim ring-fence expenditure supplement, in relation to qualifying expenditure or losses from onshore oil and gas projects. It is part of a package of measures providing significant support to the UK oil and gas industry.
As we have heard, the exploitation of shale gas and other onshore hydrocarbons provides—as at least those of us on this side of the Committee believe—a significant economic opportunity for the UK. It could create thousands of jobs, generate billions of pounds of business investment, lead to substantial revenue for the Exchequer and increase our energy security, so kick-starting exploration for onshore oil and gas is very much a part of our economic plan. That includes ensuring we have the right tax regime in place to incentivise early—I emphasise the word “early”—investment.
The oil and gas tax regime includes a ring-fence expenditure supplement, which allows companies without profits in the oil and gas ring fence to uplift their losses and pre-trading expenditure by 10% for up to six accounting periods. That ensures that companies can maintain the time value of their losses and pre-trading expenditure ahead of being used to set off against profits. Onshore projects typically have longer payback periods than those offshore, so the restriction to six accounting periods is likely to act as a disincentive to investment. The changes made by clause 64 will support the development of onshore activity by recognising the longer payback period for these projects and that, at least in its early stages, the industry will be dominated by companies without other profits from oil and gas production.
The change made by clause 64 will amend the Corporation Tax Act 2010 to extend the number of claims available to companies involved in onshore oil and gas activities from six to 10 accounting periods. The measure will have effect for pre-trading expenditure incurred on or after 5 December 2013. For losses arising in an accounting period straddling the commencement date, the measure apportions the losses before and after it. The measure is not expected, as we have heard, to have an Exchequer impact. Together with the onshore allowances, which I will come to in a moment, clauses 66 and 67—the extension to reinvestment relief and to the substantial shareholdings exemption respectively—clause 64 is expected to support companies involved in the exploration and appraisal of onshore oil and gas projects. If exploration establishes the commercial viability of the UK’s onshore oil and gas resources, it could result in a significant increase in domestic production, energy security, business investment and jobs. Any resulting increase in production also has the potential to lower energy bills for households and businesses.
On a point of definition, most of the schedules we are discussing hardly mention gas, so I am assuming it is regarded as a subset of oil. Is gas derived from coal beds by coal bed methanation or gasification, for example, also included in the ambit of this measure?
I thank the hon. Gentleman for that question. The honest answer is that I cannot give him that level of detail now, but perhaps I will be able to do so by the end of my speech. If I cannot, I will ensure that he receives that information.
The hon. Member for Newcastle upon Tyne North asked about the number of businesses that would be affected by clause 64. As I have emphasised, this is about early incentivisation. I cannot predict with any certainty how many businesses will be affected, but we receive many representations to the Treasury that indicate that there are many businesses that want to explore this area. As she said, some wells that have already been sunk.
Let me turn to clause 65, schedule 12 and the Opposition’s amendment 22. In her opening remarks, the hon. Lady said that she wanted to set out the Opposition’s approach to shale gas and that she wanted a mature debate on it. I welcome that, but I gently suggest that that position is not always shared by all Opposition Members. The hon. Member for Derby North spoke eloquently and with great passion, but I am not sure it was quite the mature debate that his colleague on the Front Bench was looking for. If the Opposition want a mature debate, they might also want to examine their party election broadcast from last week, which sank to a new low in British politics.
The one thing that the hon. Member for Derby North said that I agreed with was his call for an energy mix. He is right. We had 13 years of very little action on this issue. The hon. Member for Newcastle upon Tyne North and other Opposition Members talked about everyone going headlong into shale gas and it being effectively the only game in town. However, they completely missed the fact that this Government have got investment in our next nuclear plant going and continued investment in solar and renewables, as well as missing the whole electricity market reform agenda of the current Session—which is just ending—including the contracts for difference, the renewables obligation and all the other changes that have been introduced. Labour had 13 years to address the issue of energy security and supply and it failed to do so. As a result, this Government have had to take tough action and immediate decisions in order to put our energy security on a firmer footing, so I am not going to take any lessons from the Opposition.
The clause and the schedule make changes to incentivise investment in onshore oil and gas projects. They introduce a new allowance, which exempts a portion of a company’s profits from the supplementary charge. The amount of profit exempt will equal 75% of the qualifying capital expenditure that a company incurs on onshore oil and gas projects on or after 5 December 2013. This allowance makes the UK’s tax regime for shale gas the most competitive in Europe. Shale gas and other onshore oil and gas represent a huge economic opportunity for the UK.
The hon. Member for Newcastle upon Tyne North mentioned the Institute of Directors’ estimates that investment in shale gas alone could peak at £3.7 billion a year, supporting 74,000 jobs across the country. I am afraid her remarks typify the Opposition’s economic policy, according to which our long-term economic plan was going to lead to millions more unemployed. As we have seen, the employment rate has reached its highest level. Even if the figure of 74,000 jobs were optimistic—which I do not think it is—I thought it interesting that the hon. Member for Newcastle upon Tyne North dismissed the creation of 16,000 to 32,000 jobs as a bad thing. She also said the creation of between 50,000 and 64,000 jobs was not good enough. For each one of my constituents who gets a job, it is a huge personal success, providing security for them and their families. To say that so many thousand jobs are not worth bothering about is to miss entirely the debate we have had for the past four years in this country about getting the economy back on track and growing.
The benefits of this investment would extend beyond oil and gas to other manufacturing sectors—construction, engineering and others—which is why major industrial employers have publicly supported its development. Developing our indigenous oil and gas resources could lead to lower energy bills for households and businesses. It could increase our energy security, making us less dependent on imported supplies and reducing our exposure to geopolitical risks and lengthening supply chains.
The hon. Member for Newcastle upon Tyne North talked about the US. The US experience demonstrates the potential. In 2012, its shale gas industry accounted for more than 600,000 jobs and paid almost $20 billion in tax. It helped to reduce the price of gas, with prices falling about 70% between 2008 and 2013, improved the balance of payments and reduced dependence on gas imports. It has revitalised the manufacturing sector. It is right to say that the extent to which the US experience can be replicated here is not yet clear, but we are committed to doing everything we can to create the long-term conditions to incentivise investment and support the industry’s development. That includes putting the right fiscal framework in place to ensure that companies can fully explore the potential of our natural resources.
In relation to comparisons with the US, a recent Economic Affairs Committee report states:
“Even if its economically recoverable reserves of shale gas prove substantial, the UK is not likely to see gas price cuts on the scale of those in the US. Indigenous production would however be cheaper than imports of liquefied natural gas (LNG), improve the balance of payments and provide better security of supply.”
Those are all very worthy things that the Government have taken the responsibility to explore.
Will the Minister say whether the Government intend to give the same incentives to companies that wish to explore tidal generation?
Those incentives already exist, with the support for exploration, research and development. The Energy Technologies Institute, which is based in my constituency, has led the way in research, working with the private sector. As I have said, the Government remain committed to a broad energy mix, with energy generated in many different ways.
I was just responding to the hon. Member for Inverclyde about hydropower. The Government are open to all energy sources, in particular to renewables, and have offered many incentives to those different technologies, but today we are discussing shale gas.
Clause 65 and schedule 12 introduce a new allowance to drive early investment in onshore oil and gas projects that are economic but not commercially viable at the 62% tax rate. The onshore allowance reduces the tax rate on a portion of a company’s profits from 62% to 30%. Companies pay at the reduced rate on profits equal to 75% of their capital investment on qualifying onshore projects. To ensure the allowance is appropriately targeted to support only projects that would not have gone ahead without it, very large projects will not be eligible. The allowance includes a provision for cross-site relief. That allows companies to transfer allowance generated on an unsuccessful site to a successful site after a three-year delay, providing companies with a greater degree of certainty on the availability of the allowance and increasing the investment incentive.
As the hon. Member for Newcastle upon Tyne North mentioned, there is a short-term cost to the Exchequer of introducing the allowance—£45 million over the course of the scorecard period. The cost reflects the increased investment that the allowance is expected to generate, which will receive 100% first-year capital allowances. However, the cost is expected to be significantly outweighed by the longer-term revenue generated.
At various points the hon. Lady asked me to obtain and use my crystal ball to predict the number of jobs created, the number of companies that will benefit and how much the provision will cost. The important thing is that we are talking about early-stage investment. That is what the industry has been telling us it wants to receive. It is not possible to predict the impact beyond the scorecard period because projects such as the one we are discussing have long lead-in times and will not fully come into development for many years. Therefore, it is not possible to make the specific predictions she has asked for.
The Minister said that the measure is what the industry has been asking for. I asked a specific question about exactly who had made those representations. As far as we are aware, the allowance came entirely as a surprise to the industry. Will the Government be a bit more transparent about what representations were made requesting the tax break?
The hon. Lady will know that the Government publish a list of all the industry bodies and companies they meet, so I am not going to list them. I assure her that the legislation being introduced has been subject to close and productive dialogue in consultation with industry stakeholders. It has been welcomed by the industry and was subject to consultation with the whole industry, much of which responded. In response to the autumn statement, Malcolm Webb of Oil & Gas UK said:
“Oil & Gas UK supports fiscal plans to encourage exploration and development of the UK Continental Shelf, which will ensure the sector remains an attractive and competitive destination for investment and a driving force in the British economy.”
Amendment 22 asks the Government to lay before Parliament, within three months, a report that considers the loss of tax revenues and impact on onshore oil and gas and field development over the next 10 years. In addition the report should consider the differential impact on individual shale fields. The Government are not minded to accept the amendment for the reasons I will set out. In the Budget, the Chancellor announced a review of the entire oil and gas fiscal regime to ensure it remains competitive and fit for purpose as our oil and gas basins mature. The review will look at all aspects of the fiscal regime, including allowances. It would therefore be unhelpful to review one allowance in isolation, rather than considering it alongside all the other aspects of the wider oil and gas fiscal regime.
Secondly, the amendment asks for the report to be laid before the House within three months of Royal Assent. Much of the onshore oil and gas industry—in particular the unconventional oil and gas industry—is in its infancy, with projects still at the exploratory or pre-exploratory stage. Such projects, as I have said, typically have a long lead-in time and will not come to full development for many years. It would therefore not be possible to assess the full impact of the measure in such a short time scale.
I should be grateful if the Minister confirmed the time scale for the review that is being undertaken on the broader issue. Also, she says it would be inappropriate to focus on one small item as part of a separate review, so by the same token is not it inappropriate to grant a separate tax incentive without first carrying out the review that she says is due to report?
The tax regime is very much in line with the other tax regime that is already available to the oil and gas industry in its widest sense, as it is for the ring-fence proposals that I have just outlined with respect to clause 64. As to the fiscal review, the Government are currently working with industry—in fact, I shall travel to meet representatives of the oil and gas industry next Tuesday, and the fiscal review timings will no doubt be discussed. I am happy to be guided by industry.
One thing that industry representatives repeatedly tell me about at meetings is the long lead-in time for projects and the length of time taken for investment decisions. Those decisions are not quick, and the impact of changes is not necessarily seen instantly. Industry asks us for time in our launching of the review. I do not think I can tell the hon. Lady specifically that it will report by x year or y year. The point is that we are working with and listening to the industry, which has broadly welcomed the announcement of the review.
We do not think it would it be possible properly to assess any loss in tax revenues or potential yield over a 10-year period so quickly. We have estimated the cost of the measure at £45 million over the scorecard period. Beyond that, we would expect an increase in Exchequer yield because of additional production and profits incentivised by the measure, but it is too early to provide specific forecasts. However, industry forecasts are positive for future activity on onshore oil and gas. After the measure was announced in the autumn statement, Ken Cronin, chief executive of UK Onshore Operations Group, said:
“Today’s announcement of a new onshore oil and gas regime is as much about tomorrow as today. To build a strong industry which can contribute to the UK economy, the country needs the correct framework for operators, and that includes a clear signal that an appropriate and fair tax regime is in place that will incentivise the long term nature of investments. The Chancellor’s initiatives should be welcomed as they give that strong signal.”
Indeed, we are already starting to see investment in the UK onshore industry from global players such as Centrica, Total and GDF Suez.
Finally, to reassure the hon. Member for Newcastle upon Tyne North, I can say that, as stated in the tax information and impact note, the measure will be kept under review through regular communication with affected taxpayer groups.
There were some questions and I want briefly to deal with them.
I appreciate the Minister’s setting out the justification for the tax allowance. Given her previous comments about the Government still supporting the renewables sector, why does the Red Book say that the enterprise investment scheme will no longer be available for
“companies benefiting from Renewables Obligation Certificates and/or the Renewable Heat Incentive”?
Is not that the opposite of what she has claimed?
Actually, if the hon. Gentleman had read into this, as my hon. Friend the Exchequer Secretary to the Treasury has done, he would appreciate that that is good news, because the EIS is available for risky investments. We are saying that the renewables industry is maturing in this country and that broader investors who might not want to make risky investments are now investing in that sector. It is good news.
As I was saying, we talked about the views of local communities that might be against fracking. Of course, Members of Parliament from all parties are here to represent our constituents and listen to them when they express concerns. I should put on the record that communities can expect that companies developing shale will engage with them at each of the three stages of operations: exploration, appraisal and production. The industry’s own charter commits it to engage in advance of any operations in respect of any application for planning permission.
I believe that communities should also see concrete benefit. The industry has committed to a package for communities that host shale in their area, including £100,000 per hydraulically fractured well at exploratory stage being paid out to the communities and 1% of revenues during production.
I can understand where the hon. Member for Daventry came from. The trouble was that, like so much else with Opposition policy overall, the amendment tabled by the hon. Member for Newcastle upon Tyne North says one thing—“We quite like shale gas and fracking, but we would like to have a review of it”—but that was not the tone of her comments. There were lots of questions and lots of statements suggesting that the Opposition were saying, “We’re very unsure about this and we’d like to be looking at other things too.”
The hon. Lady talked about environmental concerns, as other hon. Members did. We have been clear that wherever hydraulic fracturing is conducted, it must be done in a safe and environmentally sound way. Robust regulations are in place to ensure on-site safety, prevent water contamination and mitigate seismic activity and air pollution.
The Minister may know that, in my constituency, there are three potential sites for underground coal gasification, which is a form of fracking. My constituents are concerned about the safety of the water table, particularly as it is our drinking water aquifer. They are also concerned about risks of earthquake and earthquake-type risks. Will she confirm that the Government are committed to ensuring that this new technology is absolutely safe, for my constituents’ benefit?
I thank my hon. Friend for his remarks. The Government are listening to the concerns of communities and want to deal with them. That is why new controls have been introduced to mitigate the seismic risks identified following events in Lancashire. A precautionary approach will be adopted for the fracking of the next few wells. The operators will be subject to particularly close scrutiny to ensure that the controls are being applied correctly and that they are effective.
In relation to water supply, water for fracking operations has been provided by local water companies, which are obligated to produce and update a long-term plan every five years that has contingency reserves in case of a drought. Therefore water companies will assess the amount of water available before providing it to operators. I assure my hon. Friend that checks and balances are in place.
The Minister will understand concerns of Opposition Members, Members of all parties and the general population about comparisons between fracking in the United States of America and in the United Kingdom. There is a much lower likelihood of fracking having an immediate impact on someone in the USA. Its land mass is 365 times that of the UK but its population is only five times greater. Obviously, interaction is much less likely to occur in a land mass that great with such a population.
I understand what the hon. Gentleman says and, as I have already said, I understand constituents’ concerns about fracking. I am not going to get into measuring wells and how close the average well is to settlements in the US compared with the UK because I am not an expert. However, I have already set out for the record that the Government are aware of those concerns, and are monitoring and dealing with them.
This is still an important potential energy supply. That is the overall thrust of this debate. Opposition Members agree that it is an important source of energy that we should be exploring. The Government are putting that regime place.
I will not test the Minister any more on her technical knowledge, but let me just say that it is important that the people in this place understand enough about the technology to be able to talk about it. For example, most technologies involved in extracting gas from coal beds are not “fracking” and the word should not be used.
The hon. Gentleman is entirely right. Sometimes in this place we discuss important topics that we may not be experts on. It is right that the correct terms are used. He provides me with a useful opportunity to come back to him on his original intervention before the Division in the House. I can confirm that all hydrocarbon production is subject to the oil and gas fiscal regime, including gas from coal, except when the gas is produced in the course of making mines safe. Clauses 64 and 65 will apply to coal bed methane. I hope that is of assistance.
The hon. Member for Newcastle upon Tyne North asked whether the move to export our gas was incompatible with the UK’s climate change targets. Shale gas is compatible with our legally binding carbon goals. Gas has an important role to play in the UK’s energy mix, while still meeting our commitments under the fourth carbon budget. A continuing role for gas is consistent with decarbonising—much of the capacity will be replacing older and more carbon-intensive coal. I will not have a debate with the hon. Member for Islwyn about where the coal should be produced if we were to still burn coal, but his plea for Welsh coal was heard on both sides of the Committee.
The hon. Member for Newcastle upon Tyne North looked at the tax information and impact note and talked about the Exchequer impact being £45 million over the course of the scorecard period. She did not quote from the economic impact, which states:
“The onshore allowance is expected to increase investment in unconventional hydrocarbon exploration. If exploration establishes the commercial viability of these resources”— meaning that we have to have the exploration in the first place, hence the debate—
“then in the longer term there could be a significant increase in the domestic production of hydrocarbons, increased energy security, the creation of jobs and benefits to the UK supply chain.”
Opposition Members said that the importance of shale gas means that other technologies—the hon. Member for Inverclyde talked about two technologies in his constituency—have been shut down. [Interruption.] They are talking from a sedentary position, but they ought to be thinking about the effect of their price freeze policy on investment in the industry—that proposal is chilling in respect of future plans for investment in the industry.
On the question of whether people who are investing in wind farms will move to fracking for quick money, the answer is no, we do not believe so. Wind farms are not taxed higher than oil and gas rates. They would be taxed, because they are corporations, at a standard rate of 21%, not at 61%. Does the hon. Member for Inverclyde want to intervene?
I thank the Minister for giving me the option to intervene. What is chilling—it is something that the Minister should look at—is families and pensioners having to switch off their energy supply and make a decision between heating and eating.
I wonder whether Opposition Members voted for the decarbonisation target, which would have added another £125 to energy bills. I hope they are doing all they can to promote the warm home discount and encouraging everybody eligible to apply for it and other green schemes. That is £140 available to vulnerable households. I hope the hon. Gentleman sent out that press release to his constituents.
Clause 64 and schedule 11 will ensure that we continue to get the most economic benefit from the country’s oil and gas resources, incentivising investment in onshore oil and gas projects that will provide jobs, growth and greater energy security. I echo those comments for clause 65 and schedule 12. I hope the Committee does not adopt Opposition amendment 22.