House of Commons Hansard Debates for 11 May 1993

Column 664

I should like to quote from the environmental health officer of Canterbury city council--it is not a Labour authority, but we did very well, thank you, in the county elections on Thursday--who has written a report recommending a statutory ban on the disconnection of domestic dwellings. He states :

"The public health movement began in the last century and its major thrust at that time was to control epidemics of infectious disease Our homes are all designed to make hygiene a matter of normal routine ; we all expect an inside WC, a bath, wash hand basin As soon as the water supply is cut off, hygiene becomes virtually impossible and the resulting insanitary' conditions can easily and quickly facilitate the growth of bacteria which cause disease".

We cannot take our public health for granted. At a time when the increase in notifications of water-borne diseases, such as dysentery, is causing great concern, Parliament could do one small thing to help by approving the Bill.

It is part of the Government's role to set and oversee standards relating to the quality of our lives. They must take the responsibility, along with Ofwat, to act urgently to reduce the number of water disconnections to domestic dwellings. But I say that even one disconnection is one too many and cannot be condoned. The practice must cease altogether.

I commend the Bill to the House.

Question put and agreed to.

Bill ordered to be brought in by Mrs. Helen Jackson, Mr. Richard Burden, Mrs. Elizabeth Peacock, Ms Jean Corston, Mr. Chris Smith, Mr. John McFall, Mrs. Anne Campbell, Mr. Paul Tyler, Mr. Bill Michie, Mr. Brian Wilson, Mr. Rhodri Morgan and Mr. Malcolm Chisholm.

Water (Domestic Disconnections)

Mrs. Helen Jackson accordingly presented a Bill to amend the Water Industry Act 1991 so as to remove the powers of water undertakers to disconnect residential premises in cases of non-payment of charges ; to constrain the installation of pre-payment devices for the supply of water ; and for connected purposes : And the same was read the First time ; and ordered to be read a Second time upon Friday 14 May, and to be printed. [Bill 194.]

Column 665

Orders of the Day

Finance (No. 2) Bill

Considered in Committee ‡ [Progress, 22 April ]

[ Mr. Geoffrey Lofthouse

in the Chair ]

Clause 183

Abolition of PRT for oil fields with development consents on or after

16 th March --1993

4.21 pm

Mr. Alistair Darling (Edinburgh, Central) : I beg to move amendment No. 21, page 137, line 32, at end insert

(aa) for which notice has been served that this is a non taxable field under Schedule 1 to the Principal Act : and'.

The First Deputy Chairman of Ways and Means (Mr. Geoffrey Lofthouse) : With this, it will be convenient also to discuss the following amendments :

No. 22, page 137, line 32, at end insert--

(aaa) for which no determination under Schedule 1 to the Principal Act has been made either in whole or in part as a non taxable field and'.

No. 45, page 137, line 34, leave out 16th March 1993' and insert such day as the Secretary of State may appoint by order, which shall be made by Statutory Instrument and shall be laid before and approved by the House of Commons'.

No. 24, page 137, line 35, leave out subsection (b).

No. 40, page 137, line 36, at end insert

or--

one in which in whole or in part, a commitment to a programme of Exploration and Appraisal drilling was undertaken under the terms of a licence agreement and approved by the Secretary of State before that date, where the field participants elect to so classify the oil field and to accept a diminishing percentage of allowable expenditure on exploration and appraisal to be offset against PRT and a ceiling on the amount allowed for each company as allowable expenditure for PRT relief ; the percent-age, the timescale and the ceiling to be determined by the Secretary of State and approved by the affirmative resolution of each House of Parliament.'.

( No. 25, page 137, line 39, leave out subsection (2).

No. 42, page 137, line 41, leave out 16th March 1993' and insert the day appointed by the Secretary of State in subsection (1)(a) above'.

No. 43, page 138, line 1, leave out 16th March 1993' and insert the day appointed by the Secretary of State in subsection (1)(a) above'.

No. 28, page 138, line 11, leave out subsection (b).

No. 35, line 138, line 29, leave out subsection (e).

No. 29, page 138, line 35, leave out subsection (6).

No. 44, page 138, line 36, leave out 16th March 1993' and insert the day appointed by the Secretary of State in subsection (1)(a) above'.

No. 31, page 138, line 42, leave out subsection (7).

No. 32, page 138, line 44, leave out permanent' and insert any'. No. 33, page 139, line 1, leave out paragraph (b).

No. 34, page 139, leave out lines 3 to 5.

Column 666

Mr. Darling : The amendments concern the Government's proposals for the taxation of North sea oil and gas. Our amendments are designed to delay, or to provide for phasing in, the Government's proposals. We oppose the principle of the proposals for reasons that I shall set out, but the amendments would allow the Government to delay and, therefore, provide some transitional protection if the fiscal regime were to change so that petroleum revenue tax, both the tax and its allowances, was abandoned. The remaining and consequential clauses in this part of the Bill also have far- reaching effects and we will return to them later in Committee.

However, the amendments are also designed to draw the Government on what exactly is their strategy for oil taxation and energy policy--if they have one--and what calculations were taken into account when the Chancellor made his proposals. It should be illuminating not only for the Committee and the industry but, I suspect, for the Department of Trade and Industry and the Scottish Office, as the Treasury proposals seem to have taken them completely by surprise.

We should remind ourselves of the importance of North sea oil to the country. Without it, the country would be bankrupt. So far, 11 billion barrels have been recovered, 7 million are under production or development and a further 7.5 million are in potential developments that are known about. It is also estimated that between 4 billion and 25 billion barrels of North sea oil and gas have yet to be discovered, some of it in very difficult conditions. It is further estimated that we have between 15 and 50 years of self-sufficiency, again an important matter, and the position with regard to gas is similar, with between 20 and 50 years of self- sufficiency. These matters are crucial when assessing the role of taxation in our overall energy strategy so that we can maximise our exploitation of this natural resource, not least because of the United Kingdom's severe balance of payments problem. We should also remember that this issue is of national importance. United Kingdom continental shelf sales in 1992 amounted to £7.7 billion--in 1984 they had been £20 billion. In 1992, they contributed 1.2 per cent. of GNP and the annual investment of £5 billion to £6 billion represents 25 per cent. of manufacturing capacity--another formidable statistic.

It is estimated that the Government's proposals will mean that manufacturing investment in the North sea will fall between £1 billion and £2 billion and it is further estimated that there will be a loss of tax revenue of between £2 billion and £4 billion over the next five years and possibly £6 billion over a 10-year period. There is no doubt that there will be a reduction in activity in the North sea.

The Ernst and Young survey of the industry is illuminating. It found that all respondents expect the number of wells drilled in the United Kingdom sector to decrease. A clear majority of those surveyed said that the attractiveness of the United Kingdom for future investment had diminished, and exploration was expected to decrease as a result of the Budget. That is the majority of people involved in the North sea and other United Kingdom sectors. Virtually all respondents expected a decline in the number of personnel working in the United Kingdom offshore industry. That is something which no Government can afford to ignore, especially as we have just heard that if the Swan Hunter yard closes another 6,000 people will join the dole queue.

Column 667

The Committee will know that there has been a mixed reaction to the Government's proposals. We oppose them for three reasons. First and most important, there is a substantial risk that companies will take their new-found profits and invest them abroad. There is no guarantee that the profits that the companies now have will be invested in the United Kingdom sector. Secondly, the traumatic disruption caused to the industry by the suddenness of the Chancellor's announcement will mean that between 10,000 and 30,000 jobs will go. Some of those jobs are of great technical and economic importance and many may be lost for ever. Thirdly, there is no evidence that the Government have any strategy for oil and gas, just as we know that they have none for the coal industry.

We should also bear in mind that much of the future development is likely to be high risk and high cost. Some of the oil finds yet to be explored lie to the west of the Shetlands, in difficult waters. Others are in the Rockall basin, and present formidable challenges in retrieval. Some will be small and will not pay PRT, but, taken together, they could be viable provided that we get the taxation framework right.

I want to look at the Government's position to assess their case for making the change. Their position is a simple and familiar one--the Chancellor was strapped for cash. He desperately needed every penny that he could get. The Chancellor's strategy is a short-term, some would say very short-term, one. Indeed, some unkind people say that the only Chancellorship that he will have in July is that of the Duchy of Lancaster, in charge of the citizens charter--the ultimate humiliation for any Cabinet member.

Even on a charitable view, the Chancellor's calculations appear to have spanned three or four years, rather than the three or four-Government period that is the normal time span for the industry. The Government looked at what has happened with PRT over the recent past and their attention was drawn, not unreasonably, to the fact that they have been repaying PRT over the past two or three years. Instead, they should have looked at what has happened over the past 10 years, because the picture is rather different.

PRT receipts peaked in 1984-85 at about £12 billion because of high production and high oil prices. However, in 1991-92, revenues plummeted to £1 billion, due to the amount of eligible cost being claimed, and a net £200 million of PRT was refunded. I understand that the Minister may be about to tell us that the figure has escalated to £900 million so as to make his proposals more acceptable. However, we know that £200 million was refunded, whereas, in that period, the Government received only £50 million in PRT receipts.

Why did that happen? The Government have conveniently ignored the fact that between 1988 and 1992 two significant events, which must be considered, occurred. First, the Government and the industry were anxious to stimulate production, incurring high exploration appraisal costs. According to the Government's Brown Book--the annual assessment of what is happening in the North sea--a record number of wells were drilled in 1991-92. It says :

"During 1992, a total of 131 exploration and appraisal wells were drilled. Although this was 55 fewer than in the previous year, it should be remembered that 1991 saw the third highest level of drilling activity since exploration began

Column 668

in 1964. Exploration success has increased to a rate of 25 per cent., with 20 significant offshore discoveries being announced during the year, 4 more than in 1991."

It is not surprising that the allowances claimable by the industry increased. Equally, it is not surprising that in the past two or three years the picture has not appeared as attractive as it did in the previous 10 years.

The second factor that we have to consider is that the industry is still reeling from the Piper Alpha disaster which had virtually stopped production. Since then, substantial claims have had to be made in order to implement the Cullen recommendations.

At a time when the PSBR is forecast to hit £50 billion, abolishing exploration and appraisal relief seems attractive at first sight. The Government's £700 million gain claimed by the Chancellor arises as a result not of increased tax revenues, but of allowances that will not be claimed. The gain is based on exploration and appraisal and that may never take place because of the Government's proposals. The £700 million claimed by the Government, by which the Minister will set some store, is disputed by many in the industry and outside. Wood Mackenzie, which has a formidable reputation as a commentator on the industry, suggests that the total might be nearer £115 million. Whatever it is, and even if we split the difference between the Government and Wood Mackenzie, the gain to the Government has to be set off against the cost of losing jobs in the industry. If the total is anything like 20,000, the Government have a formidable loss, not just in tax revenues forgone--most of those working in the industry are well paid--but in the cost of maintaining them on the dole. The Government ought to look at the PRT for the past 10 years. They must bear in mind that much of the future North sea investment will be in technically difficult areas. Production is set to rise in the middle of the decade, but many future discoveries will be in difficult areas.

Mr. Tim Smith (Beaconsfield) : Does the hon. Gentleman agree that the principal object of any tax is to raise revenue to pay for public services? What does he think the revenue would have been from the tax had the Government not proposed the changes that we are discussing this afternoon?

Mr. Darling : It is clearly difficult to predict the future rate of PRT because we do not know what will be discovered. Clearly, even with all the allowances, if oilfields do not pay PRT because it does not fall to be paid, it will be difficult to make projections of how much will be paid.

If the whole PRT regime is abandoned, first the scope for the Government levying a tax on large profits is gone, and, secondly, the allowances that are available under the PRT regime are no longer available which is a discouragement to companies to consider potentially large fields in difficult areas, as they will have to meet the entire cost of exploration and appraisal work, while at the moment they can claim substantial set-off.

The PRT regime provides the taxpayer with a potential gain, depending on what is found and a number of other factors, but it also provides a useful framework to ensure that development continues. The hon. Gentleman raised a fundamental question which I shall address in a moment, but first I shall give way to the hon. Member for Gordon (Mr. Bruce).

Column 669

Mr. Malcolm Bruce (Gordon) : Is not the problem that the Government have removed their previous achievement of a stable regime in the North sea? The hon. Gentleman is making a reasonable point. Abolishing PRT removes the automatic regulator if the price goes up. No oil company in the world believes that the Government would not change the tax regime without consultation just as quickly and just as negatively as they have this time.

Mr. Darling : The hon. Gentleman makes two important points. First, everyone to whom I have spoken in the oil industry, including those who have said publicly that they were in favour of the Government's proposals, freely admits that if the North sea sector started making large profits, in the middle of the decade for example, no Government of whatever colour would stand back and forgo the opportunity to raise money if the alternative was, for example, extending VAT to children's clothes or food or something else dear to the hearts of Conservative Members, such as raising income tax or taxation generally.

The hon. Gentleman's second point is equally important. The PRT regime was developed during the Conservative Government of 1970-74. It was implemented by the Labour Government in 1975 and it has been maintained, by and large, with cross-party support--although certainly with many adjustments--between then and the present time. It was then suddenly changed, without warning even to the Government's main energy Department, if one can call the Department of Trade and Industry such a thing--I am pleased to note that the Minister for Energy has at last turned up to listen to the debate-- which is a major departure from normal practice.

I do not argue that the Government should consult every time they make tax changes--for obvious reasons--but when one considers the importance of the North sea and the United Kingdom continental shelf to the country's economy, it seems madness for the Government to embark on a course of action that could jeopardise the future of the North sea for this country.

The hon. Member for Beaconsfield (Mr. Smith) raised an important matter. There is a legitimate public debate about whether the public ought to subsidise, encourage or shield companies from the risk of exploration. It is a legitimate debate, but the Government have not yet joined it. There is an argument that companies should shoulder the whole risk themselves ; equally, there is an argument that we should not throw away a tax regime that provides a subsidy--a shield, if you like--for the risks. It is important that the Government look after the United Kingdom's strategic interests in ensuring that we maximise the natural resource that we have in the United Kingdom continental shelf sector for as long as possible.

There is no point in denying that the changes will prolong the life of some existing fields. The Government have a point on that. There is equally no doubt that some incremental development around fields is becoming more attractive--there have been announcements in the past couple of days saying just that--but when one considers the effect of abolishing cross-field allowance and the change to the tariff receipt regime, it is by no means clear that incremental development will be as attractive.

In any event, in case the Minister is tempted to pray in aid the BP announcement yesterday and the Shell announcement about a month ago, I should mention that

Column 670

both developments were planned some time ago. Oil companies cannot announce major developments the day after the Chancellor has made an announcement.

The Financial Secretary to the Treasury (Mr. Stephen Dorrell) : Is the hon. Gentleman suggesting that Dr. Gibson-Smith, the BP exploration chief executive, was telling an untruth when he said yesterday that the new BP developments were

"made more likely as a consequence of the Budget changes to Petroleum Revenue tax"?

Those are not my words, but the words of the man in charge of exploration at BP.

Mr. Darling : Of course I am not suggesting that he is telling an untruth. What the gentleman said is that these developments became more likely. Is the Minister suggesting that in Shell people suddenly got up one morning and said, "Right, let's go ahead with this development" ? They were considering it for some time and looked at all the sums. Then there was the fiscal change, and they said, "Yes, this is a great advantage." To say that had it not been for the Government changes nothing would have happened would be absolute nonsense. What the representatives of Shell were saying is entirely consistent.

Mr. Dorrell : I think the hon. Gentleman said that Shell was thinking about it before the Budget, that there were fiscal changes and that, following the fiscal changes, Shell decided to go ahead with it. Is that the hon. Gentleman's position ?

Mr. Darling : It may surprise the hon. Gentleman to learn that, unlike some of his colleagues, I have no direct interests in the oil industry. I was not at the Shell board meeting when these matters were discussed, nor was I privy to its consideration ; but it is entirely likely that Shell has been considering this matter for some time. These developments cannot be worked up from scratch. Of course changes are taken into account. I hope that the Minister will concede that other companies would have gone ahead with work that is now less attractive because of the petroleum revenue tse schemes were not just dreamt up after 16 March. I do not understand the point that the Minister is making. He seems to be making a great deal out of nothing in particular.

Mr. Alex Salmond (Banff and Buchan) : Human nature being what it is, would not it be reasonable to suppose that the companies that will gain large sums of money--we are talking about tens and, perhaps in some cases, hundreds of millions of pounds--from tax changes might believe that they are a good idea?

Mr. Darling : That is self-evident. I noticed a flurry of announcements yesterday. It is hardly surprising that BP, Shell and other companies are happy about the proposals. As I shall develop shortly, the changes mean that they have the money in their pockets and they will decide where to spend it ; we might want to consider the implications of that.

Mr. Tim Smith : We should not object if they have the money in their pockets and decide where to spend it.

Column 671

Mr. Darling : From a sedentary position, the hon. Gentleman makes an interesting point. He claims that we should have no objection if companies have all this money in their pockets and decide where to spend it. He is right up to a point. From the point of view of the oil companies, that argument is overwhelming, but from the point of view of the United Kingdom, the Government and the people, surely we are entitled to ask ourselves whether we want a tax regime that runs a substantial risk of investment being exported to other parts of the world at the expense of a resource which we have in this country. Every Government, of whatever colour, have used the tax regime to maximise the resources available to them. If the hon. Gentleman thinks that that is wrong--possibly he still belongs to the rump of the Conservative party that believes in that system- -that is fine, but it is not a view which we take.

Mr. Robert Hughes (Aberdeen, North) : The hon. Member for Beaconsfield (Mr. Smith), who is muttering from a sedentary position, seems to forget that it was the Chancellor who said that the objective of the changes in the PRT was to raise revenue for the Government. It is the hon. Gentleman's Government who are attacking them.

Mr. Tim Smith : We do not want to tax people.

Mr. Hughes : He says that they do not want to tax people. The Government are caught on two hooks. On the one hand, they do not want to admit that they are applying the tax ; on the other, they are trying to pretend that it is our fault that it is being done.

Mr. Darling : I agree with my hon. Friend. The hon. Member for Beaconsfield seemed to take the view that it is best to give as much money as possible to the companies, which will decide what to do with it. That is statable case, but there is an overarching, strategic view that the Government have to take on behalf of the people. No doubt it would find favour in most parts of the Committee if I said that companies might be encouraged to search for large fields under the new system, whereas they might have been less enthusiastic under the old. Although they are no longer protected from exploration and appraisal costs, the risks might be high, but the gain would be immense. I dare say the Government will seek to argue that. The only point that must be made is that when an oil company looks for oil, it does not know what it will find. In many cases, oil companies have gone into areas where they thought the field might be small and have discovered that it was much larger than expected. The argument is that they would not have gone looking in the small field if protection had not been afforded by the PRT regime.

In an excellent report on the impact of the changes on the Grampian economy published a few days ago, Professor Kemp of Aberdeen university said :

"For new exploration and development activities the tax system facing investors is simply the corporation tax at 33 per cent. By world standards this is unique for a major petroleum producing province. Unfortunately there is no guarantee that this situation will be permanent and the political risk of further changes must be quite high."

The oil companies realise that, but it is interesting that Professor Kemp considers that the low tax barrier is unique. I suggest that the reason is that many countries take the view that there must be some fiscal incentive to go into difficult areas and, therefore, keep oil companies

Column 672

operating in a sector over which they have control, but if profits arise on a large scale, the taxpayer must be entitled to a fair share of them.

There is every prospect that some large oil companies will pocket their windfall gain and reinvest it elsewhere. We must bear in mind that we are in competition with many parts of the world. Substantial oil reserves are known to exist in the CIS, off south America and in the far east. Even in the United States, a high-cost country where profits are equally high, there are reserves as yet unrecovered. 4.45 pm

Boardrooms are bound to take a broad view about where it is best to go. The North sea is a high-cost centre. If companies have the cash in hand, they will not have to invest it in the North sea ; they can go elsewhere. Therefore, Britain will in effect be subsidising exploration in other parts of the world. To a large extent, the PRT system locked oil companies into the United Kingdom sector. Ultimately we will become an oil importer, but I see no reason to hasten that day.

The Government will also no doubt argue that oil companies were engaged in a spate of drilling where prospects were poor. However, given that the North sea is a mature field and that many new prospects are in difficult areas, that argument does not hold much strength. The other point that ought to be made is that in 1992 the success rate of drilling was 1 : 3.6, which is high for the industry.

I do not believe that the Government's case is proved. There is substantial doubt about the claims. I accept that over the last week, and particularly in the week following the Budget, good news was announced by companies that have prayed in aid the Government's changes, but, taken overall, there is a substantial risk that companies will be tempted to invest their profits in other parts of the world.

The position of the oil companies has to be covered. The position of the industry rather depends on whom one speaks to. Naturally, BP is laughing all the way to the bank, if not to other parts of the world. An examination of its most recent annual report is illuminating. When it deals with potential profit centres it says, among other things :

"In the Azerbaijani sector of the Caspian sea we are part of a consortium which has a 20 per cent. interest in the Azeri field where about 1.8 billion barrels of recoverable oil are thought to exist." Off Vietnam, it has started an extensive exploration drilling programme ; in South Africa, it is investing in a refinery, and it is expanding in eastern Europe. There is nothing wrong with that. It is good to see a British company doing all that and I would not want to discourage it, but hitherto there has been an incentive for many companies to stay in the North sea and to carry on drilling in sometimes difficult areas. If a company has the money in hand and has a choice between going to a high-risk, high-cost area or to an area where costs and risks are less, it might choose the cheaper option. I would not argue that one should seek to hold oil companies in an area that they would not want to be in. I do not think that anyone would argue that in regard to the North sea, but, again, I stress my doubt about our throwing away the incentive that we have.

It is not surprising that BP is pleased. Like the Government, it was strapped for cash last year and its tax bill has been cut by about £140 million. Nor is it surprising

Column 673

that it has been keen to encourage its colleagues in the oil industry not to complain, and to join the Government in praising the Chancellor's announcement. Shell has also joined forces with BP in announcing developments. Those developments were not planned recently.

While some companies say that new investment will be encouraged, others say privately that since 16 March two things have happened which we should consider. First, the fiscal and political stability which they have valued in the North sea regime--a point made by the hon. Member for Gordon--has gone. It was of great importance and should not have been lightly thrown away. Secondly, the traumatic shock caused by the Chancellor's announcement may make many people in boardrooms, often in the United States with no direct interest in this country, look long and hard at the future of the North sea and decide that future investment lies elsewhere. As I have said, we are in competition with other parts of the world and the Chancellor may have provided the jolt which will provoke some companies to go elsewhere. Equally, for some oil companies the Government's proposals are disastrous, depending on how they were placed.

What about the supply industry? Exploration and appraisal work will decrease. In some cases, exploration will cost about four times more than in the past. Every oil company has said that exploration work will reduce. Indeed, already supply companies in the north-east of Scotland and other parts of the United Kingdom have started to indicate to their work forces that they will be laid off. More than that, many companies entered into obligations with the Government based on an existing tax regime which has been changed.

I am glad that we have on the Treasury Bench both the Financial Secretary to the Treasury and the Minister for Energy. Perhaps they will share with us the difference of opinion that is apparent between the Treasury and the Department of Trade and Industry. Press reports suggest that the DTI regards some of the obligations that companies have entered into as being legally binding, while the Treasury does not. Which is correct? It is crucial for them to say which obligations they regard as legally binding. Oil companies may test the point, but it would be useful to know Government thinking on the subject.

It is also worth bearing in mind that there were changes not only to the petroleum revenue tax but to the cross-field allowance regime, which has made any incremental developments attractive to the tariff receipt allowance, which discouraged the profusion of pipes across the North sea and which, as a result of its obligation, may skew the market--for example, in respect of offshore loading--in a way that is not altogether desirable.

The position of the United Kingdom in terms of the taxpayer and the economy should be at the forefront of the Government's consideration. The Government are proposing to abandon what is essentially a profits tax. Moreover, as I have said, they are abandoning a mechanism for locking oil companies into the North sea sector, which is a high-risk and difficult area. Indeed, we may have provided an incentive for them to go elsewhere, so our fundamental concern must be about where the money will be spent.

Will the companies keep the new profits, invest them in the North sea or take them elsewhere? We are also giving up future tax revenues--some say, on a conservative estimate, of up to £6 billion over the next 10 years. The

Column 674

balance of payments--an issue of great concern, given the fact that it is in desperate straits at the height of a recession--will not be helped if we start importing oil or gas.

The effect on jobs must come into our consideration of the whole issue. The Government--it is not usual for them to concede that anything they do costs jobs--have on this occasion conceded that up to 10,000 jobs will go. In his study, Professor Kemp says that between 7,000 and 11,000 jobs may go in the United Kingdom. Others have put the estimate as high as 30,000.

Considering that it costs £9,000 to keep a person on the dole and that most of the people about whom we are speaking are well paid, the cost to the Exchequer of losing those jobs would, I believe, exceed the savings likely to occur as a result of scrapping the petroleum revenue tax regime.

It is nonsense for the Treasury to look at the issue from one aspect. It considers that it will save perhaps £700 million by scrapping PRT. On the other hand, the Department of Social Security will have to pick up the tab, and it is clear--north American experience, where a similar state of affairs existed a few years ago, bears this out--that once those people have been lost, their valuable skills will not easily be recovered.

We are speaking not simply of people working on North sea oil rigs. There is a great deal of onshore activity involving geologists, physicists and people in the support industries, all of whom are highly skilled and highly paid and who contribute substantially to the nation's economy. We run the risk of losing some of them from the industry, while others will go abroad and will be lost to the country for ever. There is the additional problem that some companies may be tempted not just to cut back on exploration appraisal but to cut down on safety.

Most people accept that at some point there must be a change in the taxation regime. The North sea oil sector is mature and it has been obvious that the PRT regime must be adjusted and perhaps one day brought to an end. But this is not the time to do that, for the reasons I have given. With oil prices expected to remain low for 10 years or so, there is a limit to how much can be taken from what is essentially a windfall profits tax.

The Government should bear five points in mind. First, the PRT system should not be scrapped now. There is scope for adjusting the rate of the tax and the rate of allowances that can be claimed. There is a case for capping the allowances. All such moves would be possible under our amendment, and we shall develop those themes when we debate later clauses. The amendment would allow the phasing in of transitional relief, and if the Government are not prepared to concede the principle, they should accept that transitional relief would be of great benefit to the industry, onshore and offshore. Secondly, the Government might consider abolishing the royalties that still exist for pre-1983 fields. That might provide assistance. Thirdly, the issue of speculative drilling could be dealt with through the licensing regime because it is for the Government to decide where companies go, because they grant the licences. Fourthly, the way in which exploration and appraisal allowances are granted could be adjusted. For example, allowances could be given on the basis of part now and part after five years or so. The Government could take all sorts of measures to make the allowances more attractive to companies, while balancing those measures with the legitimate interest of the Treasury in recovering funds.

Next Section

Home Page