House of Commons Hansard Debates for 11 May 1993

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Members believe? We believe that the oil industry and the energy sector are so disregarded by the Government that the Minister with responsibility for them is not even consulted when serious tax changes are being considered with an impact on 10,000 or more jobs, primarily in the north-east of Scotland.

The Minister for Energy (Mr. Tim Eggar) : The hon. Gentleman claims to be interested in these matters. May I refer him to the answer to a similar question that my right hon. Friend the President of the Board of Trade gave the Select Committee?

Mr. Salmond : We should like to know what it was. Was the Minister consulted or not? We can all consult the record afterwards, but I should like an answer during the debate as many Conservative Members are wondering how to vote this evening. Surely the Minister must want to tell the Committee whether he was consulted about the tax changes in the run up to the Budget proposals. I wonder whether the silence from the Treasury Bench tells us everything. I shall not even ask whether the Scottish Office was consulted as we can safely assume that no one would bother to do that. Scottish Office Ministers are not here this evening just in case they should be asked that question.

It is unfortunate that much of the debate outside the Chamber has been conducted in terms of the cash flow of individual oil companies--which companies would benefit and which would lose. It should not be a matter of the accounting position of individual oil companies but a flesh and blood issue affecting 10,000 or more families and the infrastructure of the oil industry in north-east Scotland.

I have heard the Treasury Minister, in many radio interviews, deriding those who question the wisdom of the oil changes by arguing that we want to give some advantage to the international oil industry. What greater advantage could be given to some of the largest companies in the international oil industry, at the expense of jobs and the industrial infrastructure of our oil industry, than that given under the Government's proposals ?

I am concerned about the future after the taxation changes. One argument that the Government have put forward is that it will make the North sea a more attractive province, but that argument holds only if people believe that, if oil prices were to increase rapidly at some point in the future, there would be only a corporation tax regime in place.

No one in the oil industry to whom I have spoken, whether they are for or against the changes, believes that any Government of whatever political colour would leave a taxation regime in place which meant that only corporation tax would be charged on new discoveries if, once again, there were a major escalation in oil prices. The Government have introduced instability into a tax regime having previously claimed that, above all, the United Kingdom tax regime offered stability to the industry. They have undermined their strongest argument in favour of the United Kingdom tax regime. It is obvious that the taxation changes will be bad for the industry. Clearly, any change that is anticipated to give substantial benefits to the Treasury in net financial terms will be detrimental for the industry.

The hon. Member for Dundee, East (Mr. McAllion) was right to say that at the end of the day someone will have to cough up for the additional revenue that the Treasury will expect from the changes. It will not be the

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international oil companies ; some will lose and some will gain and the ones that lose will probably explore elsewhere. I suspect that there will be a cutback and a squeeze on the service companies and that many of the effects will be felt by the workers in the industry. One consequence of a financial squeeze, as we saw in the mid- 1980s, is a reduction in maintenance and work force conditions.

The exploration sector will certainly have to become more competitive, but, once again, many workers in the North sea will face a hostile environment in terms of their conditions.

In conclusion, the changes in PRT are often described as resembling the Schleswig-Holstein question in European history in that only four people understand it : one is mad, and that certainly covers the Treasury Bench, one is dead, and in political terms that would cover the Chancellor, I have forgotten the third and the fourth is Professor Alex Kemp of Aberdeen university.

Professor Kemp was the adviser to the former Energy Select Committee. In his much-quoted report, he put forward the strongest possible argument for introducing some form of transitional relief to provide protection and attempt to save the jobs that are now at risk in north-east Scotland and elsewhere. Amendment No. 40 encapsulates Professor Kemp's recommendation and I certainly commend it to both sides of the Committee this evening.

6.45 pm

Mr. Ernie Ross : Our debates last night and tonight have demonstrated to those who watch and listen to our proceedings, who read our debates and who are affected by the policies we are discussing the Government's ability to unite diverse groups across political and economic backgrounds.

When my hon. Friend the Member for Midlothian (Mr. Clarke) catches your eye, Mr. Morris, I am sure that he will remind you that it was not long ago that the Government attempted to make the same hash of the coal industry. They consulted no one, but simply produced proposals that they considered to be in the best interests of the Government and the Coal Board. They did not worry about Britain's long-term energy needs or the impact on workers in the industry. My hon. Friend the Member for Dundee, East (Mr. McAllion) reminded the Committee that, had there been an Energy Select Committee, it could have considered these matters. It is significant that the Government chose to introduce these changes in taxation in the knowledge that there was no Select Committee to monitor the month-by-month impact on north-east Scotland and the rest of the United Kingdom. The changes to the PRT will impact on employment, but not only in the north-east of Scotland. It is quite likely that some 3,000 jobs in the southern sector will be lost as a direct result of those changes.

It is also clear that those who will benefit most do not need the benefits as much as we need to continue to encourage exploration and appraisal in our oil industry. Companies such as BP and Shell do not need long-term encouragement that will accrue to them as much as the exploration and appraisal companies need it if we are to continue to benefit from the North sea.

What are the likely effects of the decision on the PRT? Certainly the cost of drilling a well will be increased four

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times as a result of the proposed changes, and that will affect the number of wells to be drilled during 1993-94. It will follow a reduction in drilling and exploration in 1991-92.

As hon. Members on both sides of the House have conceded, the number of jobs that will be lost is not quite clear. It ranges between 6,000 and, depending on whose estimates we take, 20,000 to 30,000. Even the Treasury estimates that about 10,000 jobs will be lost. It will not just be jobs that are lost but, as other hon. Members have said, the expertise and knowledge will also be lost, and once it is gone, as we discovered to our cost, particularly in the manufacturing sector, it is difficult to replace.

We have also heard the Government estimates that the net benefit to the Treasury will be about £700 million in a full year. Others have argued with that figure, and I should be interested to hear from the Financial Secretary exactly what he thinks about an estimate of £200 million or £300 million rather than the £700 million suggested by the Treasury.

The Financial Secretary to the Treasury (Mr. Stephen Dorrell) : The hon. Gentleman need not detain the Committee long on that issue, because the Treasury's estimate of the net effect of the changes to PRT is set out in the Red Book ; he will find that the figures quoted there are £300 million in 1994-95 and £400 million in 1995-96.

Mr. Ross : The Financial Secretary must admit that other financial experts disagree with those figures. Only time will tell who is right. Given the Government's record on finance, I think people are more likely to believe estimates other than those given by the Financial Secretary.

The real impact will be felt by those directly affected. The cost to this country--if we accept the estimate of 10,000 unemployed--will be approximately £90 million to £100 million in lost revenue. My hon. Friend the Member for Aberdeen, North (Mr. Hughes) asked the Financial Secretary how, why and where the discussions that led the Financial Secretary to recommend to the Cabinet that the Chancellor should proceed had taken place. The Financial Secretary helpfully said that there had been on-going discussions over three and a half years. As my hon. Friend the Member for Aberdeen, North said, whoever the discussions took place with, they certainly never took place with the workers in the industry and the industry itself--the Financial Secretary said that he would have needed a crystal ball to decide or second guess the likely changes in the Chancellor's Budget. As we now know, the Department of Energy was not involved in the discussions ; I am not surprised at that. Neither was the Department of Employment, which will have to find jobs for the individuals who are liable to be made redundant as a result of the changes. The hon. Member for Stirling (Mr. Forsyth), the Minister of State, Department of Employment, appeared before the Select Committee on 14 April, and I asked him whether his Department would be responsible for finding employment for those made redundant as a direct consequence of the changes in taxation and whether his Secretary of State had been involved in discussions with the Treasury. He said no, there had been no discussion whatsoever.

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Although the Government will have to find some project or scheme which will provide training, re-education and jobs for those 10,000 people, the Treasury did not consult the Department of Employment, even though it will be given the responsibility. There was no prior discussion with the Department of Energy, with the industry, with the workers in the industry or with the Department of Employment. The Financial Secretary should tell us exactly who these discussions took place with.

My hon. Friends have rightly raised the spectre of the lost jobs in the north-east of Scotland, and those who will lose their jobs should be conscious that the hon. Member for Kincardine and Deeside (Mr. Kynoch) and the hon. Member for Aberdeen, South (Mr. Robertson) are likely to support these measures. They should be aware that their unemployment, according to the hon. Member for Kincardine and Deeside, will be a "positive response" to pressure from MPs for changes in the petroleum revenue tax which caused the unemployment. I hope it helps the unemployed, as they wend their way to the unemployment exchange, to know that a positive response made them unemployed. I am sure that there will be many people in those areas knocking on the doors of those two hon. Members, demanding that they find such people suitable alternative employment after the changes in petroleum revenue tax take effect.

My union, Manufacturing Science and Finance--which is the largest union in the oil industry--has other concerns. As hon. Members have suggested, when licences were awarded, the oil companies agreed to complete a given number of exploration wells. Those commitment wells are having to be drilled without the planned tax relief, so there will clearly be a loss to those companies. The DTI is insisting that those drilling commitments are met, and this will have a further impact on the ability of those companies to maintain employment. It will certainly not be in the long-term interests of the country that we will have not a healthy industry, but an industry buffeted not only by economic recession--which, we are told, is not just here in this country but worldwide but also by the impact of these changes in the exploration and appraisal tax proposals.

The White Paper on energy relied heavily on the expectation that the oil and gas sector would continue to prosper. This decision by the Treasury destroys any belief in a long-term plan for the industry. The international players in the oil business are looking for a stable fiscal background for investment. In one simple decision, the Chancellor of the Exchequer has destroyed Britain's reputation and, more importantly, shown that the Government do not understand the long-term nature of the oil industry.

The decision also sets a precedent for retrospective taxation. The commitment wells will be held to by the Department of Trade and Industry, and that will lead to further complications.

One point that has come out of this short debate is that, when such huge investments are involved, any change decided by the Government should be discussed in advance with those involved. The problems should be identified and the solutions sought before the change is gradually introduced.

I hope that other hon. Members will join the Opposition and vote for transitional arrangements which will at least offest the worst aspects of these changes.

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Mr. Eric Clarke (Midlothian) : One of our main difficulties is the absence of an integrated energy policy. Obviously, we are a lucky nation in that we have indigenous oil, coal, gas and nuclear industries, but the taxation problem is causing unemployment. This is a short-term affair ; I can see it in no other way. Constituents write to me, asking in particular what is happening to the exploitation of exploration. An extractive industry will die if there is no investment in exploration. It is impossible to keep pumping oil up a single hole ; the industry must be continually expanded. My hon. Friend the Member for Edinburgh, Central (Mr. Darling) mentioned the threat that investors may go elsewhere : that threat is staring us in the face. Many nations have now lifted the barriers preventing multi-national companies from exploiting their resources. I am thinking especially of China. Many of the North sea companies' competitors are there already. One aspect of the industry is that those who are not there on the ground floor will lose out to a market that has potential for the future.

Another aspect of the current threat is the knock-on effect on technology. It will be our loss if we hesitate to exploit the deep parts of the North sea, the export potential for the next generation and all the facilities, know-how and equipment available because of a taxation problem. The export potential and know-how that we can give other countries is there, staring us in the face. If there is a run-down in the companies involved, or of the high-technology institutes with which such companies work, that alone could give cause for regret in the future.

I am adding my tuppence worth to the debate on the basis of what I consider to be common sense. Those who have written to me feel that, ultimately, they will pay the price for the Government's incompetence in organising an inquiry into the effects of their proposals ; that cannot be tolerated. I know how I will vote tonight, and I appeal to other hon. Members to vote in the same Lobby to ensure that the Government reconsider their proposals.

My appeal is based on common sense. We want to exploit the whole of the North sea and its potential. It should not be thought for a moment that only Grampian and the north-east are affected : anyone who boards a London train to Aberdeen will see many former miners and shipyard workers from the north-east of England whose skills have been adapted for work in the North sea. Many technical people throughout the United Kingdom are affected by the cut in exploitation of resources. I hope that hon. Members will use their common sense and support the amendment.

7 pm

Mr. Malcolm Chisholm (Edinburgh, Leith) : I too will curtail my remarks.

I became interested in this subject because of two constituency considerations. First, I was getting many letters from men who worked in the North sea and were concerned that their jobs were at risk. Secondly, I was aware that a large factory in my constituency, United Wire at Granton, had quite a few employees making screening equipment for use in oil drilling. Even within a few weeks of the Budget, orders for that equipment had declined by 20 per cent.

The Government may be rejoicing that at last they have hit the bottom of the big hole that they dug for themselves,

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but the rest of us are still worried abill have over 5,000 officially unemployed. My first concern is to make sure that no more people lose their jobs.

We have heard about other parts of Scotland being worse affected. My main question is to find out the Minister's estimate of the number of jobs likely to be lost because of the tax change. Is he sticking by the much- quoted press release of 1 April, which mentioned 10,000? Another way of putting the question is to ask him whether he agrees with Professor Kemp.

I accept that Professor Kemp says different things. There may be room for small changes in the tax regime, but the main thrust of Professor Kemp's report is that about 10,000 jobs will be lost. I intended to go into his report in more detail, but because of the shortage of time I will leave it.

Does the Minister go along with what small businesses are saying? The Government claim to support small businesses. Those businesses want to know what will happen to the licences they have. Will they have to proceed with them? Does the Minister realise that small businesses are saying that they will go to other parts of the world where the tax regime is favourable?

Why is it always BP which is quoted by Conservative Members? I think that BP is the only source which has been quoted more than Professor Kemp in the debate. BP, which stands to gain £150 million from the tax change, has been abandoning new exploration in the North sea for a long time. Of course a company can be a winner under the new regime if it does not want to explore. It was misleading for the Minister to quote the new BP development, because it has a contract for that, and it will still get tax relief on it. As my hon. Friend the Member for Dundee, East (Mr. McAllion) asked, would the company have initiated the development under the tax regime?

Unemployment is our main concern, but many points about the proposal are reminiscent of problems which the Government have run into over the years. There is the short-term nature of the decision, as with so many other economic decisions. The Government seem to be saying, "Let us do something that will bring in money." It is connected with the problem of the public sector borrowing requirement. As with yesterday's debate, the tax proposal seems to be an easy way of solving the problem without regard to the long- term consequences.

Many of the mistakes which the Government have made in their economic policy are being repeated in this measure. One quarter of United Kingdom manufacturing investment is in the North sea. The low level of manufacturing investment has been a key problem under the Government, yet they are prepared to let that decline, with the result that overseas investment by companies will increase. Encouragement of overseas investment has been a feature of the Government for the last 14 years.

Even considering the matter in terms of revenue, if fewer new fields are developed, that will reduce revenue and exacerbate the fundamental balance of payments problem, to which the Government have not sought any solution. Many problems will be made worse by the measure. The main problem is that it will increase unemployment, which is still far too high in Scotland and throughout the United Kingdom.

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Mr. Calum Macdonald (Western Isles) : I understand the pressure of time, but it is important to put on record that the changes will not just affect the east coast of Scotland, north-east and south-east, but will have a major impact on the west coast. The impact on the west coast may not be so great in terms of loss of income or the volume of jobs, but it may be disproportionately greater in relation to what those jobs mean for a fragile area such as the west coast. There are direct and indirect implications. The direct implication involves people from the west coast who are employed offshore in the North sea and companies on the west coast that service part of the North sea sector. One of the most important, if not the most important, is in my constituency. The fabrication yard at Arnish, just outside Stornoway, opened in the mid-70s and closed in the late 80s when the company, Hereema, pulled out. Subsequently there was a management buyout. Under the local managers, and with the help, support and hard work of the work force, the yard has prospered, employing up to 200 people on average. That is a large number in view of the fragile economy of the Western Isles.

The quality of the jobs is as important as the number. In a rural economy dominated by agriculture and fishing, it is valuable to have highly skilled engineering jobs, filled 95 per cent. by local workers. Small yards such as that are likely to be the worst affected by the changes. Small yards will not pick up orders from companies like BP. They get orders from the smaller exploration companies which will be hardest hit by the changes.

As to the indirect effect, people from the west coast work in the North sea sector but they send their earnings home. That money plays a vital part in maintaining the economic health of the west coast. One final factor is even more indirect--the potential impact on future exploration and development of oil and gas reserves off the west coast of Scotland, if they prove to be substantial. Some companies have expressed great interest in extending their activities to the west coast. Areas such as the Western Isles could gain greatly from that development. The companies providing services and supplies would probably not be as sophisticated as those that have sprung up on the east coast, but even if they were moderate sized they would have a beneficial effect on the fragile economy of the west coast. It is deeply irresponsible of the Government to threaten the exploration and development potential of the west coast of Scotland. Did the Government take account of the longer-term effect? BP is showing great interest in the western continental shelf. It will turn out to be one of the winners from the changes. But I wonder whether BP will put its winnings into exploration and development off the west coast, given the effect of the changes. Did the Government even consult BP to find out exactly what the implications of the changes would be on the company's plans for developing off the west coast? The jobs impact on the west coast of Scotland may seem relatively small in the context of 10,000 job losses overall, but it will have a huge and disproportionate impact on the west coast if exploration activity is seriously threatened by the changes. I join other hon. Members in asking the Government to reconsider the whole issue, especially the prospect of a transitional regime, and at least give a commitment that if things turn out badly for the industry as a result of the changes in the coming year or two, they will review the matter again.

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Mr. Dorrell : It is common ground in the Committee that we are debating important changes with important implications for the structure of the oil industry in the medium and long term. I begin by answering directly the hon. Members for Aberdeen, North (Mr. Hughes) and for Dundee, West (Mr. Ross) and others. I can tell them clearly and in terms that the changes are the result of a substantial programme of work that involved consultation between the Treasury, the Inland Revenue, the Department of Trade and Industry and, before that, the Department of Energy.

The work was carefully prepared and the conclusions were reached by the Chancellor of the Exchequer on the basis of that work. The common ground, shared in all parts of the Committee, is a desire to ensure that we have in the North sea a stable fiscal regime that is attractive to the operators in the North sea and the supply industry. I agree with my hon. Friend the Member for Orpington (Mr. Horam) about the importance of ensuring that we have in this country an environment that encourages the development of competition in the oil companies and the supply sectors.

No one can believe that the present system can properly be described as stable. The basic facts about the system are well known and on the record. In 1991-92, something that we call a tax cost the Exchequer £216 million. In 1992-93, it raised the princely sum of £54 million. So, in the last two years for which figures are available, the tax cost the Exchequer £162 million.

The reason for that in large measure can be attributed to development of the use of the exploration and appraisal relief well beyond anything that was envisaged when the relief was originally introduced. When it was introduced in 1983, the budget estimate was that it would have a revenue cost of £40 million. The cost in the most recent year was £700 million.

I stand absolutely by what I said in an intervention in the speech of the hon. Member for Aberdeen, North : any serious analysis of the present North sea fiscal regime must conclude that it is in need of change. That was obvious to me when I took over responsibility for the matter 12 months ago, and I think it was equally obvious to the oil companies and oil industry representatives who have been coming into my office in that 12-month period to talk about ideas for the evolution of the North sea fiscal regime.

I do not apologise for giving my view on Second Reading that I do not believe it is right for the Treasury to engage in direct formal dicussions about the future of tax rates and tax allowances in the system. That leads to serious distortions in economic behaviour, partly through companies responding to what they perceive to be a threat to the regime and partly through financial markets seeking to discount and second-guess what tax changes are likely.

I do not agree with my hon. Friend the Member for Orpington that it is sensible for Ministers to engage in a discussion about the detail of rates and allowances. It is clear to me that any serious analysis of the North sea fiscal regime over the past two years must conclude that it is a system in need of reform.

Mr. Salmond : The Minister talked about a series of consultations, but I question whether many oil industry representatives were aware that they were taking part in

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consultations. He also talked of departmental consultations. He did not mention the Scottish Office. Was that a deliberate omission, or did he just forget it?

7.15 pm

Mr. Dorrell : The sponsoring Department for the oil industry was the Department of Energy, now the Department of Trade and Industry. The purpose of the interdepartmental discussions was to ensure that the decision--which rests properly with my right hon. Friend the Chancellor of the Exchequer-- was made on the basis of proper knowledge. That knowledge was available to him and his decision was based on a proper appraisal of the alternatives.

Let us examine the substance and detail of the present position. We have a paper tax rate of 75 per cent. for the petroleum revenue tax. That is having the effect, in my view, of depressing development activity and potentially shortening field life, because it is uniquely the highest marginal rate of tax collected anywhere in our fiscal system now.

Mr. Darling : Will the Minister explain what will be the benefit of the changes? He talked about the savings, but one must take into account the PRT that will not be collected. What calculations has he made of the cost of 10,000 people losing their jobs? Can we be given an overall picture of what the position will be from the taxpayer's point of view?

Mr. Dorrell : I gave the figure in an intervention in the speech of the hon. Member for Dundee, West. I pointed out that the Red Book contained a projection for 1994-95 of £300 million and for 1995-96 of £400 million, being the net yield from the changes.

The 75 per cent. PRT rate is recycled into exploration and appraisal, so in many cases the taxpayer is meeting 83 per cent., if corporation tax is included--that is, 75 per cent. PRT plus 33 per cent. corporation tax--of the cost of exploration and appraisal in the North sea. But as most of the fields currently being found will not pay PRT--because of the effect of the allowances--the taxpayer's share of the return on those fields, if they are found and developed, amounts to 33 per cent. In other words, the Treasury is signing the taxpayer up to a deal under which the taxpayer contributes 83 per cent. of the equity in return for 33 per cent. of the return. That fundamental distortion leads to the tax subsidies which my hon. Friend the Member for Beaconsfield (Mr. Smith) was right to deplore. I believe that if a project is uneconomic, it is no part of the job of the tax system to make that uneconomic activity appear economic. That is the result of the PRT system as it now exists. Another principle of the reform which I hold to be important is that if the existing system will not raise any tax, we do well to admit it. It seems nonsensical to talk about PRT in the context of a range of fields when it is common ground on the part of all who have examined the issue that it is a PRT system that will not produce any yield from most of the fields currently being explored.

If there is to be no yield, it is better to admit it and abolish the tax. The only purpose of keeping the tax, if there is to be no yield, is to provide an excuse for paying tax allowances. It seems the ultimate absurdity, which is

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the position that the amendment would provide, to maintain a tax system not with the object of collecting tax but to pay out allowances.

If we want to pay a subsidy to a particular sector, by all means let us do so, but it should be properly justified, not brought in under the guise of a tax system.

Mr. Malcolm Bruce : Does the Minister accept that those of us who agree that there is a case for reform and are calling for transitional arrangements are worried that the long-term disincentive to exploration will mean that the Treasury and the economy will lose out because some oil fields may not be found? It is important to ensure a viable incentive to encourage oil companies to explore in the United Kingdom rather then elsewhere.

Mr. Dorrell : I am coming to the effect of the changes on exploration, which is an important point mentioned by several hon. Members. Before doing so, I want to draw the Committee's attention to something mentioned by my hon. Friend the Member for Kincardine and Deeside (Mr. Kynoch), who does not uncritically support every aspect of the proposals. It was he who drew attention to the fact that there is striking unanimity in the industry on the point that the principles behind the long-term changes that we want to introduce are right.

I should like to quote not, as might be predicted, BP but a number of other companies. Mobil says :

"We believe that the changes proposed to the North Sea fiscal regime are well-founded and in the long-term interest of the industry and of the nation."

Amoco's view of the changes

"is one of welcome for their general thrust."

Marathon

"is supportive of the direction being taken. We believe that in the long term the development of UKCS oil and gas resources will benefit from these changes."

Shell UK believes

"that the thrust of the changes is correct."

The industry's association, the United Kingdom Offshore Operators Association, says :

"There is agreement that the reduction of the PRT rate and the elimination of PRT for new fields is a welcome step which will be positive to enhancing productivity from existing large mature fields and to the development of new fields."

There is thus widespread recognition that the long-term effect of the changes will be to make the tax and fiscal regime in the North sea much more rational than the system that it replaces.

Several hon. Members have sought to concentrate on how we arrange the transition from the system as it is to the system that we want to create. I turn now to the transitional arrangements which the Government considered ahead of the Budget and for which we have provided in the Finance Bill. We must test proposals for transitional arrangements in two ways. First, as the new structure seems to be more rational and likely to lead to a better use of resources in the economy, it is important that the transitional regime delivers the change surely, so that there is no doubt that we will reach the end result reasonably quickly. Secondly, and equally important, we want the changes delivered with the minimum dislocation. I acknowledge that some dislocation from changes on this scale is inevitable, but we want a method of introducing them that minimises it.

Before we engage in a sensible discussion of the precise structure of transitional arrangements, I should add that I agree with the point made by my hon. Friend the Member for Orpington and by the hon. Member for Edinburgh,

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Leith (Mr. Chisholm)--we must make an assessment of the effect of the proposed changes on employment and especially on exploration. That will tell us the size of the transitional problem with which we need to deal.

A number of factors are relevant in this context. First, four companies in the North sea together represent 40 per cent. of all exploration and appraisal activity there. They have publicly committed themselves to no reduction in E and A. The four are Shell, Esso, Mobil and BP. Secondly, 40 per cent. of current exploration and appraisal activity does not benefit at all from E and A relief from PRT. That being so, I am at a loss to understand how the withdrawal of the relief can lead to companies cutting short their E and A programmes. There is some overlap between the two categories, but as 40 per cent. of activity has been committed to being maintained and a different 40 per cent. is not benefiting from the relief that we are withdrawing, the worst case that we posited--a 50 per cent. reduction in exploration and appraisal--is, as I told an Aberdeen newspaper, improbably pessimistic.

I am reinforced in that belief by the evidence of what is going on in the present 14th licensing round. I understand that the Department of Trade and Industry told companies that had put in bids in the 14th round after the Budget that if, in the light of the Budget changes, they wanted to withdraw or change their bids, they were free to do so. Only a minimal number of companies have taken up that opportunity. So here we have a clear market test of the likely effect on exploration ; it reinforces my view that it is profoundly unlikely to be anything like as serious as most of the worst case scenarios would suggest.

Mr. Salmond : The Minister is telling us that everything will be all right and we should not worry too much. Can he offer the Committee anything comparable to the thoroughness and academic rigour of Professor Kemp's study? If not, would we not be best advised to proceed on the conclusion of the professor's analysis?

Mr. Dorrell : I have given the Committee the basis on which I am working. Professor Kemp came to see me this morning and I asked him for the basis on which the reduction in wells had been posited in the most recent document. He said that that had to be a matter of judgment--his words, not mine. I have provided the Committee with the evidence on which we have reached our conclusion that a 50 per cent. reduction in the level of exploration is improbable, and it is not the only factor acting on employment and total levels of activity in the economy associated with the North sea.

I say that that is not the only factor, because it altogether omits the fact that the reduction in the PRT rate from 75 per cent. to 50 per cent. has the effect of doubling the post-tax return of all development activity and all current activity in producing fields. It was precisely that effect that led BP yesterday, in announcing its £1.5 billion development programme, to say, not that the programme was dreamt up after 16 March--of course it was not--but that, against the background of the Budget changes, its enhanced development programme was "made more likely" by those Budget changes. If the hon. Member for Edinburgh, Central (Mr. Darling) prefers an alternative quotation, the company said that the programme was "given a significant impetus"

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by the Budget changes. I ask the Committee to recognise that, for oil companies considering development activity or the life of their existing producing fields, it is wildly improbable that the doubling of the post-tax rate of return will have no effect whatever on those two indicators of activity.

It was against that background that we carefully considered the transitional arrangements that should apply to get us from where we are to where we want to be. Three choices were suggested to us, and I will consider them briefly in turn. First, it was suggested from some quarters that we should protect obligation wells. That case was argued by very few companies--indeed, by almost none of the companies that have been to see me --and it is easy to see why. The bids that were put in during earlier licensing rounds, as in this one, were invited on the basis of a proper economic assessment, and the companies that submitted them overwhelmingly made their judgments on the basis of such assessments.

I was asked about obligations. Our position was made abundantly clear in a letter from my hon. Friend the Minister for Energy to UKOOA, dated 22 April, in which, speaking for the Government collectively, he said :

"I regard the drilling obligations entered into as binding, and I expect these to be honoured

Of course, this does not exclude adjustments to particular wells in a drilling programme. We have always been prepared to consider, for example, the rephasing of individual wells on a case by case basis, having regard to technical or other specific arguments for change. But it was not our intention at the time of the Budget that there should be any general reinterpretation of the licensing obligations along the lines UKOOA appear to suggest."

That is clearly the position on obligation wells.

7.30 pm

The second suggestion is that we should phase changes in the tax rates and the allowances. My hon. Friend the Member for Orpington saw some attraction in that approach. It seems to me that the problem is that, by delaying the PRT cut, we should be delaying precisely the incentive to which BP responded yesterday, while creating a powerful incentive for exploration companies to bring forward activity to benefit from the more generous allowances that would prevail--but prevail under notice. It would clearly be in the interests of the companies to act now rather than later, in order to benefit from a tax concession that we would have announced was being phased out. Some hon. Members have said that that can be dealt with by capping. It seems to me that that illustrates the unattractiveness of that course. I am reminded of the common agricultural policy. It is acknowledged that a distortion is being introduced, but we are told not to worry as another distortion can be introduced to control the first one. That is not a very attractive way of designing a tax policy.

It is for those reasons that I prefer the third approach to transition. I refer to the Government's approach, as set out in the Finance Bill, which is based on existing contractual obligations. We have said that the changes will be phased, in the sense that, although E and A relief for new fields is being abolished from 16 March, the rate cut will take effect from 1 July. That has provided my right hon. Friend the Chancellor of the Exchequer with up to £200 million gross for transitional relief, based on the existing contractual commitments of the supply companies

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