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Delegated Legislation Committee Debates

Contracting Out (Functions in Relation to Petroleum Royalty Payments) Order 2000

Second Standing Committee on Delegated Legislation

Thursday 20 January 2000

[Mr. Nicholas Winterton in the Chair]

Contracting Out (Functions in Relation to Petroleum Royalty Payments) Order 2000

4.30 pm

The Chairman: I welcome hon. Members to the Committee on this pleasant afternoon. I have no doubt that the atmosphere that prevails now will continue to do so during our important debate.

The Minister for Energy and Competitiveness in Europe (Mrs. Helen Liddell): I beg to move,

    That the Committee has considered the draft Contracting Out (Functions in Relation to Petroleum Royalty Payments) Order 2000.

It is always a pleasure, Mr. Winterton, to serve on one of your Committees, and I am sure that we will have an enjoyable and stimulating debate.

As hon. Members may know, the administration of direct Government revenues from United Kingdom continental shelf oil production is split between the Inland Revenue and the Department of Trade and Industry. The Inland Revenue's oil taxation office administers petroleum revenue tax and corporation tax, while the DTI's oil and gas royalties office, which has 14 staff in Aberdeen, administers the 12.5 per cent. royalty paid on oil and gas produced from older-- pre-1982--oilfields.

The order, which will permit the transfer of royalty collection functions from the oil and gas royalties office to the oil taxation office, will be made under section 69 of the Deregulation and Contracting Out Act 1994. It must be made by statutory instrument, and a draft order must have been approved by affirmative resolution in both Houses of Parliament. The transfer will consolidate all those functions in one unit, albeit with two sites, in Aberdeen and London. The proposed rationalisation should bring significant benefits to producer companies. The intention is that the administration of PRT and oil and gas royalties will, with industry input, be gradually conformed, to bring about a more streamlined service, building on the substantial similarities in royalty and PRT.

As noted in September's report from the oil and gas industry task force, discussions have been under way for some time with a view to the possible transfer of the royalty collection function from the DTI to the oil taxation office. The task force agreed that such a transfer would build on synergies between royalty and PRT and provide opportunities to streamline the administration of both. In due course, it would also deliver opportunities for significant deregulatory benefits to the industry. For example, there would be a single point of contact. Therefore, I confidently expect the industry to welcome the change, which should contribute to the task force's objectives of reducing the cost base of UK oil and gas operations and improving the competitiveness of the industry.

It might help hon. Members if I mentioned a little of the history. The current divisions of responsibilities between the DTI and the Revenue has its origins in the early years of the UK's oil and gas production industry. Before 1975, oil and gas producers were liable only for production royalties and conventional corporation tax on any production profits. Oil and gas royalty first began to generate substantial sums when the commercial production of gas began in the 1960s. At that time, royalty administration sat naturally with the licensing authority, the Department of Energy, which, was later absorbed by the DTI.

The special taxes on North sea production profits came somewhat later, with the introduction in the 1970s of PRT, ring-fenced corporation tax and the extra-territorial charge on profits earned by offshore contractors operating in the UK sector. Since 1975, those taxes have been administered by the Inland Revenue's oil taxation office.

The royalties office and the oil taxation office have worked more or less closely together since 1975, but their size and responsibilities have changed substantially over that time, reflecting the changes that have taken place in the North sea fiscal regime. The role of the oil taxation office has grown steadily, and now includes overall responsibility for the oil and gas industry, valuation of product for both tax and royalty, relations with overseas fiscal authorities and provision of technical support to the know-how fund and to the Falklands Islands government.

For present purposes, perhaps the most significant change was the effective abolition of royalty for post-March 1982 fields. Although the royalties office's work load is stable at present, the medium and long-term future of the office and its staff is, as matters stand, uncertain. Furthermore, the collection of royalty does not sit comfortably within the general area of responsibility of the Department.

No one can give an absolute guarantee for the long-term future of either office, but the Government have concluded that a merger of the two offices would bring worthwhile benefits. A merged operation will facilitate a conformed approach to the administration of royalty and PRT, both of which are forms of resource rent, levied on similar licensee populations. For historical reasons, the approach of the respective offices has been different, which has been a source of concern to licensees. A key objective of the merger is to secure as much commonality as is practical.

The new merged operation will have sufficient critical mass to manage the inevitable rundown of royalty and the other duties with a degree of confidence. Thus we will ensure good, effective administration in the medium and longer term, as well as for the present. Responsibility for royalty policy rests with the DTI. In this case, we are using an order under the Deregulation and Contracting Out Act 1994, rather than a transfer of functions order under the Ministers of the Crown Act 1975, because the Inland Revenue is not a ministerial Department.

There are substantial similarities between royalty and PRT on which the transfer will build, thus bringing about simpler administration of royalty. Furthermore, the royalties office and the oil taxation office currently have different skill bases, and we expect both to gain from further integration. The producer companies have been aware of that for some time; they stand to gain from closer integration of royalty and PRT administration, and have given their support to the idea. I hope that the Committee will do likewise.

4.37 pm

Mr. Nick Gibb (Bognor Regis and Littlehampton): I am grateful to the Minister for her clear explanation of an uncontroversial statutory instrument. Indeed, had it been subject to the negative procedure, I doubt whether the Opposition would have prayed against it.

I understand the reasons for bringing about this transfer under the Deregulation and Contracting Out Act 1994, rather than by the usual transfer of functions order. As the Minister said, that is because the Inland Revenue is a non-ministerial department, albeit one that is ultimately responsible to the Chancellor. I do not understand why the statutory instrument does not specify the Inland Revenue as the transferee of these functions in paragraph 2, which states that the functions shall

    "be exercised by, or by employees of, such person (if any) as may be authorised in that behalf by the Secretary of State."

There is no mention of the Inland Revenue. It gives the Secretary of State the power to transfer the functions wherever he likes.

The Minister should say why there is no reference to the Inland Revenue, and whether she really expects the Committee to authorise the Secretary of State to transfer the collection of oil royalties--projected to be about 400 million a year--to just anyone. I do not expect him to do that, but it would be helpful to have it on the face of the legislation.

As the Minister said the oil royalties apply only to oil fields that received development consent before 1 April 1982. For that reason, above all others, revenue from oil royalties fell from its peak of 2.4 billion in 1984-85 to about 1 billion in 1987-88 and about 500 million thereafter. The pre-Budget report, which was published in November, projects that income from oil royalties for this year and next will fall to about 400 million. However, the royalty regime, which amounts to about 12.5 per cent. of the net landed value of petroleum, will still apply to near-field satellite developments, which may be more recent projects, albeit attached to older fields.

Notwithstanding recent and probably temporary oil price hikes, the oil industry in the North sea faces many difficulties, such as the long-term low price of oil and the maturity of many of the oil fields. The older fields are subject not only to royalties but to petroleum revenue tax of 50 per cent., and corporation tax. We should respond to the concerns of the oil industry about the cost-effectiveness of exploiting to the full the less profitable mature oil fields in the North sea.

The United Kingdom Offshore Operators Association has made the industry's view clear. I raise that not in a party political way or to score points. We will not oppose the order, which deals with a purely administrative matter, as the Minister said. Indeed, it might even lead to a reduction in compliance costs for the oil companies because they will have to deal only with the oil taxation office rather than with two different offices in two different parts of the United Kingdom. However, it is worth raising the industry's concerns about the effect of oil royalties, whether collected by the Inland Revenue or by the DTI, and it is worth hearing the Minister's response. It is particularly worth noting that, as I see from the DTI's press release of 16 December, and as the Minister repeated today, responsibility for royalty policy will remain with the DTI, notwithstanding the fact that the order will transfer the collection functions.

The industry's concerns are principally that royalties are levied only on older and thus more marginal fields, and that royalties are based on the landed values of petroleum, rather than on the profits earned from the enterprise, UKOOA says that

    "In most cases the cost of conveying and treating oil and gas are allowable against Royalty. However, costs associated with drilling are not so allowable and in some cases this also applies to decommissioning costs. Even where these latter are allowable, industry believes the current mechanism to be defective. As mature fields move towards the end of their lives, new investment in these fields should be on the same basis as new investment in new fields."

UKOOA points to the disincentive effect that a high Government take has on continued investment in mature fields. There is approximately 69 per cent. taxation on those, compared with 30 per cent. on the new fields, yet the old fields are more marginal. For that reason, UKOOA says:

    "we would like to ask what place Royalty, which is a complex form of government take and not profit related, has in an industry that is struggling to maximise recovery of oil and gas resources from mature assets, and whether in fact Royalty should be phased out altogether."

A response from the Minister to those points would be helpful.

Finally, it would be helpful if the Government could lay to rest fears in the industry about a review of the North sea oil tax regime. A review was announced soon after the election and then put on hold when the oil price fell. Now that oil prices have recovered, even if temporarily, there is concern that such a review will be revived and that its conclusion would be to raise taxes on the sector rather than lower them. That uncertainty is a disincentive to investment, and if the Minister could say anything to mitigate those concerns, it would be enormously helpful to the industry. In December, in a debate on the oil fabrication yard, the right hon. Lady said:

    "One of the benefits of the task force"--

the oil and gas industry task force, which she has just mentioned--was that

    "the industry can . . . discuss the whole fiscal framework for the North sea directly with the Chancellor, who will keep it under review. It is not for me to speak for him, but he is aware of the difficulties in the North sea."--[Official Report, Westminster Hall, 8 December 1999; Vol. 340, c. 234WH.]

That is a helpful statement as far as it goes, but I wonder whether she might go a little further today.

The Opposition have no objections to the statutory instrument, given the Minister's assurance that it is a purely administrative matter, and given the support that the move has in the industry.

4.45 pm

 
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