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6.39 pm

Mr. Bob Blizzard (Waveney): I cannot pretend to have the same breadth of knowledge and experience of Treasury matters as the right hon. Member for Fylde (Mr. Jack), but I hope that I have some understanding of the issues involved in one part of the Bill. However, before I come to that, I want to say that, overall, the Budget was a good one, and therefore this is a good Bill.

I strongly support its three main thrusts. The first of those is investment in the national health service. The second is support for those who work, especially those on lower incomes and those with children, although not only those with children. I welcome the redistributive—I had almost forgotten how to say the word—nature of the measure. In a society of high or full employment, work is the best form of social justice. I am also pleased by its third thrust: further measures to encourage enterprise, especially among small businesses, which employ most of the people in the country and in my constituency.

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All our plans for investment in public services and social justice for poorer people, children and the elderly require a strong economy; the Chancellor's judgments over the last five years have given us that strong economy. I do not doubt his judgment that our economy is in good enough shape and the labour market strong enough to withstand the 1 per cent. increase in employers' national insurance contributions. With such a powerful record, one hesitates to call into question any aspect of the Chancellor's judgment, but I think that he has got it wrong with one measure in the Bill. In fact, it is so wrong that, in the medium and long term, I believe that it will have a negative effect on a key sector of the economy through lost investment and employment. Over time, the measure will produce less tax revenue, not more, and will add to our problems on energy policy. That policy is already the subject of the performance and innovation unit report, which offers the Government some difficult decisions to make.

I refer to the proposed changes to the fiscal regime for North sea oil and gas. At first sight, taking £600 million and upwards from oil companies' profits might seem easy pickings—it does not look like a vote loser among the general public. I question this judgment, however, as I fear that it will have a profound effect on one of the country's most important industries—an industry that has accounted for 18 per cent. of total UK industrial investment over the last decade. I look at it in terms of what is in it for UK plc, not for the oil companies themselves and I do not like what I see. I will not argue that oil companies are unable to pay more tax when the oil price is high; it is currently $26 a barrel according to this morning's paper. The price stood at more than $30 a barrel 18 months ago, but it is not always high—it was $10 a barrel four years ago. The only certainty about the oil price is its total unpredictability.

The real point is that the companies about which we are talking can make money by investing in activity anywhere in the world, because there is a world price for oil. As I represent a constituency in which the oil and gas industry is a major part of the local economy—that is why I chair the offshore oil and gas industry all-party group—I want that investment to be made in the UK continental shelf for as many years as it is technically possible to exploit the reserves. We need to remember that innovation is expanding the technical capacity all the time, and much of that innovation is British. The investment that we get means jobs, a safe and secure energy supply, and, with natural gas, environmental benefits. It also means continued tax revenues. We have so far had, for our benefit, £175 billion of tax revenues since oil and gas were first discovered in the North sea. I fear that the new extra 10 per cent. tax will drive away some of that investment.

We must understand the nature of this industry. It is truly global in its investment pattern, and each multinational company operates in that way. There are lots of places in the world where oil and gas can be exploited, and capital investment patterns and plans can easily be redirected, albeit with a long lead-in time. It does not have to stay rooted in one area because that is where its skilled work force are; as we know, the work force are highly mobile. The product itself can be moved readily around the world, although nearness to market is of some advantage in relation to gas. The investment can

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therefore easily be made anywhere in the world where oil and gas are found, and more reserves are still being found year by year.

We must face up to the real truth—on a world scale, the North sea is not particularly attractive in terms of competing for further investment. It is what we call a mature province, with only small and technically difficult fields left to exploit. Those fields are called marginal fields—the costs of producing from them are comparatively high in world terms.

When the Treasury carried out the review of North sea oil and gas taxation in 1997–98, it produced figures from consultants showing that, by international comparison, we had a low-tax regime in the United Kingdom. Those same consultants also showed at the same time that the North sea had the highest costs internationally. The Treasury eventually accepted that, and it called off the review. The threatened tax rise has now returned—not in a review but in a Bill.

It is still true today that the UK continental shelf is a costly place from which to produce. A recent study by consultants Wood Mackenzie—to which reference has already been made—shows that the weighted average unit cost from post-1999 developments ranked the UK continental shelf 58th out of 59 energy provinces around the world.

When oil and gas were first discovered here in the 1960s, it was thought that we had enough reserves for 25 years. Today, new fields are being worked on only because costs have been reduced and innovation put to use, but production reached a record level last year. We can go on for another 30 years, with all the benefits that we derive as a result, if we set the right conditions. My concern is that this measure does not help to set those conditions.

We do have some advantages internationally in competing for investment. There is a good market for gas all around the North sea, but our key advantage is stability—not just political stability, but financial stability. We should have fiscal stability, too.

Mr. Jack: The hon. Gentleman is making an extremely important set of points. Does he agree that, if the Government remain firmly in support of the proposal, it is very important that they make a detailed case for why they think that the UK offshore industry can bear more tax? In addition, they should provide some comparative data to address many of the international points that the hon. Gentleman is making.

Mr. Blizzard: I look forward to seeing that information when it is deposited in the Library, which, earlier today, my right hon. Friend the Chief Secretary agreed to do.

The stability about which I am talking breeds confidence. That is the crucial factor in making high- magnitude, extremely long-term investments, which are the particular feature of the oil and gas industry. Because no one can predict the oil price, as much stability and confidence as possible is required in the political system, Government policy and the fiscal regime. This country has enjoyed that advantage; indeed, it is our best advantage. Of course, only one thing undermines that advantage more than making a big change—doing so in a surprising way. Last week's announcement took me and

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the industry by surprise because it was so inconsistent with previous policy and other current Government policies.

One must question the Government's judgment because the policy is inconsistent with that of the previous five years and with the lessons that we appeared to learn from that previous policy. When Labour took office, a review of the North sea fiscal regime was announced. That in itself created uncertainty, and we saw levels of investment in new projects fall markedly. Then—this is not especially connected—the oil price fell and stayed at $10 a barrel for some time. Consequently, when the review was abandoned, people wondered whether it was because of the low oil price or because there was a recognition of the issues relating to maturity of the province—field size—about which I have spoken tonight. It took some time for the industry to be convinced that it was the latter reason. The Government's decision to set up the oil and gas industry taskforce, and, subsequently, Pilot helped the industry to be convinced.

Through that initiative the Government and the industry worked together—Treasury officials were included on the Pilot committee, which was an unprecedented and very welcome move—and my hon. Friend the Minister for Industry and Energy acted as chairman. Through Pilot, a future was mapped out with targets for the industry to achieve. That worked. Last year, 21 new field developments were approved and £4 billion was invested, which was above the target that Pilot had set. Together with the £4 billion of operating expenditure, that investment supports 265,000 jobs in this country, many of them in communities such as my own.

It helps to get a grip on such figures if we consider that, when £50 million or sometimes £30 million is invested to set up a new factory to make semiconductors, that makes national news. It is great and fantastic news, but the sums in the oil and gas industry dwarf those figures.

Confidence was also restored because of the statements that were made. For example, in the pre-Budget report for 2000, my right hon. Friend the Chancellor resisted calls for a windfall tax when we were in the eye of the storm over fuel protests. He said:

That statement quite rightly recognises the greater prize of long-term investment.

Many of us on the Back Benches told the industry, "If you want to avoid a windfall tax, invest." It did that but, arguably, the measure in the Bill may be worse than a windfall tax. The industry will be able to pay if the price of oil is $26 or $30, but what will happen if the price falls to $10? I am concerned that the proposal will affect medium and long-term plans for investment. At the moment, the industry always runs a project through to see if it will work by assuming a price of $16 or $18, but it will now have to add 10 per cent. to that figure. I therefore worry that fewer projects will compare favourably with those in other parts of the world. I am surprised by the proposal, because it is inconsistent with one of the key principles for which I admire my right hon. Friend, namely stability.

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Less investment in the North sea will have an effect on jobs. Many of those jobs are concentrated in coastal communities, especially those on the east coast such as mine. Those jobs are not easily replaced, because few industries choose coastal or more remote locations. It is difficult to attract businesses to such areas. I invite my right hon. and hon. Friends in the Treasury to consider the league table for unemployment in travel-to-work areas. Most of the top 20 communities in that table are coastal communities. Many towns—especially those with fabrication yards—have already had to deal with job losses in smaller-scale oil and gas activities that have resulted from cost reduction and replacement by innovation.

Let us get it straight. The measure does not mean that the industry will pack up now. We expect committed projects to be seen through and there may still be future projects. However, I fear that there will less exploration and less development of new projects. There will be less frontier and leading-edge work in finding innovative and cost-effective solutions. That has another downside. The expertise that the industry has developed in harsh conditions is recognised throughout the world and is very exportable. One of Pilot's targets is to increase such exports. However, the measure will damage the prospect of that, and it seems inconsistent with the proposal to extend research and development credits with which most Members agree.

Pilot faces a very difficult time. Many of those who have invested a lot of time in it have strong feelings about a surprise tax that seems to run counter to what the industry and the Government have been working towards together. I am concerned that the measure will only hasten the demise of the North sea oil and gas industry and not extend its life, which is what Pilot is all about.

How does the measure join up with energy policy? My hon. Friend the Minister for Industry and Energy recently said that our policy is to

That was the mission of Pilot, and it is the right policy. It is good husbandry of natural resources to get everything possible out while we have the infrastructure in place. The policy is also important in terms of having a safe and secure energy supply. Let us also remember that natural gas has helped more than anything else to achieve our Kyoto environmental targets.

The energy review shows that there is an upcoming gap in energy supply that will result from the forthcoming closure of nuclear power stations and from the natural decline in gas production from the mature fields that I have described. We are starting from a long way back with renewables and the coal industry, sadly, seems to be on its last legs. We surely do not want the gas gap—if I can call it that—to be bigger than it need be. I fear that gas that could be recovered will not be recovered if the investment needed to exploit it is directed to more attractive parts of the world as a result of this measure.

I ask the Government to reconsider. We must all contribute to funding the national health service but another 10 per cent. on top—a 33 per cent. increase—is quite a lot. As the right hon. Member for Fylde pointed out, the debt needed to finance projects will no longer be deductible against the new tax, and that will further raise

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the cost of financing North sea projects. Could not the tax be reduced or the finance charges be made deductible? Recent investment should certainly be exempted from the supplementary tax; otherwise the investment that has arisen as a direct result of Pilot and Government policy will be penalised. That does not seem right.

There is a good proposal in the Budget to abolish the oil royalty, but that only slightly offsets the new tax. It will not overcome the fears that I have expressed today, but I hope that we will not spend a year consulting about it. I hope that the Bill will repeal the royalty as I am sure that the technical details can be sorted out quickly. Capital allowances of 100 per cent. are good, but they will kick in only if the industry has the confidence to go ahead with new projects and if it feels that it will receive a return in the long term and that there are no more surprises around the corner.

Our Government's greatest strength is that they have looked to the long term. I ask right hon. and hon. Friends in the Treasury to look to the long term when they consider North sea taxation. If we can extend the life of the province, the Treasury and the taxpayer will gain too. I wonder whether I can appeal to the Treasury's most basic instinct to amass the revenue that it needs to bring about our mission to improve public services and to bring about social justice. My argument is that, in the long term, we shall receive more tax revenue through doing something else—or perhaps leaving things as they are—than we will from the measure in the Bill.

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