---

Mr. Jack: I am pleased to be called to speak in the debate. I want to analyse the Government's proposal, and to speak specifically to the amendments. I have some sympathy with them, as they offer the opportunity to pause to reflect on the matter.

I have been interested by the Economic Secretary's body language in the debate. From time to time she has smiled, or shown that she does not agree with what is being said, but I do not sense that she feels an obligation to the Committee to justify and explain the Government's policy. I know how these things are done, and I suspect that the Oil Taxation Office will have provided a raft of arguments for her to use to justify her position. I do not expect her to admit that there may be merit in the argument of those who oppose the proposal.

However, it is time for a more forensic examination of the Government's use of language. The Red Book states that the changes will ensure

"a regime that raises a fair share of revenue and encourages long-term investment".

Will the Economic Secretary say what the word "fair" means? Will she say, in some detail, why the present regime is unfair, and why there is a need to raise more revenue from a sector that the Government believe has been successful? Will other industries in effect be hit by the windfall tax that the supplementary charge could be interpreted to be? That is the wider question, and it is why the amendments would either reduce or remove the supplementary charge. Others will be waiting in the wings to know the Government's exact intentions.

I am intrigued too by what the Red Book reveals about the research and development tax credit. The Government are putting forward the thesis that much economic activity

9 May 2002 : Column 349

can be stimulated by an expenditure of £400 million, but the Red Book seems to claim that removing £450 million in year two of the proposed regime will have no effect at all. The two arguments cannot be right.

We need to look carefully at the justification sustaining those Labour Members who have spoken against the amendments. A few years ago, the Government were willing not to alter the current North sea fiscal regime, but the Red Book now says that that regime

"fails to strike the right balance between promoting investment and taking a fair share of revenue".

On Second Reading I asked the Chief Secretary to the Treasury if he would be kind enough to provide an economic justification for the Government's position. I asked him if he would place in the Library of the House some form of business model that would provide a justification for the phrase "fair share". In its own way, the evidence that the hon. Member for Arundel and South Downs (Mr. Flight) kindly provided makes a case for the amendments. The covering letter talks about the need for the North sea fiscal regime to strike the right balance between stimulating investment and getting a fair return. I would like to know what "fair" means in this context. Let us look at the example. The word that shines forth from the Treasury's analysis is "hypothetical".

5 pm

The Chief Secretary did not respond in the way that I had hoped. I thought that he would produce an analysis showing the overall investment position, the factors that would be taken into account by the oil industry in determining its investment and a review of the taxation regime. I thought that there would be some attempt to provide us with a business model of the North sea gas and oilfields to show that the amount that the Government want to take out by these tax measures would not have any impact on investment intentions.

In that context, I was intrigued by the remarks of the hon. Member for Glasgow, Maryhill (Ann McKechin), most of which were predicated on an analysis built on the attitudes of BP and Shell. However, many of the representations that have been made to me have been from smaller oil companies. Many of them finance their investment opportunities in places such as the North sea oilfield and off the west coast of the United Kingdom, where my interest lies, by debt financing. They operate a very different financial regime; they are not the big oil barons of this world and this measure will have an impact on them because of the way in which they conduct their business.

Coming back to the Chief Secretary's example, the Government's justification, as published to date, is one hypothetical, arithmetical net present value calculation on one field using one set of assumptions. The real world of oil finance varies considerably. I want the Economic Secretary to describe in detail what the real world impact is rather than giving a hypothetical project justification. Although the Treasury may draw some comfort from the fact that it shows in net present value terms that under its proposed regime for that field, which invests £100 million, there is a gain in return, no sensitivity analysis has been made by making a marginal change to some of the variables. No analysis has been made of existing fields.

9 May 2002 : Column 350

One of the problems with the measure is that it will be introduced at a given moment in time. We have no information from the Treasury about the rates of return for fields that are currently in production but which will, under clause 90, be affected on their present earnings by the arrival of the supplement. The amendment to reduce or postpone its introduction would enable us to look at that aspect.

Malcolm Bruce: The right hon. Gentleman is making an important point. Does he acknowledge that some companies made investments a few years ago for which they did not get an uplift because the forecast oil price was not met because the price collapsed? Only now are they getting the returns that they anticipated, just to find that their payback has been further cut by these proposed changes.

Mr. Jack: The hon. Gentleman makes the point that this is a variable business. I am aware that when any business is threatened by an increase in tax, it cries foul. Businesses can sometimes bear additional tax charges just as the citizen has to make provision for additional tax charges because nobody can predict what the Treasury's demands will be year on year. The oil business deals with long-term investments, and as Members on both sides of the Committee have said, people in the oil industry wanted a degree of stability in planning their forward investment strategy. However, they have now been hit by an element of instability.

I received a copy of a letter, which was sent to the Chancellor by the Non-Operators Forum on 24 April. It states:

"The taxation changes announced on 17th April give us a great deal of concern, particularly since we had been working extremely hard with officials and ministers in the Department of Trade and Industry towards improving the commercial environment in the North Sea to encourage further investment."

The letter also mentioned the PILOT forum—as have other Members who have spoken in the debate—which is also designed to improve extraction rates and new exploration in the North sea. The 17 companies in the Non-Operators Forum are at the lower end of the scale and they stressed the impact of the proposal, especially as it came on 17 April. The companies made a second, and important, proposal on which I should like the Economic Secretary to reflect.

The Government justify their position by arguing that new investment can be funded from cash flow, but there are two flaws in that argument. The first is that not all new investment will be so profitable in year one that all the 100 per cent. allowance can be used up. The Treasury's example assumed that a field is fully profitable in year one, but that might not be the case, so as profits build up in years two, three and four, that must adversely affect the net present value calculation. There is a flaw in the Treasury's argument.

There is also a problem for fields that are funded by borrowings. Currently, the clause would not permit the costs of extra borrowing to be offset against the new 10 per cent. charge. That is another failure in the argument. Faced with those problems the smaller oil companies—those with existing fields—would be harshly penalised. It might be true—as the hon. Member for Glasgow, Maryhill said—that a large, multinational company could, in theory, absorb the effects of the

9 May 2002 : Column 351

charges on some of their activities. However, as has been pointed out, they do not currently exploit the North sea and the offshore continental shelf for the very reasons given by the hon. Member for Aberdeen, Central (Mr. Doran).

The debate has been strongly focused on oil, but I should also like to hear the Economic Secretary's justification for the proposals as regards gas. Gas prices are considerably lower than they have been for some time, and it is likely that there will be significant effects on gas exploration.

We need to reiterate the questions about the costs of the proposals. The amendments correctly call for the reappraisal, justification or reduction of the costs. Professor Kemp's work has been much quoted, so I feel justified in referring to it. He has carried out some sensitivity analysis of the effects of the measure. Even assuming an oil price of $15 a barrel, he shows that, cumulatively, until 2010, there would be a yield of £3.7 billion from the North sea. A price of $25—perhaps rather high on the scale—would mean that the yield was £9.6 billion. A price of $20 would give an amount of £6.5 billion. Those are serious amounts.

The Chancellor's analysis in the Red Book covers only the next three financial years. It seems to me that the Treasury must have decided that the measure would not bite this year and would have only a small effect next year. However, given that it will really start to bite only in year three and that the oil industry looks to the long term, we have completely dodged an analysis of the full-scale effect of the proposal on the long-term investment opportunities of the industry—[Interruption.] The Economic Secretary shakes her head. I hope that she can offer a justifiable argument that such considerations would not have an impact, given the fact that oil fields are developed over 10, 15 or 20 years.

---