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Mr. Bill Tynan (Hamilton, South): Does my hon. Friend believe that a pre-tax profit of 34.3 per cent. in 2001 was an inadequate return on the investment that companies made in the North sea? If you do not, what level do you believe would be an adequate return?
Mr. Blizzard: I accept what my hon. Friend says. That is a generous return. However, when the oil price is $10 a barrel, the return is nowhere near that figure. It is difficult to link the tax to the oil price, because one cannot predict the oil price. I am arguing that we should ensure that we get the full investment. The longer we keep the industry going, the longer we shall receive the benefits.
I want to say a little about royalties. A tax change in terms of the supplementary charge will come in straight away and the Government have made it clear that they want to abolish the royalty. However, there will be a consultation period and the worry is that there could be up to a year's gap between the two things taking place. The industry has told me that it believes that the consultation could be carried out in one month, so when does the Treasury intend to begin the consultation? Will it commit to a short consultation period and can we have a firm date as soon as possible for the abolition of the royalty? Will the Treasury consider whether it is possible to carry out the consultation in one month, because it is important, if we are to attract new investment, that people know soon when the royalty will be abolished? It strikes me that no one will invest until they know when the royalty is to be abolished. If we are trying to attract investment, we do not want to wait too long, so it is important to have those commitments on royalty.
Hon. Members have made international comparisons and highlighted different tax regimes around the world, but tax rates cannot be considered in isolation. What matters to investors is the overall expected return, which takes into account the cost of finding oil and gas and the chances of finding them. That cost varies around the world. A fair assessment of how attractive we are in the international investment game takes into account development cost and the field size, which gives an idea of how many years and how many millions of barrels will be produced for the initial investment. That is related to the field's maturity. When we add up those considerations, it is clear that the North sea is not especially attractive in an international context. We must be careful that we do not make it more unattractive.
We must also ensure that we compare like with like. Some of the figures that have been bandied around are for standard developments. We can only compare deep-water developments with deep-water developments. Perhaps the easiest comparison to make is with Norway, because we are both dipping in the same area. Norway has similar unit costs of $8 or so a barrel and a similar tax regime: Norway's is 78 per cent.; ours is increasing to a marginal rate of about 74 per cent. The difference is that the fields in the Norwegian sector are 100 million-barrel fields, whereas the fields that we are developing are 25 million to 30 million-barrel fields. It is clearly less attractive to invest in smaller fields.
Although Norway will face the same challenge as us, its fields are not in the same state of maturity and it is doing fine out of larger fields. When those start to run out and it is considering developing smaller fields, it will face the same problems as us.
Sir Robert Smith: Like the hon. Member for Banff and Buchan (Mr. Salmond), many of my arguments and concerns were voiced on Second Reading, in the Budget debate and in the Scottish Grand Committee[Interruption.] The problem is that the Financial Secretary made his statement in the Grand Committee and then left. If he left this debate before the hon. Member for Banff and Buchan finished his speech, he will have missed the important point that came out of yesterday's Grand Committee, in which one member of the Cabinet recognised that there will be an impact on jobs. Given Cabinet collective responsibility, one would assume that
Mr. Salmond: The hon. Member for Glasgow, Cathcart (Mr. Harris) seems to be suggesting that the Secretary of State for Scotland is trying to minimise a job boost in Scotland, which makes what the Government have been playing at over the past year in general manufacturing industry altogether clearer.
Sir Robert Smith: The Secretary of State was clearly saying that there will be a negative impact as a result of the measures. The question is the scale of that impact; she tried to play it down, but some of us are worried that it could be significant.
Sir Robert Smith: We are not; we are reflecting our constituents' concerns. Some of them have already experienced such an impact, when the tax changes alluded to by my hon. Friend the Member for Gordon (Malcolm Bruce) were introduced. One of them came to my surgery in 1997, after the Chancellor threatened to do something similar, and said that he did not want what happened to him, his business and all the people he employed the first time round to be repeated under the present Government. Some of us have been concerned ever since; our constituents who have worked in the industry for a long time, understand how it works and know what has happened, want us to impress their anxieties on the Committee. We are doing so not because we are doom merchants but because we are success merchantswe want to promote the wider benefits of the industry.
The Treasury and the Department of Trade and Industry need to be more joined up, which was the point of the PILOT initiative and the taskforce. Those who accuse us of being doom merchants may not have heard the praise that we have heaped on the Government in the past few years for the taskforce's achievements. The Financial Secretary did not attend previous sittings of the Scottish Grand Committees and did not hear that praise[Interruption.] No, there were benefits, as we have seen, in signing up to the commitments in PILOT; the taskforce had a positive outcome in bringing together the Treasury, the DTI and the industry. Unfortunately, the Treasury has chosen not to learn the lessons of that, and we are now facing a surprise consequence for the industry.
The hon. Member for Waveney (Mr. Blizzard) made an extremely important point that comparisons must not be hypothetical. The right hon. Member for Fylde (Mr. Jack) made an equally important point that Treasury analysis has been based on hypothetical analysis. People who make investment decisions base them not on hypotheses but on real possibilities. Comparisons between fields must take account of the fact that our fields are smaller now, and we need a regime that recognises that. There are larger fields elsewhere, where returns and the risk-reward ratio are better, so the country must maintain attractiveness for the sake of the tax regime.
The amendments on the timing of the tax are useful because they make the point, as others have said, that the Government's proposals are out of phase. The royalties are supposed to be the upside of the change, but we do not know when they will be sorted out. It would be far better to postpone the tax. Indeed, if analysis proves that it will have a negative impact, the Government should not merely postpone it; they should withdraw it. There should be a chance to sort out royalties and introduce proposals on them as soon as possible. An impact assessment should be made; we need far more substantial Treasury data in the Library than the two sides of A4 produced so far.
The Government are committed to consultation. The hon. Member for Aberdeen, Central (Mr. Doran) said that the industry was asleep, but communication is a two-way process. If the Government wanted genuine consultation, they should have woken the industry up first, thus negating the element of surprise that causes long-term damage. No one knows what the Government's intentions are, whether the Chancellor is just trying it on this year, and what the tax regime will be in the future.
I repeat what was said in the Grand Committee, as it is relevant to the assessment of the impact of the tax. Labour Members, trying to straddle a compromise between recognising the concerns that will be evident in their constituencies, and their desire not to upset their colleagues on the Front Bench too muchbecause the Chancellor has made his statement and as Back Benchers
However, there is no undertaking that the tax will go away if the price drops. The tax, according to the Chancellor, is there to stay. It is in his Red Book for several years to come. Some in the industry have been privately getting the message that when the price falls, they can lobby the Government for a lower tax regime. That is no way to make a planning horizon for investment. It provides no sense of stability to tell the industry, "Come back and lobby us for a tax cut and we might see what we can do." In order to have the confidence to invest, people need to know in advance what the tax regime will be.