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Mr. Salmond: In that case, can the Economic Secretary tell us why the Secretary of State for Scotland tried to minimise the impact in the Scottish Grand Committee yesterday? Why was the effect minimal and negative yesterday, according to a Cabinet Minister, but positive, according to the Economic Secretary, today?
Ruth Kelly: I have been explaining how carefully these tax measures have been designed to promote investment in North sea oil. I want to quote some slightly more objective analysts who have considered the question. Tony Wood, the Royal Bank of Scotland's senior economist, says:
Ruth Kelly: I understand that he was looking at the overall long-term effect of our tax changes. If the right hon. Gentleman wants to write to me to make a specific point, I will of course consider it.
Ruth Kelly: I understand my hon. Friend's anxiety for prompt consultation, but I do not want to speculate about its results or the timing of the royalty's abolition. However, we are committed to prompt progress, and the Department of Trade and Industry has said that it will effect that. We want to get the changes and their timing right.
I want to consider the analysis that the Treasury has undertaken in making the tax changes. I want to put on record the analysis and the criteria that we have used in designing them. A full analysis was made of reform's effect on investment. We examined the impact on all investment, exploration and appraisal, development projects that had already commenced, probable and possible developments on new fields that had already been discovered, and incremental developments of fields already in production. Let me consider each in turn.
On exploration and appraisal, companies are known to use the expected monetary value approach to exploration investment decisions. That is sound economic rationale. Using that method, we found that the rate of return on future exploration is likely to be improved by the tax change. That is because, in most cases, saving exploration and appraisal costs that arise from the higher rate of relief outweighs the loss of the expected development net present value from subsequent finds, thanks to the new 100 per cent. relief.
Our research on development projects that have already commenced, with the costs already sunk, suggests that it is unlikely that any project will become uneconomic, and we do not expect any loss of investment.
We applied all the various investment criteria that companies use to establish whether projects will proceed. We used the long-term oil and gas prices that companies typically use: $17 to $20 per barrel of oil. We did not use recent oil prices. We also worked on the basis of 18p per therm for gas. We applied a safety check to ascertain that a lower hurdle rate of return would be achieved if oil prices were low.
We cross-checked that the quantity of new field investment that the industry planned according to its estimates was consistent with the required thresholds that we used. For projects to proceed, all the test thresholds had to be met. As an additional safeguard, we modelled more and less stringent tests and took the average effect on investment that the different assumptions produced.
We also considered incremental investment. It is generally expected that the spread of internal rate of return and net present value of incremental projects are broadly similar to those of new fields. We were therefore able to interpolate from the new field data.
The work concluded that the overall impact on North sea investment and jobs was likely to be positive. I hope that hon. Members will accept that we undertook the work thoroughly and responsibly, using real data and projects to which commentators have not been privy.
Mr. Jack: I thank the Economic Secretary for her kindness. Given all her work, which is genuinely interesting and impressive, why cannot the data and the methodology be put into the public domain on an anonymised basis? She prayed in aid her summary of it, and we should therefore be able to examine the calculations on an anonymised basis.
The hon. Member for Arundel and South Downs (Mr. Flight) asked why the measure applied to gas as well as to oil. Gas, like oil, is a scarce national resource that often generates high rates of return. The special tax
Hon. Members have pointed out that gas prices currently appear to be low. I would respond that there is a wide variety of gas prices, depending on when and where the gas is delivered. The profits to be made from gas will obviously depend on the average price over the year. The current market price for a year's supply of gas is 20p per therm. In April 1999, it was 11p per therm, so I do not accept the suggestion that gas prices are particularly low at the moment.
The hon. Member for Arundel and South Downs argued that the changes amounted, in some respects, to retrospective taxation. I do not accept that. No profits arising before 17 April will be subject to the supplementary charge. Any change to business or personal tax rules will inevitably affect people who have made decisions prior to the change, but that does not amount to retrospection. The Government are making these changes because they are right, and we cannot be diverted from doing what is right just because some companies may be adversely affected.
My hon. Friend the Member for Waveney (Mr. Blizzard) said, in his interesting and thoughtful contribution, that the Government had compared tax takes with those of other countries without taking it into account that field sizes are much smaller and costs much higher in the United Kingdom than elsewhere. I would like to put on record our response to that point. To take an example, let us suppose that, instead of comparing similar-sized fields, we consider a smaller fieldsay, a 25 million-barrel oilfield in the United Kingdom, with unit costs 50 per cent. higher than average. In such a field, the tax take will not rise under the proposed changes; it will fall from 45 per cent. to 40 per cent. in present value terms. Helping projects in a weaker economic position such as thosethere are many in the United Kingdomis the precise point of the package that we are putting forward today.
My hon. Friend the Member for Aberdeen, Central (Mr. Doran) raised the concern that had been pointed out to him about whether the supplementary charge would be creditable under double taxation treaties. We believe that the supplementary charge is substantially similar to corporation tax, and that it should be creditable under most double taxation agreements. Ultimately, of course, that will be a matter for our treaty partners. I would be interested to hear from the industry if this matter is of particular concern. We shall certainly be able to take the issue up with the United States authorities if that proves necessary.
The hon. Member for Arundel and South Downs asked whether losses could be offset. The supplementary charge applies from 17 April 2002, and it is based on adjusted ring-fence profits. If a company's adjusted ring-fence profits are negative in future yearsin other words, if it makes a lossit will be able to carry that loss forward for that year and subsequent years. Companies will also be able to carry forward losses arising from previous years, except losses arising from financing costs. We shall come to that matter in the course of our discussions on further amendments.
The right hon. Gentleman also mentioned the impact on companies' balance sheets and the impact of the deferred tax reserve. I accept that there will be some impact on companies' balance sheets, but because these are one-off provisions, they should be interpreted as such by the stock market. In fact, we have seen only a modest effect on share prices, and I would suggest that this is not going to be a substantial problem.
The hon. Member for West Aberdeenshire and Kincardine (Sir Robert Smith), among others, questioned whether the Government had considered future energy supply issues. Of course, our objective is to ensure that the full economic potential of the North sea is derived for the nation. The investment incentives provided by the new first-year allowance will ensure that. These measures are also particularly helpful in promoting the continuing life of mature fields.