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Mr. Flight: I add my congratulations on your coming silver celebration, Mr. Deputy Speaker, although I seem to remember that you were first elected to the House nearly 32 years ago.
These four new clauses, and the Scottish nationalist amendments, are self-evidently about what we view as the Government's unwise and excessive taxation of the North sea industry. The Scottish nationalist amendments simply propose to reverse both the taxation and the new capital allowances. Our new clauses, which are supported by the Liberal Democrats and the Scottish nationalists, seek to alleviate the effect of those measures.
Somewhat typically, when the Chancellor of the Exchequer responded to my hon. Friend the Member for Epsom and Ewell (Chris Grayling) on 20 June, he candidly displayed an arrogant and unwise attitude to this issue. He commented that he hoped that Members would not fall for the industry's propaganda and he argued that the 100 per cent. investment allowance would
- "make it more profitable to develop new oil fields".
- "more favourable than that of other countries."—[Official Report, 20 June 2002; Vol. 387, c. 400.]
I respect the noble efforts of the Paymaster General to put the Government's economic case, but the essence of our case is that these taxes will cause serious damage to North sea oil recovery in the coming years. As everyone knows, the North sea field is at a very mature phase, and most subsequent recovery will depend on smaller, newer companies. Many of them will not have the profits to qualify for the 100 per cent. allowance.
Have the Government even considered the fact that the projected average fall in North sea oil production is 1.5 billion barrels a day, which is the equivalent of a cost of £12 billion to the current account deficit, which is already at the highest real figure on record? According to the Government's own assessment, it is calculated that the measures will lose 50,000 jobs by 2010 and £10 billion- worth of capital investment. If we add up the loss of income tax and national insurance revenues and the potential welfare costs, it is unlikely that the Government will see more than half the tax take projected for the measures.
The Government were extremely unwise to act in bad faith in relation to the substantial £4 billion—a figure much higher than in previous years—of new investment that resulted from the PILOT collaboration. The former Secretary of State for Trade and Industry—yet again, the right hon. Member for Tyneside, North (Mr. Byers)—assured investors of the future stability of the tax regime that prevailed. However, investors have been zapped with an extra 30 per cent. of taxation without even being able to benefit from the capital allowances on the new investment that they have made.
The Government try to argue that they have warned the industry since 1997 that they were going to raise taxation, so I place the Chancellor of the Exchequer's remarks on the record again. He said:
- "It has been put to me that the North sea oil companies earning higher profits from higher oil prices should be subject to special taxes, but I can tell the House that I am determined not to make short-term decisions based on short-term factors. The key issue is the level of long-term investment in the North sea. This will be the approach that guides tax decisions in future."—[Official Report, 8 November 2000; Vol. 356, c. 317.]
The Government have based their arguments for extra tax on the excessive returns that have been made, and they have quoted the return of 34 per cent. achieved in 2000 at the top of the cycle. The industry has responded by quoting returns on investment since 1996, and those figures are most relevant for the future. They show a return of only 7.2 per cent., reducing to 5.9 per cent. after tax. In the whole decade of the 1990s, the average return was 14 per cent. before the new tax was introduced.
I turn to the fundamental reason why it is economically unwise to increase North sea taxation at this point in the oil price cycle given that the North sea field is in its
mature phase. Taxation of oil and gas provinces needs to reflect the relevant basin's geological realities as well as their maturity. The average UK continental shelf discoveries now contain only 25 million to 30 million barrels of oil equivalent. By comparison, the figure is 100 million barrels in Norway, 150 million in the gulf of Mexico and 350 million in Angola. The UK continental shelf is virtually the most expensive province in the world in which to engage in activity. Development costs average $4 a barrel; operating costs add another $4 a barrel; and exploration and appraisal costs add a further $4 a barrel.According to the recent Wood Mackenzie study, of 59 recent developments, only one province—the east coast of Canada—is more expensive than the UK continental shelf. The study ranked the UK continental shelf as 31st out of 51 countries in terms of exploration attractiveness and concluded categorically that there was no room to extract additional fiscal rent from the UK continental shelf.
Those findings reflect the fact that the North sea field has entered its most difficult phase as it declines and enters maturity. Average discovery sites are likely to be much smaller than in the past, and discoveries will be more difficult to make and more expensive to develop. In short, North sea activity is far riskier than it has been and the fiscal regime needs to reflect that fact and compensate for the high costs and geological realities. It should not add extra penalties in the way that it is now doing.
The Government will argue that some UK continental shelf fields have been very profitable in the past and have been highly taxed. However, in reality, it was only the hope of discovering such profitable fields that provided the incentive to future activity and to overcoming technical barriers. Indeed, there has been far greater extraction from the North sea than was previously predicted. There is little hope of discovering such profitable fields in the future if success is to be excessively penalised on the rare occasions that a profitable field is discovered.
Some have argued that our fiscal regime is generous. However, the facts, when properly analysed, do not support that view. Allowance must be made for geological realities and, even before the Budget, taxes imposed on the UK continental shelf ranged from 30 to 69 per cent. depending on a field's age and profitability. Those taxes have now gone up to between 40 and 74 per cent. They are high tax rates for a province that has high costs, poor prospects and small fields.
The Government have relied on analysis that assumes much larger fields than are found in the North sea and lower development costs. If allowances are made for the differences, the British tax regime is considerably less attractive than appears on a shallow analysis. Other basins in other countries are more attractive. For example—comparing like with like—the top rate of tax in the gulf of Mexico is 44 per cent., in Norway 78 per cent. and in Angola 68 per cent. Those are some of the UK continental shelf's main competitors, so the Chancellor's comment that the UK has one of the most attractive tax regimes does not stand up.
Chris Grayling: Does my hon. Friend agree that one of the most fascinating elements of the Chancellor's reply to my question of 20 June was that, although he said that he was creating a wonderfully attractive environment in
the North sea, he admitted that he was taking £500 million out of the industry? It beggars belief that any Chancellor of the Exchequer could believe that one could take £500 million out of an industry and benefit it.
Mr. Flight: I thank my hon. Friend for making that point clear. However, the Chancellor was wrong even on this issue. The leading expert, Professor Kemp, has estimated an additional tax bill of £7.6 billion for the industry as a whole up to 2010. That is considerably more than the £500 million per annum quoted. I repeat that although the tax revenues are greater than the Government are letting on, the tax losses will be significant as a result.
6 pm
New clause 1 would allow the financing costs incurred for the purpose of the ring-fenced trade to be deducted to reduce the profits on which the supplementary charge is levied. Hon. Members will know that the supplementary charge of 10 per cent. on the profits of UK companies arising from oil and gas extractions is levied without deducting the costs of financing the trade. In addition to being charged on profits that do not reflect the commercial reality of the businesses, because companies have to finance the investment in the expensive plant and machinery required for oil and gas extraction, the supplementary charge denies a deduction for financing costs. That will make the UK much less attractive, especially to overseas investors and smaller investors who are crucial to further exploitation of the North sea.
For overseas-based businesses, the interaction of UK and overseas tax on profits will be such that the United States of America and France in particular will allow only their residents to credit the foreign tax paid if financing costs have been deducted when calculating taxable profits. In other words, the effect of the financing costs not being tax deductible and the newly defined additional taxation not being a straightforward corporation tax will be the loss of double taxation treaty benefits.
No doubt the Government will respond by saying, "Hard luck", because they think that the interest deductions from which the industry has benefited have been too great. No doubt they also believe that although the costs will not qualify for double taxation, they might qualify as an expense. Those are not the fundamental issues at stake on the double taxation arrangements, however. The Revenue has received no response from the IRS to its inquiry about the new charge. However, the tax counsel to Mobil Oil advised definitively that the result will be unfavourable and the new cost will not be allowed.
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