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Ruth Kelly: This has been an interesting debate. The hon. Member for Arundel and South Downs (Mr. Flight) has accused the Government of unwise and unnecessary taxation. He attacked the good faith of my right hon. Friend the Chancellor, when he warned the Opposition not to fall for the propaganda of the oil industry. However, it seems to me that the hon. Gentleman, who speaks for the Opposition, has fallen hook, line and sinker for that propaganda. In the process, he has accused the Government of undermining the integrity of the tax system.

Last year—even after investing £4 billion—oil companies generated net cash flow of £10 billion from the North sea, after all the taxes that they paid. I do not accept the argument that an additional annual tax burden of, say, £600 million must reduce investment in the UK because there are no longer sufficient funds to maintain it.

The hon. Member for Banff and Buchan (Mr. Salmond) accused the Government of a short-term smash and grab raid. I tell him, as I tell other hon. Members, that the Government have consistently made it clear that the North sea tax regime needs to strike the right balance between securing a fair share of profits for the nation and encouraging investment.

North sea oil and gas is a limited national resource. Oil companies produce oil and gas under Government licence, and the returns generated from that often exceed a normal

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commercial rate of return. Furthermore, at times, producers make large profits simply due to movements in the world oil price. But the key point is that underlying rates of return are high, even when adjusted for short-term oil price movements. Every single major oil-producing country has a special tax regime to reflect the economics of the oil industry and to ensure that their country shares in the benefits.

7.45 pm

Mr. Salmond: When the Prime Minister told people in the north-east of Scotland immediately before the last election last year not to expect any windfall tax, was he unaware of the arguments that the Economic Secretary has just outlined or was he purely misleading people for electoral purposes?

Ruth Kelly: The hon. Gentleman's proposal would result in a windfall tax on oil companies; a time-limited specific additional tax on oil companies. It is the Government who are committed to a long-term stable regime for the oil industry that is based on securing a fair share of the industry's resources for the UK citizen while making sure that there is a favourable climate for investment.

Several hon. Members, including the hon. Member for Banff and Buchan, have difficulty in understanding the relatively simple concept that we can design a tax measure so as to promote future investment, while securing more revenue from the oil industry.

Mr. Salmond rose

Ruth Kelly: If the hon. Gentleman will allow me to continue, I will explain how it works. There are two elements. The first is the investment allowance. That means that even with the supplementary charge, companies investing in new products will have higher post-tax rates of return than under previous rules. Secondly, in net present value terms, the benefit of the 100 per cent. allowance outweighs the additional tax for marginal projects. It is the effect on marginal projects that determines the effect on investment. Marginal projects will be encouraged by this change; the increased tax reduces the net present value of more profitable fields, as it is designed to do. But these are likely to go ahead in any event, so the combined package increases the incentive for oil companies to invest in marginal fields.

Mr. Salmond: We need a bit of humility from the hon. Lady; some of us were working in the industry on these matters even before she was a Minister. Can we get back to the Prime Minister and the explicit undertaking that he gave to people in the north-east of Scotland that no such change was envisaged? Was he, at that stage, aware of the arguments that the Financial Secretary is making just now, or was he merely misleading people last year for electoral purposes? Can we have an answer this time, instead of a lecture?

Ruth Kelly: The hon. Gentleman accuses the Government of imposing a windfall tax on the oil companies. We are determined not to do that; that is why we have carefully designed a package that promotes investment while securing a fair share of resources for the country's citizens. The package is designed to promote a

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long-term stable fiscal regime for oil companies to operate in. I shall return to the perceptions of the oil companies in due course. I have spelled out in considerable detail to the House the investment criteria and the criteria that we took into consideration when designing these tax measures.

Sir Robert Smith: Will the Financial Secretary explain why the Treasury chose not to consult on draft clauses and engage with the industry on them—as it has done, according to the Leader of the House, for other businesses—and instead chose to surprise the industry?

Ruth Kelly: I will come on to deal with the element of fiscal risk, the perceptions in the oil industry and why we did not consider PILOT to be an appropriate forum to discuss those issues before the new regime was introduced.

I was on the point of explaining the analysis behind our tax changes. A full analysis has been made of the impact on investment, and I have spelled it out in great detail to this House, including the criteria behind the analysis. The analysis has been open thereafter to public scrutiny and scrutiny by oil companies. I will not run through all the criteria used for the analysis again today.

We looked, for example, at 108 new fields that were potentially commencing development over the next five years. We applied all the investment criteria that companies used to establish whether projects will proceed. We used the long-term oil and gas prices typically used by the industry when calculating those rates of return. The conclusion of all of our work—particularly that on new fields and incremental investment—was that, on average, the impact on marginal investment projects was positive.

The oil industry broadly accepts that analysis. The industry differs over specifics, but broadly accepts that if we have a 100 per cent. capital allowance—which makes new investment in marginal fields more profitable—and combine that with a supplementary charge, there can be a positive impact on investment. The industry differs on the impact on fiscal risk and the stability of the long-term regime. We have heard interesting and thoughtful points made by hon. Members on that precise subject.

I disagree fundamentally with the projections that the oil industry is now claiming to attach to the impact of our regime change. The hon. Member for Arundel and South Downs quoted industry figures for the fall in production, a forecast of 1.5 million barrels a day by 2010. He quoted figures on investment and jobs. The problem is that the industry was forecasting those figures before the tax changes. It is very difficult to say that the impact on jobs and investment is as a result of the tax changes when those forecasts were produced, apparently, before the industry had any idea of what those tax changes were to be.

Chris Grayling: In April, Lord Browne said of the changes in the Budget:

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Is the Financial Secretary suggesting that Lord Browne, whom I believe to be a man of integrity, is not giving an accurate picture of the truth?

Ruth Kelly: I was saying that the oil industry was forecasting an impact on jobs and investment before the results of the tax changes had even been announced. It is completely inappropriate to tie that analysis to subsequent tax changes.

Malcolm Bruce: If the industry is predicting a reduction in jobs, production and investment, why do the Government believe that increasing the tax burden on it will halt or reverse that process?

Ruth Kelly: I have just been through the analysis supporting our conclusion that, taken as a whole, the tax package will promote marginal investment in new fields. In fact, the industry is blaming decline—which was forecast—on tax changes that were designed to help investments with less attractive returns. That analysis is completely disingenuous, and I am surprised at those hon. Members who have fallen for it.

I do not accept that the North sea regime is uncompetitive; on the contrary, tax rates for new fields remain lower than for all other major oil and gas producers. Combined with generous allowances, the low rate means that the United Kingdom will remain an attractive place to invest. All companies have their own hurdle rates of return and other criteria for investment. If they were prepared to invest here before the tax changes, there is no logical reason why they should not be prepared to do so now. In general, the tax changes should not reduce any returns below companies' own thresholds for investment; indeed, as I have explained, in some cases the changes may raise returns from marginal projects, so that they will be above the required thresholds in future.

I am aware of the arguments, put forward after the Budget announcements, concerning the tax changes' impact on the fiscal regime. I am also aware of the argument—made by, among others, the hon. Members for Arundel and South Downs, and for Gordon (Malcolm Bruce), and my hon. Friends the Members for Aberdeen, Central (Mr. Doran) and for Waveney (Mr. Blizzard)—concerning the impact of any tax change on the perception of fiscal risk in the United Kingdom. I intend to deal with that specific issue in as much detail as I can. The industry is claiming that the fiscal risk has somehow increased since the Budget changes, and that although the changes would in principle lead to greater investment and more jobs, changing the perception of fiscal risk could impact on jobs and investment. Indeed, the industry is putting great stress on a predicted hypothetical 20 per cent. supplementary charge for future projects.

Labour Members have discussed such issues with me, and they are fully aware that that is the industry's projection, and that it is using those figures to back its analysis of the impact on investment and jobs. However, the regime that we have introduced is a regime for the long term, combining a 10 per cent. supplementary charge with 100 per cent. relief for capital expenditure. That is the regime that we are debating today—not some hypothetical future regime. In fact, as far as is practical, fiscal risk has now been eliminated. Before the Budget, a substantial element of fiscal risk was clearly attached to North sea investment. The Government reviewed the

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position in 1997–98, and when the review ended, we gave no commitment to maintaining an unchanged North sea regime. Indeed, as the 2001 Budget Red Book states, the Chancellor made it clear that he was considering "the next steps" on North sea taxation. We have made the changes required—

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