North Sea Oil and Gas Industry

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Sir Robert Smith (West Aberdeenshire and Kincardine): Does the hon. Gentleman share my concern that the Financial Secretary's dismissal of the importance of the industry, putting it aside as a minor sector of UK industry, illustrates how out of touch the Treasury is with the consensus that we thought we had last year?

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Mr. Salmond: I suspect that what took place this year was not a detailed analysis of the prospects for the North sea; nor was it an examination of the taxation changes that were necessary to stimulate employment over the long term. I suspect that, as it was a tight Budget, the Chancellor was scrabbling around for an extra £1 billion a year, which is what the industry will generate in five years' time according to Government forecasts, and that proved an irresistible attraction.

The hon. Member for West Aberdeenshire and Kincardine (Sir Robert Smith) and I may differ on this. As I said last year, I do not say that there should be no changes in taxation in the North sea: there is a case that fields which are under production are relatively lightly taxed. However, certain requirements are necessary for anyone introducing taxation changes. The first is to demonstrate that an analysis has been conducted to show that the changes will minimise the impact on employment, jobs and output over the long term. It does not seem that such an analysis has been conducted. If it has, we have still to see it placed in the Library, as was promised last week. It really is extraordinary, given the importance of the industry, that we are still waiting for the Government to demonstrate that they even considered employment prospects in Scotland and elsewhere before they embarked on the changes.

Malcolm Bruce (Gordon): The hon. Gentleman makes an extremely important point. Does he consider the Government's announcement to be extraordinarily ill-timed, given that the companies have not recovered their cash flow from losses caused by the previously depressed oil price and have just completed a round of redundancies that Lord Browne at BP has said may have to be revisited in the light of the tax change? What is the point of having a pre-Budget process if one just announces proposals without consultation?

Mr. Salmond: The consultation point is very important. The last time the Chancellor considered oil tax changes in 1997, the Treasury press release stressed the considering and consulting on changes and the importance of consultation:

    ''A consultative document will be published . . . with the aim of legislation in the next Finance Bill. The industry has requested further consultation on any planned changes and the Government believes that this will be beneficial to the process of developing an appropriate fiscal regime for these activities.''

What happened? We had consultation, which lasted more than two years. Decisions and assumptions were made—certainly by the hon. Member for Aberdeen, South and members of the Committee last year—that there were to be no changes and that stability was the key word for the oil tax regime. This year, without consultation or analysis—certainly, without published analysis—a change has been made that may have damaging consequences for jobs in the constituencies of every single member of the Committee.

Many of us with oil jobs in our constituencies have already seen redundancies in the sector. The hon. Member for Falkirk, East (Mr. Connarty) is not in his place, but he knows that up to 1,000 jobs have been lost in the refining sector at BP. There have been job losses in many parts of the oil industry. Considering the employment aspect, it must be said that the

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industry needs help. Therefore, to make such a change without consultation seems quite extraordinary.

We deserve an explanation. Why was there no consultation with the industry? Why has no document been published, as was promised? Did the Scotland Office or, for that matter, the Department of Trade and Industry make any representations to the Chancellor before or after the Budget? Did they know about the changes before Budget day? When did the Secretary of State and the Minister for Industry and Energy find out about the proposed tax changes? Did they support them before the Budget? We know that they support them today—they have no choice—but did they support them before they were announced? Certainly, nothing in the demeanour of the Secretary of State last year when she spoke to the Committee or in any statement from the Minister for Industry and Energy suggested that such a substantial tax change was under consideration.

The Minister for Industry and Energy has followed the Secretary of State in chairing the Pilot initiative. Last year, he spoke eloquently about its success, based on partnership, consultation and information exchange with the industry. Was there any discussion in Pilot of the forthcoming tax changes? I believe that the Minister was about to answer the question, which is pretty straightforward.

The Minister for Industry and Energy (Mr. Brian Wilson): I was just acknowledging its existence.

Mr. Salmond: The Minister acknowledges the existence of the question. He is the chairman of the Pilot initiative. As the Minister, he carries responsibility for the welfare of the industry and for the hundreds of thousands of people employed in it. I think it is entirely reasonable, given the much vaunted role of Pilot as a forum for discussion between Government and industry, to ask a straight question; was there any discussion or consultation in Pilot about the forthcoming substantial tax changes, or were they a total surprise not just to the industry but to the Secretary of State and to the Minister? I hope that the Minister answers that question when he sums up.

I have never taken the position that it is wrong to make any tax change. I can see the argument that there are certain fields in the North sea from which the returns are very high. Capital investment was carried through generations ago and $25 a barrel gives an exceptionally high return. If changes are going to be made, the purpose of consultation is to look at how they can be made in a way in which the impact on exploration and appraisal drilling, which is the seed-corn for the future of the industry, is minimised. Was there any debate or input into whether there could have been an additional uplift for exploration and appraisal drilling?

I have to say to the hon. Member for Aberdeen, Central (Mr. Doran) that his comments in the press suggesting that taking £1 billion out of the industry would have either no effect or a beneficial effect on jobs are beyond belief. If one takes £1 billion of revenue out of an industry, it will not have a positive effect on jobs. It might be possible to minimise the impact of that by, for example, offsetting interest

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payments on field development. Instead of abolishing royalties, for example, it would be possible to provide relief based on incremental development.

One great feature of the early tax regime in the North sea was that the petroleum revenue tax regime locked in companies to future development. One danger in the present tax regime, particularly when tax goes up, is that there is not much there to stop companies moving elsewhere in the world. When the Secretary of State speaks and the Minister replies, I hope that they will consider such an initiative. The industry has generated £160 billion for the Exchequer over the past 20 years and is expected to generate another £32 billion over the next six years. We are therefore entitled to know whether Scottish jobs were even a factor in the debate before those changes were made. Was there input from the industry, when will an analysis be published and why was it not published at the time of the Budget?

In the last Grand Committee, I had an exchange with the Minister of State, Scotland Office, about the landing charges at the St. Fergus gas terminal. He wrote to me saying that that had nothing to do with the Government and everything to do with supply and demand because lots of people wanted to land at St. Fergus and the charges were therefore very high. That is not quite true. The reason why the landing charges are high is because the infrastructure has not been put in place to allow the transmission of substantially greater quantities of gas to St. Fergus. St. Fergus's future is reasonably secure, but the Mossmorran plant is dependent on processing liquids that have been landed there.

Five new pipeline schemes are being considered. Four of those schemes are Norwegian and one is by Marathon oil. Each of them is considering either going to Bacton in Norfolk from the central and northern North sea, or even to Zeebrugge. Those options would be bad not only for Scottish employment and jobs, but for revenue for the Exchequer. If the pipeline goes from Norway to Bacton, the only revenue that will accrue to the Exchequer is corporation tax on the last six miles of the pipeline. There is presently a fiscal advantage for companies to take gas to Bacton.

If the pipeline goes to Zeebrugge it will be even worse. The Chancellor has just increased the tax take from the North sea, but if gas is landed at Zeebrugge and brought through the interconnector pipeline to Bacton, tax will only be paid at 30 per cent. The Government are building into the system a tax structure that discriminates against landfall points in Scotland and investment in the North sea. I hope that there has been further consideration of those matters to prevent that happening in the future.

To take an example, the Shell pipeline to St. Fergus, the FLAGS system, was the major pipeline system in North sea, but it is operating at about 50 per cent. of its capacity. Because of the tax structure that has been introduced, the taxation and tariff on it will be more than 70 per cent. To send gas through a new pipeline system will cost either 40 per cent. to Bacton or 30 per cent. to Zeebrugge. The Minister looks surprised, but that is the taxation system that operates for the North sea, which positively discriminates against landing gas

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at St. Fergus. I hope that the Minister appreciates the extent of what is happening in taxation.

When I spoke to Marathon about the proposed pipeline development to Bacton, I was given information that caused me concern. I was told that when the company was undertaking field development for Brae Field in quadrant 16—north of the central North sea and well north east of Aberdeen—as a change, it had to travel to the oil and gas directorate in London. I made inquiries and found that the Tiffany and Balmoral fields were having to do the same, as were British Gas, Armada and Blake fields. The Britannia operation consortium, based at Rubislaw in Aberdeen, also has to travel to London. I know that British Airways' finances have been sketchy recently, but I should like to know whether the grand strategy to boost the finances of British Airways is to make companies travel to the directorate in London to talk about field development plans. Far from transferring jobs and responsibilities north, there has been in recent months a transfer of more and more sea sectors back to London and the DTI.

More than 10 years ago, the Select Committee on Energy battled to achieve a transfer of jobs, not on the basis of 80 civil posts being vital—80 more posts in any constituency is good news—but on the basis that having the key decision-making jobs in the north-east of Scotland would mean that a company's headquarters, its development and project teams would also be based there. I have heard the Minister for Industry and Energy say on radio and television that the Buzzard field is an exciting new development; indeed, it is. However, it is in block 20 of the North sea. Where are the directorate jobs? Where will the DTI decision makers be based for the development of consultation in that new field? My information is that it will be London again.

If decision making is in London, Pan-Canadian will have a great temptation to locate its project there because it will otherwise be in the position of Marathon, British Gas and Britannia of having to send project teams to London to talk about developments, which are not in the southern North sea or the Irish area, but in the northern North sea. The Minister has carelessly allowed that situation to develop despite all efforts to build up responsibilities in Aberdeen. I hope that he will provide a substantial explanation of whether over the past few months there has been a reversal of decision making in the DTI oil directorate under his tutelage.

I am conscious that other Members would like to speak because, despite the complacency of Government Benches, I detect huge concern not just from constituencies in key oil-producing areas of Scotland, but throughout the country. People recognise that jobs, livelihoods and the long-term future of the North sea are at stake. I repeat that I do not mind a tax change, so long as analysis has been done on minimising its impact on jobs. We have a crisis situation in the number of exploration and appraisal wells being drilled. The 20th licensing round was certainly not a resounding success; in fact, it was an appalling failure. That is a key indication of what will happen, not in five or 10 years, but in 15, 20 or 25

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years. I hope that the Government have not reverted to the position, which we thought had passed, of grabbing as much revenue as possible from the North sea, filling the Treasury coffers, and having no concern for the long-term development and future employment prospects of Scotland.

There has been no consultation on the changes, which I suspect were a surprise even to the Secretary of State—she probably heard about them on the morning of the Budget, and no analysis of the impact of the changes on jobs and investment has been published. Unless we have substantial answers to those substantial questions, the Government will be indicted for sacrificing and jeopardising employment prospects in Scotland to fill up the Treasury coffers through the Budget.

11.35 am

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